ACC Chapter 7 Learn smart

True or false: Repairs and maintenance expenditures related to an asset do not increase future benefits.

True

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

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

Long-term tangible assets include

buildings. equipment. land

a _________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

a____________is an exclusive right of protection given to a creator of a published work, such as a song, film, painting, photograph, or book.

copyright

The formula to calculate the depreciation for the units-of-production method (activity-based depreciation) is ((cost - residual value)/total estimated production) x ______.

current-year activity or production

Goodwill is recognized only when one company_____another company.

Blank 1: acquires, buys, or purchases

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

a ______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

The original cost of an asset minus accumulated depreciation is

book value.

The accumulated depreciation account is classified as a(n)

contra asset.

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.

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.

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

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

units of output method units of production method

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. (($100,000 - 20,000)/40,000 machine hours = $2.00 per machine hour.)

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 Rationale: Depreciation expense is ($50,000 - 10,000)/5 = $8,000 per year. $50,000 less accumulated depreciation of $24,000 = $26,000.

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. Rationale: $210,000 - $30,000 = $180,000/60,000 machine hours = $3.00 per machine hour.

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 Rationale: The depreciation rate is 2 x 1/5 = 40%. $100,000 x 40% = $40,000 depreciation expense in year 1.

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 (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 Rationale: $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 costs should be capitalized in the costs of acquiring a building?

-purchase price -realtor commissions -legal fees to obtain title

Units of production or units of output are alternative terms for the________________-___________depreciation method.

Blank 1: activity Blank 2: based

The original cost of the asset less the accumulated depreciation is the _____________--___________of the asset.

Blank 1: book Blank 2: value

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

Blank 1: depreciate

The estimated use the company expects to obtain from an asset before disposing of it is referred to as the__________life of the asset. (Enter one word per blank)

Blank 1: service, useful, or depreciable

The depreciation rate we use under the declining-balance method is a multiple of the________________---_____________Method

Blank 1: straight Blank 2: line

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 Blank 2: use, usage, or activity

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 Title insurance Grading the land Legal fees to secure title

Which of the following items should be capitalized in the cost of equipment?

Legal fees to establish title Sales tax Freight to deliver the equipment Installation and testing of equipment

Which of the following costs should be capitalized in the costs of acquiring a building?

Legal fees to obtain title Realtor commissions Remodeling building

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?

Net income is lower. Total assets are lower

The exclusive legal right to manufacture a product or to use a process is called a(n)_________

Patent

Expensed Capitalized

Research and development costs Purchase price plus costs necessary to get asset ready for use

Attorney fees and other costs necessary to secure a patent should be

added to the patent account.

For accounting purposes, depreciation is

an allocation of a cost of an asset.

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

depreciation

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

a _________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

The key factor in classifying items as repairs and maintenance is that

future benefits are not provided beyond those originally anticipated from the asset.

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

Using the declining balance method, depreciation will be

higher in earlier years, but lower in later years.

Goodwill may only be recognized

in a business acquisition.

The distinction between land and land improvements is that:

land has an indefinite life

The cost of land improvements are capitalized separately from land because land improvements tend to have a________useful life

short, finite, limited

The declining balance method of depreciation is a multiple of the

straight-line rate of depreciation.

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

the book value at the beginning of the year.

The depreciable cost is

the cost of the asset minus the residual value.

Which of the following items are capitalized into the cost of a patent?

Filing fees Purchase price Attorney fees to secure patent

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

Total depreciation recognized over the asset's service life.

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

declining-balance straight-line

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.