Chapter 7 Study Set

Match each term with its definition

Depreciation = allocation of the cost of tangible fixed asset Depletion = allocation of the cost of natural resources Amortization = allocation of the cost of an intangible asset

Long-term tangible assets include

Equipment Buildings Land

Which of the following are long-term tangible assets?

Equipment Property

When an asset has a significant decline in value and is written down, this is called ____

Impairment

An asset that has no physical substance is called an

Intangible asset

The formula for straight-line depreciation is

(cost - residual value) / service life

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

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

Repairs and maintenance Improvements Additions

The depreciable cost of an asset is the asset's cost minus its estimated _____

Residual value

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 referred to as the ____ life of the asset

Service

Which of the following are commonly used depreciation methods?

Straight-line Activity-based Declining-balance

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

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

The same regardless of the depreciation method used

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

Other terms used for an activity-based depreciation method are:

Units of output method Units of production method

The purchase price and all costs to bring an asset to its desired condition and location for use should be

capitalized

When an asset is no longer useful, but cannot be sold it is called an asset ____

retirement

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 formula for calculating the double-declining-balance method is

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

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

Recognize a loss of $2,400

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

Repairs and maintenance Additions Improvements

The depreciable cost is

The cost of the asset minus the residual value

Units of production or units of output are alternative terms for the _________ depreciation method

activity-based

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

(cost - residual value) / estimated total production

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

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 an asset minus accumulated depreciation is

Book value

The original cost of the asset less the accumulated depreciation is the _____ of the asset

Book value

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?

Credit gain or exchange of asset $30,000 Credit equipment $90,000 Debit accumulated depreciation $70,000 Debit equipment $50,000

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

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 loss on exchange $10,000 Debit equipment $40,000 Credit equipment $90,000 Debit accumulated depreciation $40,000

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

Debit to loss Debit to accumulated depreciation Credit to equipment

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

Declining-balance Straight-line

Straight-line, declining-balance, and activity-based refer to methods commonly used to ____ property, plant, and equipment.

Depreciate

The formula for calculating declining balance depreciation is the depreciation rate per year times

The book value at the beginning of the year.

Straight-line depreciation 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

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

Total depreciation recognized over the asset's service life.

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

Depreciation

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

Amortization refers to the allocation of the cost of ____ assets to expense

Intangible

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.

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

_________ value is the amount the company expects to receive for the asset at the end of its service life.

Residual