Chapter 7 Smartbook

The original cost of an asset minus accumulated depreciation is

book value.

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 ____.

Blank 1: depreciation Blank 2: amortization

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

Straight-line deprecation is calculated as the depreciable cost divided by

the estimated service life of the asset.

Total depreciation recorded over an asset's service life is:

the same regardless of the depreciation method used

The types of expenditures that can occur subsequent to an asset's acquisition are

improvements. additions. repairs and maintenance.

Goodwill may only be recognized

in a business acquisition

The distinction between land and land improvements is that:

land has an indefinite life

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.

Where is the account accumulated depreciation on equipment found on the financial statements?

As a contra account to equipment on the balance sheet

If a company generates its own goodwill through advertising or training, how should these costs be treated?

Expense the costs as incurred.

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

Pearce Corporation exchanges old equipment for new equipment. The original cost of the old equipment was $120,000, and its accumulated depreciation at the date of exchange was $40,000. The new equipment received had a fair value of $50,000 and a book value of $32,000. The journal entry to record this exchange will include which of the following entries?

Credit equipment $120,000 Debit accumulated depreciation $40,000 Debit loss on exchange $30,000 Debit equipment $50,000

Which of these are parts of the journal entry to record depreciation?

Debit Depreciation Expense Credit Accumulated Depreciation

Match each term with its definition.

Depreciation Allocation of the cost of a tangible fixed asset Depletion Allocation of the cost of natural resources Amortization Allocation of the cost of an intangible asset

True or false: Depreciation is a valuation method for property and equipment.

False

Which of the following items are initially recorded as an expense on the income statement?

Research and development costs Advertising costs

Which of the following does not differ among the different depreciation methods?

Total depreciation recognized over the asset's service life.

Larry purchases land to be used for a new corporate headquarters. Which of the following items are capitalized in the cost of land?

Grading the land Legal fees to secure title Costs to remove an old building Title insurance

The journal entry to retire old equipment that is not fully depreciated includes a:

debit to loss credit to equipment debit to accumulated depreciation

Which depreciation methods allocate the cost of long-term assets based on time?

declining-balance straight-line

The formula to calculate an activity-based depreciation rate is:

(cost - residual value)/estimated total production.

The formula for straight-line depreciation is

(cost - residual value)/service life.

Long-lived assets are typically classified in two categories:

Blank 1: tangible Blank 2: intangible

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 _____ .

Blank 1: time or lifetime Blank 2: use, usage, or activity

A(n) ____ is an exclusive right to display a word, slogan, symbol, or emblem that distinctively identifies a company, product, or service.

Blank 1: trademark or tradename

The gain or loss on disposal of an asset is calculated as:

amount received less the book value of asset sold

Which account is credited in a journal entry to record depreciation on machinery?

Accumulated Depreciation

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

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

Goodwill is recognized only when one company ____ another company.

Blank 1: acquires, buys, or purchases

Recording depreciation results in the allocation of the cost of a long-term asset to the years during which the asset provides

Blank 1: benefits, revenues, benefit, value, or revenue

The original cost of the asset less the accumulated depreciation is the __ __ of the asset.

Blank 1: book Blank 2: value

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.

Blank 1: copyright

The allocation of the cost of a tangible asset over its service life is referred to as

Blank 1: depreciation

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.

Blank 1: franchise

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.

Blank 1: franchise

The depreciable cost of an asset is the asset's cost minus its estimated ____ value.

Blank 1: residual or salvage

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

In accounting, expenditures recorded as assets are said to be _____.

capitalized

The accumulated depreciation account is classified as a(n)

contra asset.

Otto Inc. retires old equipment with a book value of $2,400. Otto should

recognize a loss of $2,400

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 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.

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.

Which of the following are expenditures for assets subsequent to acquisition?

Additions Repairs and maintenance Improvements

Use of MACRS for tax purposes usually results in ____ income tax in the earlier years of an asset's life.

Blank 1: less, lower, reduced, or reducing

The cost of land improvements are capitalized separately from land because land improvements tend to have a _____ useful life.

Blank 1: limited, finite, shorter, short, or definite

A(n) ____ is the exclusive right to manufacture a product or use a process granted for a period of ____ years.

Blank 1: patent Blank 2: twenty or 20

An estimated residual value _____ the total amount of depreciation recorded over an asset's service life.

Blank 1: reduces, lowers, or decreases

An asset ____ occurs when an asset is no longer useful, but cannot be sold.

Blank 1: retirement, retire, retires, or retirements

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.

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

The formula for calculating the double-declining-balance method is

book value at beginning of year x 2/estimated service life