ACCTG 101 - Chapter 7 - Smart learning
When a company acquires a business in a business acquisition and the purchase price is greater than the fair value of the net assets acquired, the excess is reported as _____ .
goodwill
Companies use accelerated depreciation for tax purposes because
it reduces taxable income in the early years of the asset's life and provides better cash flows.
Gerhard Inc. recognizes goodwill related to the acquisition of another company. Gerhard should:
- capitalize the goodwill when company is acquired - periodically test goodwill for impairment
What are the two steps in the two-step process of measuring impairments?
- Test for impairment using the future cash flows. - Measurement of the impairment and record the loss.
Which of the following are classified as natural resources?
- Timber forests - Oil deposits - Mineral deposits
A(n) _______ is an exclusive right of protection given to a creator of a published work, such as a song, film, painting, photograph, or book.
copyright
For an asset with an estimated salvage value greater than 0, depreciation during the last service year may be less than the amount calculated based on the carrying value times the depreciation rate in order to avoid
depreciating part of the salvage value.
The allocation of the cost of a tangible asset over its service life is referred to as
depreciation
Intangible assets are written down when events or changes in circumstances indicate that the asset's ______ amount is less than its _______ amount.
recoverable; recorded
Cash received from selling salvaged materials:
reduces the cost of the land
A basket purchase or lump-sum acquisition of assets requires that an allocation is made to each individual asset based on the asset's ______.
relative fair value
Costs of periodically servicing equipment is an example of:
repair and maintenance
In a basket purchase of assets, the cost must be allocated to the individual assets because
the assets have different useful lives
A trademark registered with the U.S. Patent and Trademark Office protects the trademark from use by others for a renewable period of
10 years
Compute the asset turnover ratio using the following information: net sales is $100,000 for the year, last year's assets in place were $900,000 and this year's assets in place are $1,100,000. Receivables for both years are $50,000.
10% (Reason: Net sales/average total assets = $100,000/[($900,000 + $1,100,000)/2] = 10%)
True or false: Depreciation is a valuation method for property and equipment.
false
True or false: Expenditures that qualify as an addition should be expensed in the period incurred.
false
True or false: Goodwill acquired in a business combination is amortized over its estimated service life.
false
True or false: Goodwill is the intangible value of a company's employees, management team, and business location that is recorded by the company.
false
True or false: Internally developed goodwill should be capitalized as an asset.
false
True or false: Repairs and maintenance expenditures should be capitalized in the period incurred.
false
When a company purchases another company and the purchase price is greater than the fair value of the net assets acquired, this excess is referred to as ______.
goodwill
An intangible asset that is measured as the purchase price less the fair value of the net identifiable assets is called
goodwill.
When an asset has a significant decline in value and is written down, this is called ---------
impairment
When we recognize depreciation, we allocate a portion of the asset's cost to each year in which the asset
provides benefits to the company.
The depreciation method that allocates an equal amount of the depreciable base to each year of the asset's service life is the
straight-line method.
The declining balance method of depreciation is a multiple of the
straight-line rate of depreciation.
Straight-line and declining balance methods allocate the cost of a long-term asset based on ________, while an activity-based method allocates the cost of an asset based on its _____.
time; use
The journal entry to record the amortization for a patent would include a debit to ______ and credit to _____
Amortization Expense; Patents
When assets are purchased in a group for a single sum, it is referred to as a
Basket purchase
What is the formula for the asset turnover ratio?
Net sales divided by average total assets.
Land used in a company's ______ is classified as property, plant and equipment, while land held solely for the expected increase in value is classified as an ______.
Operation ; Investment
The cost of successfully defending a patent should be added to:
Patent account
Because the future benefits of research and development costs are uncertain, FASB requires that research and development costs be treated as
an expense on the income statement.
If a company replaces a major component of an asset with a new component with the same characteristics of an old component, it is classified as
an improvement.
Asset turnover ratio is net sales divided by
average total assets.
The cost of a major improvement that extends the service life of an asset would be _______, whereas the cost of maintenance that does not increase the future benefits would be ________.
capitalized; expensed
The allocation of the cost of a tangible fixed asset is referred to as _______ , whereas the allocation of the cost of an intangible asset is referred to as _______.
depreciation; amortization
The cost allocation for property, plant, and equipment is referred to as _____ , while the cost allocation for intangible assets is referred to as ______ .
depreciation; amortization
Which of the following costs are capitalized as an asset for an internally developed patent?
- Legal fees - Filing fees
The journal entry to retire old equipment that is not fully depreciated includes a:
- debit to loss - debit to accumulated depreciation - credit to equipment
What is the accounting treatment for goodwill acquired in a business acquisition?
- Test for impairment - Do not amortize - Capitalize the goodwill
Using the declining balance method, depreciation will be
higher in earlier years, but lower in later years.
The term used to describe the amount the company expects to receive for an asset at the end of its service life is
residual value
The estimated use the company expects to obtain from an asset before disposing of it is referred to as the _____ life of the asset
service
A purchased intangible is valued at its original cost. Original cost for acquiring a patent would include.
- legal costs to acquire. - required filing fees. - purchase price.
At the beginning of year 1, Valerie Corp. purchases equipment for $10,000. The equipment has a residual value of $4,000 and an expected service life of 4 years. What is straight-line depreciation for year 1?
$ 1,500 (Reason: ($10,000 - 4,000)/4 years = $1,500 per year)
Smith Corporation acquired West Company by paying $5 million in cash. The total fair value of West's identifiable assets is $8 million and the total fair value of its liabilities is $4 million. The amount of goodwill reported by Smith Corporation relating to its acquisition of West is:
$1 million (Reason: $5 mill - ($8 mill - $4 mill))
Kuhn Corporation acquired Salz Company by paying $65 million in cash. The total fair value of Salz's identifiable assets is $90 million and the total fair value of its liabilities is $40 million. The amount of goodwill reported by Kuhn Corporation relating to its acquisition of Salz is:
$15 million (Reason: $65 mill - ($90 mill - $40 mill))
Berner Inc. internally develops a patent, which has an estimated value of $25 million. Related legal, design and registration fees were $155,000. The amount reported on Berner's balance sheet should be:
$155,000
On January 1, year 1, London Corp. purchases equipment for $400,000. The equipment has a 5-year service life and a $50,000 residual value. London uses the double-declining-balance method of depreciation. What is the book value at the end of year 1?
$240,000 (Reason: 2 x 1/5 x $400,000 = $160,000 depreciation expense in year 1. Book value is calculated as cost less accumulated depreciation ($400,000 - $160,000 = $240,000) book value at end of year 1.)
On January 1, 2018, Pritchett Corporation purchased equipment for $50,000. The equipment had a five-year life with a $10,000 residual value. Pritchett uses the straight-line depreciation method. What is the book value of the equipment on January 1, 2021?
$26,000 (Reason: Depreciation expense is ($50,000 - 10,000)/5 = $8,000 per year. $50,000 less accumulated depreciation of $24,000 = $26,000.)
Lester purchased a new car for $30,000 and depreciated it straight-line over an estimated service life of five years with no residual value. After two years, Lester estimates that the remaining service life of the car is four years. Assuming that Lester continues to apply the straight-line method, depreciation recognized for each of the remaining years will be:
$4,500 (Reason: $ ((30,000 - (12,000))/4))
On January 1, year 1, LaRose Corp. purchases equipment for $100,000. LaRose uses the double-declining-balance method of depreciation. The asset has a 5-year service life and a $10,000 residual value. What is depreciation expense for year 1?
$40,000 (Reason: The depreciation rate is 2 x 1/5 = 40%. $100,000 x 40% = $40,000 depreciation expense in year 1.)
On October 1, year 1, Kirby Corp. purchased equipment for $100,000. The equipment has an expected service life of 5 years with no residual value. Kirby uses the straight-line method of depreciation. The partial year depreciation for year 1 is
$5,000 (Reason: $100,000/5 years = $20,000 per year x 1/4 year = $5,000 depreciation expense in year 1. October 1 - December 31 is 3 months so 1/4 year.)
On January 1, year 1, Roark Corp. purchased equipment for $120,000. The equipment has a residual value of $20,000, and has a life of 1,000,000 hours. Roark uses the activity-based method of depreciation. In year 1, Roark used the machine 30,000 hours, and in year 2, Roark used the machine 50,000 hours. What is the depreciation expense for year 2?
$5,000 (Reason: The depreciation rate per unit is ($120,000 - $20,000)/1,000,000 hours = $0.10 per machine hour. Year 2 depreciation is 50,000 hours x $0.10 = $5,000.)
On January 1, year 1, Mark Corp. purchases equipment for $300,000. The equipment has a 10-year service life and a $50,000 residual value. Mark uses the double-declining-balance method of depreciation. What is depreciation expense for year 1?
$60,000 (Reason: 2 x 1/10 x $300,000 = $60,000 depreciation expense in year 1.)
On January 1, 2018, Lennox Corporation purchased equipment for $100,000. Lennox depreciated the equipment straight--line over 10 years with no residual value. What is the book value of the equipment on January 1, 2021?
$70,000 (Reason: $100,000/10 years = $10,000 depreciation per year. Historical cost of $100,000 less $30,000 depreciation (for 2018, 2019, and 2020) = $70,000.)
At the beginning of year 1, Looby Corp. purchases equipment for $100,000. The equipment has a residual value of $20,000 and an expected service life of 10 years. What is straight-line depreciation for year 1?
$8,000 (Reason: ($100,000 - 20,000)/10 years = $8,000 per year)
Which of the following assets are depreciated?
- Land improvements - Buildings - Equipment
Marston acquired a patent for $100,000. At the end of year 3, the patent had a book value of $60,000. An impairment loss was indicated, and the fair value of the patent was $48,000. The journal entry to record the impairment loss will include:
- debit to loss on impairment of $12,000. - credit to patent of $12,000
Which depreciation methods allocate the cost of long-term assets based on time?
- declining-balance - straight-line
A subsequent expenditure for an asset increases the future benefits of the asset if it
- extends the asset's service life. - increases the operating efficiency of the asset. - increases the quality of the goods or services produced by the asset.
A company can manipulate income by overstating an impairment loss. The financial statement effects of this are
- future depreciation, depletion, or amortization is unrealistically low. - future income is unrealistically high. - current-year income is low.
The issues that are important for tangible and intangible assets, include determining:
- how to expense the cost of the asset over its life - how to record the disposal of the asset - what amounts to include in the cost
Long-lived assets are typically classified in two categories: ______ and _______
- intangible - tangible
Long-term assets are classified as
- intangible, - tangible
Which account is credited in a journal entry to record depreciation on machinery?
Accumulated Depreciation
Where is the account accumulated depreciation on equipment found on the financial statements?
As a contra account to equipment on the balance sheet
Linx purchases an intangible asset for $10,000. How should the $10,000 be reported in the financial statements?
As an asset for $10,000.
On January 1, year 1, Clem Corp. purchased equipment for $160,000. The equipment has a residual value of $10,000, and has a life of 100,000 hours. Clem uses the activity-based method of depreciation. In year 1, Clem used the machine 2,000 hours, and in year 2, Clem used the machine 3,000 hours. Which of the following statements is true?
Clem will depreciate the machine for $150,000 over its service life.
Straight-line, declining-balance, and activity-based refer to methods commonly used to _______ property, plant, and equipment.
Depreciate
What is the first issue that needs to be addressed in order to properly report tangible and intangible assets?
Determining the amounts to be included in the assets' initial cost
Which of the following involves both an acquisition and a disposition of an asset?
Exchange of fixed assets
If a company generates its own goodwill through advertising or training, how should these costs be treated?
Expense the costs as incurred.
Gosling Corporation had a return on asset ratio of 4% in 2017 and 9% in 2018. This change in return on assets can be interpreted as
Gosling is using its assets more effectively to earn income.
Which of the following standards requires that impairment losses are reversed if the fair value of the related asset recovers during a subsequent period?
IFRS only
What costs are capitalized as an intangible asset for a franchise?
Initial payment for the franchise.
Which statement is true about the straight-line method of depreciation?
It allocates an equal amount of depreciation to each year the asset is used.
What depreciation method results in an equal amount of depreciation each year?
Straight-line
Which of the following does not differ among the different depreciation methods?
Total depreciation recognized over the asset's service life.
Jan purchases a piece of land and immediately tears down an old building. The proceeds from selling the salvaged materials should be recognized as:
a reduction in the cost of the purchased land
Green Inc. expenses the cost of small tools provided that the amount is less than $1,000. This accounting treatment is:
acceptable if the amount is considered immaterial
Units of production or units of output are alternative terms for the _____ - _____ depreciation method.
activity; based
On January 1, 20X1, Claire Corp. purchases a patent. One month after acquiring the patent, Claire paid $3,000 in legal fees to successfully defend its right to the patent. The $3,000 should be:
added to the Patent account
Costs associated with major equipment improvements should be:
added to the equipment account
Attorney fees and other costs necessary to secure a patent should be
added to the patent account.
Depreciation is a process of cost ______ , and not a process of valuation.
allocation
Allocating the cost of intangible assets to expense is referred to as
amortization
The gain or loss on disposal of an asset is calculated as:
amount received less the book value of asset sold
A new major component that is added to an existing asset is called
an addition.
For accounting purposes, depreciation is
an allocation of a cost of an asset.
In accounting, the term impairment refers to
an asset's significant decline in value.
When selling a fixed asset, the seller recognizes a gain or loss for the difference between the amount received and the ______ value of the asset sold.
book
The original cost of the asset less the accumulated depreciation is the ________ of the asset.
book value
The formula for calculating the double-declining-balance method is
book value at beginning of year x 2/estimated service life
The accumulated depreciation account is classified as a(n)
contra asset.
A(n) ______ is protected by law and gives the creator of a published work the exclusive rights to reproduce and sell the work for the life of the creator plus 70 years.
copyright
The formula to calculate the depreciation for the units-of-production method or activity-based depreciation, is ((cost - residual value)/total estimated production) x ______.
current-year activity or production
Marston acquired a patent for $100,000. At the end of year 3, the book value of the patent was $60,000. An impairment loss was indicated, and the fair value of the patent was $48,000. The journal entry to record the impairment loss will include a
debit to loss on impairment of $12,000.
An estimated residual value _____ the total amount of depreciation recorded over an asset's service life.
decreases
The profit margin ratio indicates the amount of net income achieved for
each dollar of sales.
Machines used in manufacturing, computers, printers, vehicles, furniture, and fixtures generally are classified as _____
equipment
Costs incurred to acquire equipment are recognized as a(n) _______, while cost providing a benefit in the current period only are recognized as a(n) _______.
equipment; expenses
Jones Corporation's long-term asset has a book value of $100,000 and an estimated fair value of $101,000. Jones estimates that the future cash flows associated with the asset are $95,000. To determine whether the asset may be impaired, Jones should compare the asset's book value to its
estimated future cash flows.
A(n) ______ is a contractual arrangement in which one entity grants the purchaser the exclusive right to use the trade name, formulas, and product rights within a specific geographic area for a specific period of time.
franchise
A contractual arrangement in which one entity grants the purchaser the exclusive right to use the trade name, formulas, and product rights within a specific geographic area for a specific period of time is called a
franchise.
The key factor in classifying items as repairs and maintenance is that
future benefits are not provided beyond those originally anticipated from the asset.
The rationale for expenditures being capitalized as assets is based on whether the expenditures benefit ______.
future periods
Under U.S. GAAP, if a company recognizes an impairment loss,
future recovery of the impairment loss is prohibited.
Expenditures classified as ______ involve the replacement of a major component of an asset.
improvements
Goodwill may only be recognized
in a business acquisition.
A change in accounting estimate requires a company to account for the change
in the current and future years
Intangible assets are categorized as those with finite lives and those with ______ lives.
indefinite
In accounting terminology, the life of a trademark is considered
indefinite.
The residual value of an intangible asset is usually ______
indeterminable or zero
Amortization refers to the allocation of the cost of _______ assets to expense.
intangible
An asset that has no physical substance is called a(n) ______ asset
intangible
Copyrights, franchises, and goodwill are examples of _______ assets.
intangible
An asset that has no physical substance is referred to as a(n)
intangible asset
No amortization is recorded for
intangible assets with indefinite lives.
The distinction between land and land improvements is that:
land has an indefinite life
In a business acquisition, goodwill equals the purchase price
less the fair value of net assets acquired.
A long-lived asset is assumed to be impaired if its estimated future cash flows are ------- than its book value.
less, smaller, lower, or lesser
Accounting for land improvements requires that the land improvements are recorded separately from land because the improvements have a _______ life
limited
Expenditures subsequent to acquisition may be properly capitalized when they increase the asset's service life or increase its productive capacity. However, most companies set thresholds for capitalizing these expenditures based on
materiality.
In a business combination, goodwill is recognized to the extent that the purchase price of the company is _____ than the ______ value of the acquired company's identifiable net assets.
more; market
_________ are physically diminished as minerals and other materials are extracted from the ground and are sold or used in the production process.
natural resources
The profit margin ratio is defined as -------- divided by net sales
net income
What is the formula for the profit margin ratio?
net income divided by net sales
Intangible assets with indefinite useful lives should
not be amortized.
The exclusive legal right to manufacture a product or to use a process is called a(n) ______.
patent
Goodwill is recognized only when one company _______ another company.
purchases
Otto Inc. retires old equipment with a book value of $2,400. Otto should
recognize a loss of $2,400
An asset ______ occurs when an asset is no longer useful, but cannot be sold.
retirement or retire
Recording depreciation results in the allocation of the cost of a long-term asset to the years during which the asset provides _______.
revenue
The asset turnover ratio provides an indication of how efficiently a company uses all of its assets to generate -----
revenue
The depreciable cost of an asset is the asset's cost minus its estimated ______ value
salvage
The amortization of an intangible asset occurs over the period of time that is the ______ of the legal, regulatory, contractual, or service life.
shorter
Most companies use ______ - ______ amortization for intangible assets
straight-line
Most companies use _______ - ______ amortization for intangible assets.
straight-line
The depreciation method that is easiest to apply and results in higher net income in earlier years is
straight-line
The depreciation rate we use under the declining-balance method is a multiple of the _______ - ______ method.
straight-line
The most frequently used depreciation method for financial reporting is the ______ method.
straight-line
Land, land improvements, buildings, equipment, and natural resources are examples of ______ assets
tangible
The measurement of an impairment loss in step 2 is the difference between
the asset's book value and its fair value.
The ratio that measures the sales per dollar of assets invested is referred to as the asset _____ ratio.
turnover
Goodwill and some trademarks are examples of intangible assets that are assumed to a have a(n) _____ life.
unlimited
Impairment losses can be used to manipulate earnings by
writing off impairments in the current year and taking losses to decrease future depreciation and increase future earnings.
Which of the following costs may be capitalized into the cost of a trademark?
- Registration fees - Design costs - Fees for a successful legal defense
The formula to calculate an activity-based depreciation rate is:
(cost - residual value)/estimated total production.
Which of the following are tangible assets?
- Building - Land improvements - Equipment - Property
Which of the following items typically are classified as equipment?
- Computers and printers used in office - Machinery used in manufacturing - Furniture and fixtures
The service life of an intangible asset may be limited by what types of provisions?
- Contractual - Legal - Regulatory
An asset that is traded for another asset is treated as a(n)_______, whereas an asset that is sold or retired is treated as a disposition
exchange
Monet Company purchased a patent with an estimated service life of ten years for $200,000 After three years of amortizing the patent using the straight-line method, Monet estimates that the remaining useful life is only 5 years. Amortization expense for the fourth year is:
$28,000 (Reason: [200K-(200K/10)*3] = 140 K; 140K/5 = 28K)
Self-constructed buildings include which of the following costs?
- interest costs incurred during construction - labor costs incurred for construction of building - material costs incurred for construction of building
Which of the following items are expensed?
Costs related to maintaining equipment
Cheng Corporation exchanges old equipment for new equipment. The original cost of the old equipment was $90,000, and its accumulated depreciation at the date of exchange was $40,000. The new equipment received had a fair value of $40,000 and a book value of $35,000. The journal entry to record this exchange will include which of the following entries?
- Debit equipment $40,000 - Debit loss on exchange $10,000 - Debit accumulated depreciation $40,000 - Credit equipment $90,000
Which of the following items are capitalized?
- Major repair that increases future benefits - Replacing a major component - Successful legal defense of a patent
Norbert Inc. purchases a machine for $21,000 with an estimated service life of three years and estimated salvage value of $1,000. The company utilizes the double-declining balance method. Depreciation expense for the last service year is: (Round to the nearest dollar.)
$1,333 (Reason: $(21,000 - [(21,000 x 2/3) + (7,000 x 2/3) + (1,000)] = $1,333)
On July 1, year 1, Smith Corp. purchased equipment for $200,000. The equipment has an expected service life of 10 years with no residual value. Smith uses the straight-line method of depreciation. The partial year depreciation for year 1 is
$10,000 (Reason: $200,000/10 years = $20,000 per year x 1/2 year = $10,000 depreciation expense in year 1.)
On January 1, year 1, Paisley Corp. purchases equipment for $200,000. Paisley uses the double-declining-balance method of depreciation. The asset has a 10-year service life and a $10,000 residual value. What is the book value at the end of year 1?
$160,000 (Reason: The depreciation rate is 2 x 1/10 = 20%. $200,000 x 20% = $40,000 depreciation expense in year 1. Book value at the end of year 1 is cost less accumulated depreciation, $200,000 - $40,000 = $160,000.)
Blake uses the activity-based depreciation method. Blake purchases equipment for $100,000 and expects to use the equipment for 40,000 machine hours. The machine has a residual value of $20,000. The depreciation rate is
$2.00 per machine hour. (Reason: ($100,000 - 20,000)/40,000 machine hours = $2.00 per machine hour.)
Smith Company acquires a franchise from West Corp for $200,000. The franchise agreement covers a period of 10 years. Compute amortization expense for the second year.
$20,000 (Reason: $200,000/10 years = $20,000 per year)
Cray uses the activity-based depreciation method. Cray purchases equipment for $210,000 and expects to use the equipment for 60,000 machine hours. The machine has a residual value of $30,000. The depreciation rate is
$3.00 per machine hour. (Reason: $210,000 - $30,000 = $180,000/60,000 machine hours = $3.00 per machine hour.)
On January 1, year 1, Clem Corp. purchased equipment for $160,000. The equipment has a residual value of $10,000, and has a life of 100,000 hours. Clem uses the activity-based method of depreciation. In year 1, Clem used the machine 2,000 hours, and in year 2, Clem used the machine 3,000 hours. What is the depreciation expense for year 2?
$4,500 (Reason: The depreciation rate per unit is ($160,000 - $10,000)/100,000 hours = $1.50 per machine hour. Year 2 depreciation is 3,000 hours x $1.50 = $4,500.)
West Corp purchased a piece of equipment for $35,000 and depreciated it straight-line over an estimated service life of seven years with a residual value of $7,000. After two years, West estimates that the remaining service life of the equipment is four years and the residual value remains unchanged. Assuming that West continues to apply the straight-line method, depreciation recognized for each of the remaining years will be:
$5,000 (Reason: The asset has been depreciated $8,000 to date. (($35,000 - $7,000)/7) x 2 = $8,000. The new book value is $35,000 - $27,000 = $8,000. (($27,000 - $7,000)/4) = $5,000 per year)
The formula for straight-line depreciation is
(cost-residual value)/service life
Match each depreciation method to the explanation. Activity-based: Straight-line method: Declining-balance method:
- Activity-based: Method that matches usage of the asset with revenues generated from the asset - Straight-line method: Allocates an equal portion of the depreciable base to each year of the asset's service life - Declining-balance method: Accelerated method that multiplies a constant percentage rate times the decreasing book value
Which of the following items are initially recorded as an expense on the income statement?
- Advertising costs - Research and development costs
Which of the following statements describe the accounting rules for a franchise agreement?
- Amortize the cost of the franchise over its life. - Expense periodic payments as incurred. - Capitalize the cost of the franchise.
Select the correct accounting treatment for subsequent expenditures relating to long-term assets with the corresponding description. - Capitalized as incurred: - Expensed as incurred:
- Capitalized as incurred: Expenditure increases future benefits derived from asset - Expensed as incurred: Expenditure yields benefits in current period only.
Which items are considered changes in estimates that would be treated on a prospective basis in the current period and future periods?
- Change in service life of an asset - Change in residual value of an asset
Clarion purchases land and prepares it for use. Which of the following items should be capitalized as land improvements?
- Cost of driveways - Cost of lawn sprinkler system - Cost of sidewalks
Larry purchases land to be used for a new corporate headquarters. Which of the following items are capitalized in the cost of land?
- Costs to remove an old building - Grading the land - Legal fees to secure title - Title insurance
Sarah purchases land to be used for a new storage facility. Which of the following items are capitalized in the cost of land?
- Costs to remove an old building - Legal fees to secure title - Commissions
On December 30, 20X1, Brighton Corp. disposed of equipment with a historical cost of $150,000 and accumulated depreciation of $60,000. The equipment was sold for $70,000 cash. The journal entry to record the sale will include which of the following?
- Credit equipment $150,000 - Debit loss on sale of equipment $20,000 - Debit accumulated depreciation $60,000 - Debit cash $70,000
Wall Corporation exchanges old equipment for new equipment. The original cost of the old equipment was $100,000, and its accumulated depreciation at the date of exchange was $60,000. The new asset received had a fair value of $80,000 and a book value of $65,000. The journal entry to record this exchange will include which of the following entries?
- Debit accumulated depreciation $60,000 - Debit equipment $80,000 - Credit gain on exchange of asset $40,000 - Credit equipment $100,000
Krasel Corporation exchanges old equipment for new equipment. The original cost of the old equipment was $90,000, and its accumulated depreciation at the date of exchange was $70,000. The new asset received had a fair value of $50,000 and a book value of $45,000. The journal entry to record this exchange will include which of the following entries?
- Debit accumulated depreciation $70,000 - Credit gain on exchange of asset $30,000 - Debit equipment $50,000 - Credit equipment $90,000
On December 30, 20X1, Rocket Corp. disposed of equipment with a historical cost of $100,000 and accumulated depreciation of $70,000. The equipment was sold for $80,000 cash. The journal entry to record the sale will include which of the following entries?
- Debit cash $80,000 - Debit accumulated depreciation $70,000 - Credit equipment $100,000 - Credit gain on sale of equipment $50,000
On December 30, 20X1, Glaze Corp. disposed of equipment with a historical cost of $50,000 and accumulated depreciation of $30,000. The equipment was sold for $10,000 cash. The journal entry to record the sale will include which of the following entries?
- Debit to accumulated depreciation $30,000 - Credit to equipment $50,000 - Debit to loss on sale of asset $10,000 - Debit to cash $10,000
On December 30, 20X1, Glaze Corp. disposed of equipment with a historical cost of $50,000 and accumulated depreciation of $30,000. The equipment was sold for $45,000 cash. The journal entry to record the sale will include which of the following entries?
- Debit to accumulated depreciation $30,000 - Credit to gain on sale of asset $25,000 - Debit to cash $45,000 - Credit to equipment $50,000
Which of the following are commonly used depreciation methods?
- Declining-balance - Activity-based - Straight-line
Match the cost allocation terms with the type of assets to which they relate. Depreciation: Amortization:
- Depreciation: Property, plant, and equipment - Amortization: Intangible assets
Match each term with its definition. - Depreciation: - Depletion: - Amortization:
- Depreciation: allocation of the cost of a tanggible fixed asset - Depletion: alloation of the cost of natural resources - Amortization: allocation of the cost of an intagible asset
Which of the following expenditures are classified as repairs and maintenance for a vehicle owned by the company?
- Routine oil change - Engine tune-up
Match the recognition of related costs with the description. - Expense when incurred: - Capitalize on the balance sheet:
- Expense when incurred: Research and development costs incurred when developing a new product - Capitalize on the balance sheet: The purchase price of an intangible asset
Match the accounting treatment of costs associated with intangible assets with the description. - Expensed: - Capitalized:
- Expensed: Research and development costs - Capitalized: Purchase price plus costs necessary to get asset ready for use
Under what circumstances are accelerated depreciation methods most appropriate?
- For an asset that will provide greater benefits in earlier years of its life. - For an asset that will be used less in the later years of its life.
Which of the following items should be capitalized in the cost of equipment?
- Freight to deliver the equipment to its location - Purchase price - Installation and testing of equipment - Insurance on equipment during shipping - Sales tax - Legal fees to establish title
Which of the following are expenditures for assets subsequent to acquisition?
- Improvements - Additions - Repairs and maintenance
Which of the following strategies can be used to increase a company's return on assets?
- Increased sales volume with lower prices - Product differentiation and premium pricing
Margot Company constructs a new building that will replace its current office building. In addition to construction materials and labor, which of following costs incurred during the construction period should be included in the cost of the new building?
- Interest costs - Architect fees - Construction related overhead costs
Which of the following strategies could likely be used by a company to increase its return on assets?
- Product differentiation with premium pricing - Higher turn-over with discount pricing
Match the purpose of land with the proper reporting category. - Property, land and Equipment: - Investment:
- Property, land and Equipment: Land is used in company's operations - Investment: Land is purchased and held until price rises
Match the reporting category with the description. - Property, plant and equipment: - Natural resources:
- Property, plant and equipment: The asset is not physically used up or depleted - Natural resources: The asset is physically used up or depleted
Which of the following items are capitalized into the cost of a patent?
- Purchase price - Filing fees - Attorney fees to secure patent
Correctly match the intangible asset with the description - Purchased intangible asset: - Internally developed intangible asset:
- Purchased intangible asset: Patents, copyrights, trademarks, or franchise rights acquired from other companies. - Internally developed intangible asset: Product or process created internally for which patent may be obtained.
Match the costs with the appropriate accounting treatment. - Recurring costs related to equipment: - Cost of preparing asset for use:
- Recurring costs related to equipment: Expense during the period they are incurred - Cost of preparing asset for use: Include as part of asset cost
What are the financial statement effects of using the declining balance method of depreciation as compared to the straight-line method in the first year of an asset's life?
- Total assets are lower. - Net income is lower.
Which of the following items are intangible assets?
- Trademark - Patent - Copyright - Goodwill
Which of the following intangible assets are usually considered to have indefinite lives?
- Trademarks - Goodwill
Match the accounting treatment for impairment loss recoveries with the accounting standards. U.S. GAAP: IFRS:
- U.S. GAAP: Impairments are permanent and cannot be reversed - IFRS: Impairments are reversed if value recovers
Match the accounting standard with the correct treatment of the costs of development-related activities. - U.S. GAAP: - IFRS:
- U.S. GAAP: Recorded as expense during period incurred - IFRS: Recorded as intangible asset
A retirement or abandonment of an asset is different from a sale of an asset because
- a loss must be recognized for the remaining book value. - no cash is received.
The types of expenditures that can occur subsequent to an asset's acquisition are
- additions. - repairs and maintenance. - improvements.
Long-term tangible assets include
- buildings. - land. - equipment.
Which of the following items should be capitalized as land improvements?
- cost of fences - cost of parking lots - cost of sidewalks
Which of these are parts of the journal entry to record depreciation?
- credit accumulated depreciation - debit depreciation expense
The journal entry to record the amortization of an intangible asset includes
- credit to the intangible asset. - debit to amortization expense.
The two categories for intangible assets are
- intangibles with finite lives. - intangibles with indefinite lives.
Which of the following costs should be capitalized in the costs of acquiring a building?
- purchase price - realtor commissions - legal fees to obtain title - Remodeling building
Other terms used for an activity-based depreciation method are:
- units of production method - units of output method
Which of the following long-lived assets would not be depreciated?
Land
Which of the following costs are expensed under both U.S. GAAP and IFRS?
Research costs only
______ value is the amount the company expects to receive for the asset at the end of its service life.
Residual
The first step in determining whether an impairment loss should be recorded is to determine if the sum of estimated future cash flows from an asset is less than the asset's
book value.
The original cost of an asset minus accumulated depreciation is
book value.
The term _______ means to record an expenditure as an asset.
capitalize
In accounting, expenditures recorded as assets are said to be _____.
capitalized
The purchase price and all costs to bring an asset to its desired condition and location for use should be ______.
capitalized
Costs that produce future benefits are ______, but costs that produce benefits only in the current period are ______.
capitalized ; expensed
Mueller installs a new motor in its manufacturing equipment. The new motor is expected to decrease energy use by 25%. The related cost should be:
capitalized in the equipment account
An expenditure that qualifies as an addition should be
capitalized.
If an intangible right is successfully defended, the legal costs should be
capitalized.
The cost of land improvements are capitalized separately from land because land improvements tend to have a _______ useful life.
definite
Ling Corporation's long-term asset has a book value of $200,000 and an estimated fair value of $195,000. Ling estimates that the future cash flows associated with the asset are $198,000. To determine whether the asset may be impaired, Ling should compare the asset's book value to its
estimated future cash flows.
Under IFRS rules for R&D, the costs of research-related activities are recorded as _______, while the costs of development-related activities are recorded as ________.
expense; Intangible assets
Expenditures for repairs and maintenance should be ______ in the period incurred.
expensed
If an intangible right is not successfully defended, the legal costs should be
expensed
For a patent developed internally, the research and development costs are
expensed as incurred.
An accelerated depreciation method is appropriate when the asset will provide
greater benefits in the earlier years of the asset's life.
Intangible assets that are acquired from other entities are referred to as purchased intangibles, whereas intangibles that are created by a company are referred to as
internally developed intangibles.
The method of amortization used for intangible assets
is most commonly straight-line.
A higher return on assets typically indicates the company
is using its assets effectively.
The FASB requires research and development costs to be expensed because
it is difficult to determine whether costs will result in future benefits.
Use of MACRS for tax purposes usually results in _______ income tax in the earlier years of an asset's life.
lower
The initial valuation of purchased intangible assets requires that the intangible asset is recorded at
original cost
A(n) ______ is the exclusive right to manufacture a product or use a process granted for a period of ______ years.
patent; 20
The accounting for copyrights uses the same accounting rules as
patents
The ratio that indicates the amount of net income achieved per dollar of sales is the
profit margin ratio.
When an asset's fair value falls below its book value, the difference between fair value and book value is
recognized as an impairment loss.
Accounting for land improvements requires that the costs of land improvements are
recorded separately from the land itself.
The depreciable cost is
the cost of the asset minus the residual value.
Straight-line deprecation is calculated as the depreciable cost divided by
the estimated service life of the asset.
The service life or useful life of an asset is
the estimated use that the company expects to obtain from the asset before disposing of it.
In a basket or lump-sum purchase of assets, the total acquisition cost is allocated to the individual assets by multiplying the lump-sum purchase price times
the relative fair value percentages of each asset.
Total depreciation recorded over an asset's service life is:
the same regardless of the depreciation method used
A(n) ______ is an exclusive right to display a word, slogan, symbol, or emblem that distinctively identifies a company, product, or service.
trademark
An exclusive right to display a word, slogan, symbol, or emblem that distinctively identifies a company, product, or service is referred to as a
trademark
True or false: All long-term assets are subject to impairment rules.
true
True or false: If an impairment loss is recognized under U.S. GAAP, later recovery of the loss is prohibited.
true
True or false: Repairs and maintenance expenditures that do not increase the future benefit of the asset are expensed.
true
True or false: The accounting treatment for the cost of copyrights is identical to that of patents.
true
True or false: The initial cost of property, plant, and equipment includes the purchase price and all expenditures necessary to bring the asset to its desired condition and location for use.
true
