Accounting Chapter 8

On January 1, 2017, X-it Company bought a new delivery truck for $30,000. X-it plans to use the truck for 4 years, after which it will be sold for $6,000. Depreciation expense for 2019, the third year of use, using double-declining-balance equals ______

$1,500 reason: Accumulated Depreciation after 2 years equals $22,500 (=($30,000 x 2/4) + (($30,000 - 15,000) x 2/4). Since the truck should not be depreciated below its residual value, the Depreciation Expense in the 3rd year is only $1,500 (=$24,000 net book value - 22,500) instead of $3,750 (=($30,000 cost - 22,500) x 2/4)).

When does impairment occur?

When the future cash flow expected from using an asset is less than the asset's book value

When equipment is purchased using noncash assets, the equipment is recorded as ______.

an asset at its cash equivalent price

If a cost is capitalized it is recorded as an _________ not an expense

asset

Executives at WorldCom committed an $11 billion fraud by capitalizing costs that should have been expensed. What was the effect of this fraud on WorldCom's financial statements?

assets being overstated stockholders' equity being overstated

An asset's cost minus accumulated depreciation is its ______ value.

book

A company should depreciate a long-lived tangible asset to ______.

match part of the cost of the asset with the revenues generated by the asset

If a company were to purchase inexpensive wastebaskets that are expected to be used for 3 years, the company ______.

may choose to expense the wastebaskets in the period purchased

Which of the costs associated with the purchase of undeveloped land would be debited?

sales commissions title fees survey fees

A gain on the disposal of an asset occurs when the ______.

selling price is greater than the asset's book value

Depreciation is not intended to report an asset at its current value.

true

True or false: US GAAP allows companies to use different methods of depreciation for different specific assets or asset groups as long as the method is consistently applied.

true

depreciation expense is an estimate because it is based on the asset's ______ _________ and _________

useful life residual

Four years ago, on January 1, California Creamery bought a new delivery truck for $30,000. The company planned to use the truck for 7 years, and then sell it for $2,000. The company used the truck for 4 years and properly recorded straight-line depreciation each year. At the beginning of the 5th year, a change in emissions standards made the truck illegal in California. The company expects to sell the truck outside of California later this year for $6,000. The company should record a journal entry that includes a(n) ______.

$8,000 debit to Impairment Loss $8,000 credit to Truck reason: The truck's net book value equals $14,000 (= cost of $30,000 - accumulated depreciation of $16,000). GAAP require the truck to be written down because it has been impaired. Since it thinks it can sell it for $6,000, it needs to reduce the net book value by $8,000 (=$14,000 - 6,000) by debiting Impairment Loss and crediting the Truck account.

Shenandoah Skies built a new lodge for its ski resort. Which of the following costs should be capitalized?

-$7,000 in architect fees -$70,000 cost of lumber to build the lodge -$4,200 paid in sales tax on the lumber to build the lodge

In accordance with US Generally Accepted Accounting Principles, which of the following costs associated with long-lived assets are expensed, not capitalized?

-Ordinary repairs and maintenance -Immaterial repairs and maintenance -Interest on loans to purchase the assets

Ace, Inc. just bought a new delivery truck. Which of these costs should be capitalized?

-The $2,000 paid to install shelves inside the truck -The $25,000 cost of the truck

Acme Enterprises just bought a new manufacturing machine. Which of these costs should be capitalized?

-The $8,000 cost of tearing down Acme's factory wall to get the machine inside -The $500,000 invoice price of the machine -The $15,000 freight bill to deliver the machine to Acme's factory

The amount recorded for the purchase of long-lived tangible assets is the ______.

-acquisition cost -net cash equivalent amount paid or to be paid -cash equivalent price

Long-lived assets are ______.

-assets acquired for use over 1 or more years -used by the business

Which of these are long-lived productive assets?

-delivery equipment -machinery

Acme, Inc.'s balance sheet shows Equipment at a cost of $5,000,000. Accumulated Depreciation is $2,000,000. Acme's income statement shows Depreciation Expense of $200,000 for the year. The equipment has $0 salvage value. Which of the following statements is true?

40% of the equipment's economic benefits have been used up so far.

Which of the following may lead to a revision of an estimate of a company's depreciation expense?

A change in the estimated residual value A change in the estimated useful life Extraordinary repairs that significantly extend the asset's usefulness

The write-down of goodwill for impairment will affect which of the following financial statements?

Balance sheet Income statement

Why would public companies use two sets of accounting records that have different net income?

Because the GAAP rules differ from the Internal Revenue code, two sets may be needed

Why is the straight-line method of depreciation called "straight-line"?

Depreciation expense is a constant amount each year, so a graph of depreciation expense over time is a straight line

Which of the following statements are true?

Depreciation of a truck equals the decline in the estimated usefulness of the truck. Impairment loss on an asset arises from a precipitous decline in the current value of the asset.

True or false: In accordance with US Generally Accepted Accounting Principles, a company will always capitalize the cost of a long-lived asset.

False

Squid Roe, Inc.'s $48,000 sushi bar was originally expected to be used for 8 years with no residual value. Depreciation on the bar was $6,000 per year for the past 2 years. In the 3rd year, management changed the estimated life of the bar to be a total of only 6 years instead of 8. What should Squid Roe do?

Revise the depreciation expense to be $9,000 for years 3 through 6.

Both Spam Am Airlines and TWB Airlines used straight-line depreciation for a $20 million jet. Spam Am used an estimated 35 year useful life and TWB Airlines used an estimated 25 year life for its planes but estimated similar residual values. As result of the differences in useful lives, which company will appear more profitable?

Spam Am

Miss Hap, the company bookkeeper, recorded the annual repair costs on the company's machinery as an increase to the machinery account. As a result, which of the following is true?

Stockholders' equity will be overstated. Assets will be overstated.

Why might a company dispose of a long-lived tangible asset?

The asset has reached the end of its useful life. The asset was seriously damaged. The asset is replaced with a newer, more efficient model. The company doesn't need the asset anymore.

An asset's book value or carrying value is its ______.

cost minus accumulated depreciation

Matching part of the cost of a long-lived asset with the revenues generated by the asset is ______.

depreciation

To determine the approximate age of a noncurrent depreciable assets remaining life,

divide the book value by the original cost

A company might record an involuntary disposal of an asset ______.

if the asset was seriously damaged in a fire

Depreciation and impairment are different in that only ______.

impairment represents the decline in the current value of the related asset

The total cost of the purchase of undeveloped land ______.

includes the cost plus all other identical costs such as title fees

Capitalized costs differ from expenses in that only capitalized costs result in a(n) ______.

increase to long-lives assets

A company may make an exception to the accounting rules and not capitalize a long-lived asset if its cost is

insignificant, small

Vango, Inc. sold its van for $6,000 cash. The van's original cost was $40,000, and its Accumulated depreciation was $32,000. When recording the sale, Vango should record a ______.

loss of 2,000

assuming straight-line depreciation is used, a higher estimated useful life will result in a __________ depreciation expense per year and a ________ net income

lower, smaller higher, larger

The costs of a new building that is currently under construction, not for sale but for a company's own use, are ______.

reported on the balance sheet as a noncurrent asset

The straight-line depreciation method ______.

reports an equal amount of depreciation expense each year

Which of the costs associated with the purchase of undeveloped land would be debited?

title fees sales commissions survey fees