ACG2021 Chapter 9

When equipment is sold for cash in an amount that is greater than its book value, the company debits the following

Accumulated Depreciation and Cash

When equipment is sold for cash in an amount that is less than its book value, the company debits the following

Accumulated Depreciation, Cash, and Loss on Disposal of Plant Assets

When there is a change in a depreciable asset's useful life or salvage value

only that asset's current and future years' depreciation will be affected.

When a plant asset is retired, the difference between original cost of the asset and the book value of the asset is

recognized on the income statement as a loss on disposal of plant asset.

When using the straight-line depreciation method, which of the following is not a factor that affects the computation of depreciation?

Book value of the asset The factors affecting the computation of depreciation include acquisition cost, useful life, and salvage value.

Corian Company purchased equipment and incurred these costs: Cash price, $24,000; Sales taxes, $1,200; Insurance during transit, $200; Annual maintenance costs, $400. What amount should be recorded as the cost of the equipment?

$25,400 Cash price + Sales taxes + Insurance during transit

Coronado Company purchased land for $80,000. The company also assumes $12,000 of accrued taxes on the property, incurred $5,000 to remove an old building, and received $2,000 from the salvage of the old building. At what amount will the land be recorded in the accounting records?

$95,000 Purchased land + Accrued taxes + Incurred money - Received money from salvage

Which one of the following will maximize a company's reported net income in the first year of owning an asset?

A long estimated life, a high salvage value, and straight-line depreciation

Which one of the following will minimize depreciation expense in the first year of owning an asset?

A long estimated life, a high salvage value, and straight-line depreciation

Which one of the following will maximize depreciation expense in the first year of owning an asset?

A short estimated life, a low salvage value, and declining balance depreciation

Which of the following measures provides an indication of how efficient a company is in employing its assets?

Asset turnover ratio

Bazydlo Corporation bought equipment for $320,000 and it had an expected salvage value of $40,000. The life of the equipment was estimated to be 7 years. The depreciable cost of the equipment is

Depreciable cost = Purchase price - Salvage Value

Which of the following is not a depreciable asset?

Land

Which one of the following costs will not be included in the cost of equipment?

Maintenance cost

In the current year, Pierce Company incurred $160,000 of research and development costs in its laboratory to develop a new product. It also spent $25,000 in legal fees for a patent on that new product. Later i the current year, Pierce paid $15,000 for legal fees in a successful defense of that patent. What is the total amount that should be debited to the company's Patents account in the current year?

Only the $25,000 in legal fees and the $15,000 of successful defense costs should be debited to the Patents account. The research and development costs spent to develop the new product must be expensed in the year they were incurred because there is no certainty of future benefits.

Which of the following two ratios multiplied together yields the return on assets ratio?

The profit margin ratio and the asset turnover ratio

Which of the following is an intangible asset that is not amortized?

Trademark

If a company properly reports goodwill as an intangible asset on its books, which of the following must be true?

The company purchased another company.

On May 1 of the current year, Moreno Company purchased a patent from another company for $96,000. The estimated useful life of the patent is 8 years, and its remaining legal life is 12 years. How much is Moreno's amortization expense for the current year?

Amortization is calculated using the straight-line method over the shorter of the useful life or the remaining legal life. In this case, the shorter is 8 years. Amortization expense for the current year = $96,000/8 years x 8/12 = $8,000.

Which of the following statements is false?

Research and development costs are not expensed when they result to a successful patent.

On May 1, Year 1, Best Buy purchased an asset for $12,000, with a $1,500 estimated salvage value, and a 6-year useful life. How much is the Year 1 depreciation expense using the straight-line method?

$1,167 Depreciation expense = (Purchase price - Salvage value) ÷ Years x Portion of year that will be expensed

Lorek Company acquires land for $160,000 cash. Additional costs are as follows: Removal of shed, $500; Filling and grading, $2,000; Salvage value of lumber of shed, $120; Broker commission, $6,000; Paving of parking lot, $15,500; Closing costs, $1,000. Lorek Company Should record the acquisition cost of the land as

$169,380 Purchase price, 160,000 Add: Removal of shed less salvages (i.e., 500 - 120), 380 Add: Filling and grading, 2,000 Add: Broker's commission, 6,000 Add: Closing costs, 1,000 Acquisition costs of land, 169,380

A purchase of equipment includes a purchase price of $18,000, freight charges of $500 and installation costs of $2,500. The estimated salvage value and useful life are $3,000 and five years, respectively. Under the straight-line method, how much is annual depreciation expense?

$3,600 1) Cost of equipment + Freight cost + Installation 2) Depreciation = (Total expenses - Salvage value) ÷ Useful life

At the beginning of the current year, a company purchased machinery for $50,000. It has a salvage value of $5,000 and an estimated useful life of 9 years. How much is depreciation expense for the first year under the straight-line method?

$5,000 Depreciation expense per year = (Purchased price - Salvage value) ÷ Useful life

Massey Corporation purchased a piece of land for $60,000. Massey paid attorney's fees of $5,000 and brokers' commissions of $4,000 in connection with the purchase. An old building on the land was torn down at a cost of $3,000, and proceeds from the scrap were $700. Massey also assumes $5,000 of property taxes on the land owed by the previous owner. How much is the total cost of the land?

$76,300 Purchased land + Attorney's fees + Broker's commission + Cost to tear down - Proceeds from scrap + Property taxes

Paul Company purchased a dump truck for $27,000. In addition, Paul Company paid freight charges of $500, and $700 to paint the company's logo on the truck. The estimated salvage value and useful life are $1,200 and 5 years, respectively. How much is the accumulated depreciation under the straight-line method after three years?

1) Purchase price + Freight + Paint 2) (Sum of purchase price - Salvage value) ÷ Useful life 3) Answer x 3 years

A plant asset was purchased on January 1 for $45,000 with an estimated salvage value of $5,000 at the end of its useful life. The current year's depreciation expense is $5,000. It is calculated on the straight-line basis. The balance of the company's Accumulated Depreciation account at the end of the year after-adjusting entries is $25,000. The remaining useful life of the plant asset is

1) Useful life = (Purchase price - Salvage value) ÷ Depreciation expense 2) Years expired = Accumulated depreciation/Depreciation per year 3) Remaining life = Useful life - Years expired

A company uses straight-line depreciation. It purchased a truck for $40,000. The truck's salvage value is $4,000. The truck's monthly depreciation expense is $600. What is the truck's useful life?

5 years 1) Purchase price - Salvage value = Depreciable cost 2) Useful life = Depreciable cost ÷ Annual depreciation cost ($600x12)

A company sold a plant asset for $3,500. It had cost $11,000 and its accumulated depreciation is $8,500. What gain or loss did the company experience?

Book value is $2,500 ($11,000 - $8,500). Since the proceeds ($3,500) exceed the book value ($2,500) by $1,000, there is a gain.

Harrington Corporation recently leased a number of trucks from Andre Corporation. In inspecting the books of Harrington Corporation, you notice that the trucks have been recorded as assets on Harrington's balance sheet. The balance sheet also shows a liability for the leases. Based on this information, what type of acquisition are the trucks for Harrington?

Capital Lease

On May 1 of the current year, La Presa Company sells some equipment for $25,000. The original cost was $50,000, the estimated salvage value was $5,000, and the expected useful life was 5 years. Straight-line depreciation is used. On January 1 of the current year, the Accumulated Depreciation account had a balance of $18,000. How much is the gain or loss on the sale?

Since the equipment has a $45,000 depreciable cost (i.e., Depreciable cost = Cost - salvage value = $50,000 - 5,000) and a life of 5 years, the depreciation is $9,000 per year. In the current year, depreciation expense is $3,000 (i.e., $9,000 per year x 4/12) which increases accumulated depreciation. The Accumulated Depreciation balance at the date of sale is $21,000 (i.e., $18,000 + 3,000). Book value equals cost minus accumulated depreciation. Book value is $29,000 (i.e., $50,000 - $21,000). A gain occurs if the selling price exceeds the book value, and a loss occurs if the selling price is less than the book value. Sales price - book value = $25,000 - 29,000 = ($4,000) (i.e., loss).

Which statement is true about additions to plant assets?

They are capitalized.

All of the following statements are true regarding the declining-balance method of depreciation except

the declining-balance method produces lower depreciation expense in the early years as opposed to the later years.

Which of the following is an acceptable way to express the useful life of a depreciable asset?

All of these

Companies can either lease or purchase assets that they need to operate their business. For example, many companies lease vehicles instead of buying them. Which of the following is not an advantage of leasing using an operating lease relative to purchasing an asset?

Higher risk of obsolescence by the lessee

Santiago Corporation bought equipment on January 1. The equipment cost $350,000 and had an expected salvage value of $50,000. The life of the equipment was estimated to be 6 years and straight-line depreciation is used. The book value of the equipment at the end of the fourth year would be

Solution: Depreciation per year = ($350,000 - 50,000)/6 years = $50,000 per year Accumulated depreciation after 4 years = $50,000 x 4 = $200,000 Book value = Cost minus accumulated depreciation Book value = $350,000 - 200,000 = $150,000.

A company's average total assets are $275,000, depreciation expense is $20,000, and accumulated depreciation is $80,000. Net income is $1,500,000. Net sales total $325,000. What is the asset turnover?

The asset turnover is net sales divided by the average total assets: $325,000/$275,000 = 1.18 times.

Schneider Trucking Inc. purchased a new truck on January 1 of the current year for $180,000. Its expected useful life is 5 years and its salvage value is estimated at $25,000. What is the depreciation expense for the current year using the declining-balance method at a double the straight-line rate (i.e., the double-declining balance method)?

The depreciation expense for 20X1 would be the truck's cost times 2 divided by the life in years = $180,000 x (2 x 1/5) = $72,000.

Adams Trucking Inc. purchased a new semi-truck on January 1, 2017 for $250,000. Its useful life is expected to be 5 years and its salvage value is estimated at $20,000. What is the depreciation expense for 2018 using the declining-balance method at double the straight-line rate (i.e., the double-declining balance method)?

The depreciation expense for the first year would be ($250,000 - 0) x (2 x 1/5) = $100,000. The asset's book value becomes $150,000 (i.e., $250,000 - 100,000). The depreciation expense for the second year would be based on the book value at the start of the second year: $150,000 x (2 x 1/5) = $60,000. Alternatively, the depreciation expense for the second year = ($250,000 - 100,000) x 2/5 = $60,000

Kent Enterprises purchased a truck for $80,000 on January 1 of its first year. The company uses the units-of-activity method and it estimates that the truck's useful life will be 120,000 miles. The truck will have an estimated salvage value of $5,000. The company drives the truck 20,000 miles in the first year and drives it 30,000 miles in the second year. How much accumulated depreciation will be reported on the company's balance sheet as of the end of the second year?

The depreciation rate to use for units-of-activity is calculated as: (Cost - Salvage value)/Total activity expected. To compute accumulated depreciation at the end of two years, the depreciation rate (i.e., per mile) should then be multiplied by the units of activity (i.e., miles driven) for both years. Depreciation rate = ($80,000 - 5,000)/120,000 miles = $0.625 per mile Accumulated depreciation = (20,000 + 30,000) x $0.625 per mile = $31,250

Given the following account balances at year end, how much are total intangible assets on the balance sheet of Alisha Enterprises? Sales revenue, $45,000,000; Cash, $1,500,000; Copyrights, $500,000; Accounts receivable, $4,000,000; Land, $15,000,000; Equipment, $25,000,000; Trademarks, $1,000,000; and Goodwill, $4,500,000. The company also paid $2,000,000 for research & development during the current year.

The intangibles are copyrights of $500,000, trademarks of $1,000,000, and goodwill of $4,500,000 totaling $6,000,000. Notice that research & development is not an intangible asset even though research & development may lead to new intangibles, such as patents or copyrights.

Given the following account balances at year end, how much are total intangible assets on the balance sheet of Alisha Enterprises? Sales revenue, $45,000,000; Cash, $1,500,000; Accounts receivable, $3,000,000; Land, $15,000,000; Equipment, $25,000,000; Franchises, $500,000; Trademarks, $1,700,000; and Goodwill, $2,800,000. The company also paid $1,500,000 for research & development during the current year.

The intangibles are trademarks of $1,700,000, franchises of $500,000, and goodwill of $2,800,000 totaling $5,000,000.

The calculation of depreciation using the declining-balance method

ignores salvage value in determining the amount to which a constant rate is applied.

Lake Coffee Company reported net income of $64,000 and net sales of $600,000. The company's asset turnover ratio is 3.5 (or 3.5 times). What was the company's return on assets?

Return on assets = Asset turnover x Profit margin = 3.5 x ($64,000/$600,000) = 37.33%.

Which ratio is computed by dividing net income by net sales?

Profit margin ratio

A business bought a new truck for $40,000 for its auto parts delivery service. It estimated that the truck would last 200,000 miles with a salvage value of $8,000. What would be the depreciation expense for the first year assuming it is driven 11,500 miles in the first year?

The truck's depreciation rate per mile is $0.16, which is computed as ($40,000 - $8,000) divided by 200,000 miles. Depreciation expense in the first year = $0.16 X 11,500 miles = $1,840.

Which one of these statements is true?

- Research and development costs are expensed in the year incurred. - The amortization period of a patent is the lesser of its useful life or 20 years, whichever is shorter.

A company has the following asset account balances: Buildings and equipment, $8,900,000; Accumulated depreciation, $1,800,000; Patents, $850,000; Land Improvements, $1,200,000; and Land, $5,000,000. How much will be reported on the balance sheet under property, plant, & equipment?

Buildings and equipment, land improvements, and land, less accumulated depreciation are included for a total of $13,300,000. (i.e., 8,900,000+1,200,000+5,000,000-1,800,000=13,300,000).

Which of the following costs should not be included in the cost of a building?

Parking lot repaving

Ben's Razor Company purchased a machine for $90,000 on January 1, 2016 and depreciated it on a straight-line basis over a 10-year life assuming no salvage value. If the company sells the machine for $24,000 on June 30, 2020, what would be the company's gain or loss from the sale?

The selling price less the book value of the machine equals the gain or loss on the sale. The Book value of the machine when sold: $90,000 - [($90,000/10 years) x 4.5 years] = $49,500. The gain (loss) on the sale = sales price minus book vale = $24,000 - $49,500 = ($25,500).

Caruso Company purchased equipment on January 1 at a total invoice cost of $400,000. The equipment has an estimated salvage value of $10,000 and an estimated useful life of 5 years. What is the amount of accumulated depreciation at the end of the second year if the straight-line method of depreciation is used?

1) Accumulated Depreciation = (Total invoice cost - Salvage value) ÷ Useful life 2) Total Accumulated Depreciation = Accumulated Depreciation x Consumed life

Able Towing Company purchased a tow truck for $60,000 on January 1 of its first year. The truck was originally depreciated on a straight-line basis over 10 years with an estimated salvage value of $12,000. At the end of the third year, before year-end adjusting entries have been recorded, the company decided to revise the estimated life of the truck to a total of 6 years and to change its estimated salvage value to $2,000. How much depreciation expense should be recorded for the third year?

For the first three years, the annual depreciation expense is ($60,000 - $12,000)/10 years = $4,800 per year. In the third year, before depreciation is recorded, the asset's book value is ($60,000 - 2 x 4,800 = $50,400), and this remaining book value should be depreciated to the asset's revised salvage value over the asset's remaining estimated useful life: ($50,400 - $2,000)/(6-2) = $12,100. Note: There are four years of useful life including the third, fourth, fifth, and sixth years.

A permanent decline in the market value of an asset is called

an impairment.

An asset was purchased on January 1 for $53,000 has an estimated salvage value of $3,000. The depreciation expense for the third year is $5,000 and the balance of the Accumulated Depreciation account after the third year's adjusting entries are recorded is $15,000. If the company uses the straight-line method, what is the asset's remaining useful life?

7 years 1) Depreciable cost = Purchase price - Salvage value 2) Consumed life = Accumulated Depreciation ÷ Depreciation expense 3) Total years of life - Consumed life = Remaining useful life

Harrington Corporation recently leased a number of trucks from Andre Corporation. In inspecting the books of Harrington Corporation, you notice that the trucks have not been recorded as assets on Harrington's balance sheet. Based on this information, what type of acquisition are the trucks for Harrington?

Operating lease

Which of the following gives the recipient the right to manufacture, sell, or otherwise control an invention for a period of 20 years?

Patent

Oahu Industries' average total assets for the year are $5,000,000, its average total stockholders' equity for the year are $2,500,000, its net income is $700,000, its gross margin is $2,500,000, and its net sales are $10,000,000. What is Oahu's return on assets?

Return on assets is calculated by dividing net income by the average total assets. Oahu's return on assets is $700,000 divided by $5,000,000 = 14%.

On January 1, 2015, Jamaica Company purchased equipment for $18,000. The estimated salvage value is $2,000 and the estimated useful life is 5 years. On December 31, 2017, before adjusting entries have been made, the company decided to extend the estimated useful life of the equipment one year giving it a total life of 6 years. The company did not change the salvage value and continues to use the straight-line method. What is the depreciation expense for 2017?

The annual depreciation for the first two years of life is calculated as the sum of the purchase price less the salvage value divided by the useful life: ($18,000 - $2,000)/5 years = $3,200 per year. The depreciable cost that remains is $18,000 - $2,000 - (2 years x $3,200) = $9,600. This amount is allocated over the remaining useful life, and the remaining useful life is 4 years (i.e., 6 total years - 2 expired years). Depreciation in the third year is $2,400 (i.e., $9,600/4 years).

An asset purchased on January 1 for $60,000 has an estimated salvage value of $3,000. The current useful life is 8 years. How much is total accumulated depreciation using the straight-line method at the end of the second year of life?

The annual depreciation is calculated as the sum of the purchase price less the salvage value divided by the useful life: ($60,000 - $3,000)/8 years = $7,125. At the end of the second year, there will be two years of accumulated depreciation for a total of $14,250.

In the current year, Brogan Company sold equipment for $20,000. The original cost was $80,000, the estimated salvage value was $8,000, and the expected useful life was 6 years. The equipment was fully depreciated. How much is the gain or loss on the sale?

The book value at the date of sale is the salvage value since the asset is fully depreciated. The gain or loss is the selling price less the book value: $20,000 - $8,000 = $12,000 gain.

Bubba's Trucking Company purchased a new truck on January 1, 2017 for $270,000. Its useful life is expected to be 9 years and its salvage value is estimated at $25,000. What is the depreciation expense for 2018 using the declining-balance method at double the straight-line rate (i.e., the double-declining balance method)?

The depreciation expense for the first year would be ($270,000 - 0) x (2 x 1/9) = $60,000. This produces a book value of $210,000 (i.e., $270,000 - 60,000) at the end of the first year. The depreciation expense for the second year would be based on the book value at the start of the second year: $210,000 x (2 x 1/9) = $46,667.

Clarence Trucking Inc. purchased a new truck on January 1, 2017 for $360,000. Its useful life is expected to be 8 years and its salvage value is estimated at $60,000. The company uses the declining-balance method at double the straight-line rate (i.e., the double-declining balance method). What is the truck's book value at the end of December 31, 2018?

The depreciation expense for the first year would be ($360,000 - 0) x (2 x 1/8) = $90,000 which produces a book value of $270,000 at the end of the first year (i.e., $360,000 - 90,000). The depreciation expense for the second year would be based on the book value at the start of the second year: $270,000 x (2 x 1/8) = $67,500. The book value at the end of the second year equals the asset's cost minus its accumulated depreciation = $360,000 - 90,000 - 67,500 = $202,500.

Given the following account balances at year end, how much is amortization expense on Analog Enterprises' income statement for the current year if the company amortizes intangibles over ten years? Sales revenue, $45,000,000; Patents, $2,500,000; Accounts receivable, $4,000,000; Land, $15,000,000; Equipment, $25,000,000; Trademarks, $1,200,000; Goodwill, $4,500,000; and Copyrights, $1,500,000. The company also paid $2,000,000 for research & development at the start of the current year. Assume that all of the company's intangible assets were acquired at the start of the current year.

The intangibles are trademarks, patents, goodwill, and copyrights. Only patents and copyrights are amortized. Amortization expense for the year equals ($2,500,000 + $1,500,000)/10 = $400,000.