Financial Accounting Chapter 9

Joe's Copy Shop bought equipment for $60,000 on January 1, 2013. Joe estimated the useful life to be 3 years with no salvage value, and the straight-line method of depreciation will be used. On January 1, 2014, Joe decides that the business will use the equipment for a total of 5 years. What is the revised depreciation expense for 2014?

$10,000 $60,000/3 years = $20,000 annual depreciation $40,000/4 remaining years = $10,000 annual depreciation $20,000 - $10,000 = $10,000

A company decides to exchange its old machine and $55,000 for a new machine. The old machine has a book value of $45,000 and a fair value of $50,000 on the date of the exchange. The exchange has commercial substance. The cost of the new machine would be recorded at

$105,000 $55,000 + $50,000 = $105,000

Jefferson Company purchased a piece of equipment on January 1, 2014. The equipment cost $60,000 and had an estimated life of 8 years and a salvage value of $8,000. What was the depreciation expense for the asset for 2015 under the double-declining-balance method?

$11,250 25% or (1/8 x 2) (DDB) $60,000 (book value) x 25% = $15,000 [($60,000-$15,000) x 25%] = $11,250

Equipment was purchased for $60,000. Freight charges amounted to $2,800 and there was a cost of $8,000 for building a foundation and installing the equipment. It is estimated that the equipment will have a $12,000 salvage value at the end of its 5-year useful life. Depreciation expense each year using the straight-line method will be

$11,760 $60,000 + $2,800 + $8,000 - $12,000 = $58,800 $58,800/5 years = $11,760

Erin Danielle Company purchased equipment and incurred the following costs: Cash price -$24,000 Sales taxes- $1,200 Insurance during transit- $200 Installation and testing-$400 Total costs-$25,800 What amount should be recorded as the cost of the equipment?

$25,800 All of the costs in addition to the cash price should be included in the cost of the equipment because they were necessary expenditures to acquire the asset and make it ready for its intended use.

Costs incurred to increase the operating efficiency or useful life of a plant asset are referred to as

capital expenditures.

Depreciation is a process of

cost allocation

Depreciable cost is the

cost of an asset less its salvage value.

When there is a change in estimated depreciation

current and future years' depreciation should be revised.

The Internal Revenue Service (IRS) requires the taxpayer to use the same depreciation method on the tax return that is used in preparing financial statements.

False The IRS does not require the same depreciation method on the tax return that is used in the financial statements.

The gain or loss on exchange of plant assets is the difference between the fair value and the cost of the asset given up.

False The gain or loss on exchange of plant assets is the difference between the fair value and the book value of the asset given up.

Recognizing depreciation on an asset results in an accumulation of cash for replacement of the asset.

False Recognizing depreciation on an asset does not result in an accumulation of cash for replacement of the asset.

The cost of land includes closing costs such as title and attorney's fees.

True

To determine the revised depreciation expense, the company computes the asset's depreciable cost at the time of the revision and divides it by the asset's remaining useful life

True

The cost of land includes all of the following except

parking lots

Losses on an exchange of assets that has commercial substance are

recognized immediately

If disposal of a plant asset occurs during the year, depreciation is

recorded for the fraction of the year to the date of the disposal.

All of the following are intangible assets except

research and development costs.

A change in the estimated useful life of equipment requires

that the amount of periodic depreciation be changed in the current year and in future years

In exchanges of assets in which the exchange has commercial substance

both gains and losses are recognized immediately.

Natural resources include all of the following except

land improvements

Companies amortize the cost of a patent over its

legal life or its useful life, whichever is shorter

A company purchased land for $100,000 cash. Accrued real estate taxes on the land, $2,000, and real estate taxes on the land for the current year, $3,000, were also paid in cash. Real estate brokers' commission was $8,000 and $10,000 was spent on demolishing the building that was on the property before construction of a new building could begin. The company was able to sell some of the salvaged materials from the demolished building for $2,000 cash. Under the historical cost principle, the cost of the land would be recorded at

$118,000 $100,00 + $2000 + $8,000 + $10,000 - $2,000

Able Towing Company purchased a tow truck for $60,000 on January 1, 2012. It was originally depreciated on a straight-line basis over 10 years with an assumed salvage value of $12,000. On December 31, 2014, before adjusting entries had been made, the company decided to change the remaining estimated life to 4 years (including 2014) and the salvage value to $2,000. What was the depreciation expense for 2014?

$12,100 ([($60,000-$12,000)/10 years] x 2 = $9,600 ($60,000-$9,600-$2,000 = $48,400 $48,400/4 = $12,100

Micah Bartlett Company purchased equipment on January 1, 2014, 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. The amount of accumulated depreciation at December 31, 2015, if the straight-line method of depreciation is used, is

$156,000 ($400,000 - $10,000)/5 = $78,000 $78,000 x 2 = $156,000

Martha Beyerlein Company incurred $150,000 of research and development costs in its laboratory to develop a patent granted on January 2, 2015. On July 31, 2015, Beyerlein paid $35,000 for legal fees in a successful defense of the patent. The total amount debited to Patents through July 31, 2015, should be

$35,000

Bailey Company purchases a new delivery truck for $35,000. The sales taxes are $2,000. The logo of the company is painted on the side of the truck for $1,200. The truck license is $120. The truck undergoes safety testing for $220. What does Bailey record as the cost of the new truck?

$38,420 The cost of truck includes the purchase price, the sales tax, painting the logo on the side of the truck, and the safety testing. $35,000 + $2,000 + $1,200 + $220

Schopenhauer Company exchanged an old machine, with a book value of $39,000 and a fair value of $35,000, and paid $10,000 cash for a similar new machine. The transaction has commercial substance. At what amount should the machine acquired in the exchange be recorded on Schopenhauer's books?

$45,000 $35,000 + $10,000 = $45,000

Equipment was purchased for $800,000 on January 1, 2013. It has an estimated useful life of 8 years and a salvage value of $120,000. Depreciation is being computed using the straight-line method. What amount should be shown for the Equipment, net of accumulated depreciation, in the company's 2014 balance sheet?

$630,000 ($800,000 - $120,000) / 8 years = $85,000 $85,000 x 2 years = $170,000 $800,000 - $170,000 = $630,000

Miles Co. earned $250,000 net income last year and their net sales were $4,900,000. Beginning total assets were $12,250,000 and ending total assets $15,750,000. The asset turnover is

0.35 times $4,900,000/[($12,250,000 + $15,750,000)/2] = 0.35 times.

Lake Coffee Company reported net sales of $180,000, net income of $54,000, beginning total assets of $200,000, and ending total assets of $300,000. What was the company's asset turnover?

0.72 times Net Sales/Average Total Assets or 0.72 times or ($180,000/ [$200,000+$300,000/2]).

A plant asset was purchased on January 1 for $40,000 with an estimated salvage value of $8,000 at the end of its useful life. The current year's depreciation expense is $4,000 calculated on the straight-line basis and the balance in the Accumulated Depreciation account at the end of the year is $20,000. The remaining useful life of the plant asset is

3 years $40,000 - $8,000 = $32,000 depreciable cost $32,000/$4,000 = 8 years $20,000/$4,000 = 5 years 8 years - 5 years = 3 years

In what respect does accounting for research and development costs differ under IFRS as compared to GAAP?

Costs in the development phase are capitalized once technological feasibility is achieved under IFRS.

Angus Company utilizes IFRS for accounting purposes. Angus has chosen to revalue its plant assets as of December 31, 2015. What is a key requirement of this revaluation?

It must apply the revaluation to all assets within the class that is selected for revaluation.

Asset Turnover Ratio

Net Sales/Average Total Assets

A gain on sale of a plant asset occurs when the proceeds of the sale exceed the

book value of the asset sold.

In the current year, Betz Company incurred $400,000 of research and development costs to develop a patent. It is estimated that these costs will be recouped at the end of 3 years. On August 1 of the current year, the patent was granted. On November 1, Betz Company paid $50,000 in legal fees in a successful defense of the patent. How should Betz Company report the research and development costs and legal fees for the current year?

Research and development costs of $400,000 are included on the income statement as an expense and legal fees of $50,000 are reported on the balance sheet as part of the Patents account.

What term is used by IFRS that is equivalent to "salvage value" for GAAP?

Residual value

What is used in determining the amount of depreciation under the units-of-activity method.

Salvage value

Companies generally use the units-of-activity method to compute depletion

True

Goodwill is the excess of cost over the fair value of the net assets acquired.

True

The straight-line method produces

a constant annual depreciation expense over the useful life of an asset.

Factors that affect the computation of depreciation include all of the following except

book value.

Maggie Sharrer Company expects to extract 20 million tons of coal from a mine that cost $12 million. If no salvage value is expected, and 2 million tons are mined and sold in the first year, the entry to record depletion will include a

debit to Depletion Expense of $1,200,000 $12 million/20 million tons = $0.60 per ton 2 million tons x $0.60 = $1,200,000

A truck which had an original cost of $72,000 and accumulated depreciation of $11,000 was sold for $57,000. The journal entry to record the sale will include a

debit to Loss on Disposal for $4,000 $72,000 -$11,000 = $61,000 $61,000 - $57,000 = $4,000

The depreciation method that produces a decreasing annual depreciation expense over an asset's useful life is the

declining-balance method

The method that ignores salvage value in determining the amount of depreciation until the final year of the asset's useful life is the

declining-balance method

Plant assets decline in service potential over their useful lives except for

land