Accounting Chapter 8 Smartbook

On January 3, ATA Company purchases a copy machine for $11,500. The machine is expected to last five years and have a salvage value of $1,500. Compute depreciation expense for the first year, assuming the company uses the straight-line method.

$2,000 Reason: (11,500-1,500)/5 =2,000

Accumulated depreciation is reported on which of the following financial statements?

Balance sheet

The process of allocating the cost of a plant asset to expense while it is in use is called (depreciation/salvage)

Blank 1: depreciation

A plant asset is (depreciated/discarded/obsolete) ____________ when it is no longer useful to the company, and it has no market value.

Blank 1: discarded

Which of the following items related to depreciating equipment would be found on a company's income statement?

Depreciation Expense - Equipment

Depreciation Expense is reported on which of the following financial statements?

Income statement Reason: Depreciation expense is an expense which is reported on the Income Statement.

The cost at which a company records purchases of machinery and equipment should include which of the following? (Check all that apply.)

Installation Taxes Shipping fees Purchase price

__________ assets are assets used in a company's operations that have a useful life of more than one accounting period.

Plant Blank 1: Plant or Fixed

Plant assets are recorded at cost, which includes all expenditures necessary to get the asset in place and ready for use. All of the following would be included as part of the cost of a plant asset except:

damage done when unpacking the plant asset

The depreciation method that determines the depreciation for the period by multiplying a depreciation rate (often twice the straight-line rate) by the asset's beginning-period book value is known as the _____________ method.

declining-balance

A plant asset trade-in with commercial substance means that it changes the company's:

future cash flows

Tops Co. purchases equipment for $12,000 and has been using straight-line depreciation, estimating a 5-year life and $500 salvage value. At the beginning of the third year, Tops decides to use the equipment for a total of 6-years with no salvage value. Compute the revised depreciation for the third year.

$1,850 Reason: (12,000-500)/5=2,300 per year. $2,300 x 2 years = $4,600 depreciation taken. Book value at beginning of year 3 = $12,000-4,600= $7,400/4 = $1,850.

Ion Co. purchased land for $190,000. Ion also paid $5,000 in real estate commissions, $1,000 in legal fees, and $500 in title insurance fees. Ion should record the cost of this land at:

$196,500 Reason: 190,000+5,000+1,000+500=196,500

Wen Co. purchased a building for $200,000. Wen paid $20,000 in lawyer and title fees. Wen also paid an additional $15,000 to modify the building in order to accommodate his business needs. Wen should record the cost of the building at:

$235,000

Juno Co. purchased a machine for $10,000 and estimates it will use the machine for three years with a $2,000 salvage value. It expects to produce a total of 8,000 units as follows: 3,000 during year one; 2,500 during year two; and 2,500 during year three. Using the units-of-production depreciation method, compute the machine's first year depreciation expense.

$3,000 Reason: $10,000 - 2,000 = $8,000. $8,000 / 8000 units = $1.00 per unit. Year one 3,000 x $1.00 = $3,000.

Alin Co. purchases a building for $300,000 and pays an additional $30,000 for title fees and lawyer fees. Alin also pays $20,000 in renovations, including painting, carpet, lighting, etc. Alin should record the cost of the building at:

$350,000. Reason: 300,000+30,000+20,000=350,000

Juno Co. purchased a machine for $10,000 and estimates it will use the machine for four years with a $2,000 salvage value. Using the double declining-balance depreciation method, compute the machine's first year depreciation expense.

$5,000 Reason: $10,000 x (.25 x 2) = $5,000.

Straight-line depreciation can be calculated by taking:

(cost minus salvage value)/useful life

Which of the following situations will result in recognizing a gain on sale of a plant asset?

A fully depreciated asset is sold for $1,000.

Accumulated depreciation is recorded on which of the following financial statements?

Balance sheet

Geo Co. purchased a building for $400,000. In addition, Geo paid $35,000 for taxes and lawyer fees. Geo also paid $60,000 to modify the building, changing the layout specifically for Geo's needs. Geo should record the building at $ _____________________

Blank 1: 495000 or 495,000

On January 2, Dice Co. purchases a mixing machine for $25,500. The machine is expected to last four years and have a salvage value of $5,500. Assuming the company uses the straight-line method, depreciation expense should be $__________ per year.

Blank 1: 5000

Accumulated depreciation is a ________________ asset account (one that is linked with the plant asset account, but has an opposite normal balance) and is reported on the balance sheet.

Blank 1: contra

Straight-line depreciation is calculated by taking cost minus (salvage/market) ______________ value divided by useful life.

Blank 1: salvage

Which of the following items are plant assets? (Check all that apply.)

Building used for operations Equipment used in operations

Which of the following factors determine depreciation? (Check all that apply.)

Cost of asset Salvage value Useful life

________ is the process of allocating the cost of a plant asset to expense while it is in use.

Depreciation

Land (improvements/additions) ____________________________ are assets that are additions to land and have limited useful lives, such as walkways and fences.

Improvements

Depreciation expense is reported as a decrease on which of the following financial statements?

Income statement

On December 31, Briar Co. disposed of a piece of equipment that cost $6,000 with accumulated depreciation of $4,500. The entry to record this disposal would include a debit to which account and for how much?

Loss on Disposal of Equipment for $1,500

Plant assets should be recorded at cost, including all normal and reasonable expenditures necessary to get the asset in place and ready for its intended use. This would include which of the following costs? (Check all that apply.)

Shipping charges Assembling Testing

The factors necessary to compute depreciation include all of the following, except:

book value

Privo Co. purchases a machine that cost $15,000. Privo estimates a 5-year life with no salvage value. The first three years of depreciation expense are $6,000; $3,600; and $2,160, respectively. Based on this information, Privo is using the Blank______ depreciation method.

declining-balance

A company owns an asset that is fully depreciated. The asset is no longer being used in operations and has no market value. The company has decided to Blank______ the asset by recording an entry to remove it from the balance sheet.

discard

Assets that increase the benefits of land, have a limited useful life, such as parking lots and lighting systems, are called:

land improvements

Grand Co. owns one copier that was purchased for $10,000 three years ago. The depreciation expense taken on the copier each year has been $2,700; $1,800; and $2,200, based on the number of copies that have been made on the copier. Based on this information, the company uses the Blank______ depreciation method.

units-of-production

On October 30, Cleo Co. purchased a machine for $26,000 and estimates it will use the machine for four-years with a $2,000 salvage value. Using the straight-line depreciation method, compute the machine's first year partial depreciation expense for October 30 through December 31.

$1,000 Reason: This is a partial year depreciation. $26,000 - 2,000 = $24,000/4 = $6000 per year. $6000 x 2/12 = $1,000.

On June 1, Harding Co. purchased a machine for $14,000 and estimates it will use the machine for five-years with a $2,000 salvage value. Using the straight-line depreciation method, compute the machine's first year (partial) depreciation expense for June 1st through December 31st.

$1,400 Reason: (14,000-2000)/5 x 7/12=1,400 for a partial year depreciation The partial year depreciation should be recorded for seven months (June 1- December 31).

Bina Co. purchased a vehicle on January 1st for $15,000 and estimates it will use the vehicle for eight years with a $3,000 salvage value. Using the double declining-balance depreciation method, compute the vehicle's second year depreciation expense.

$2,812.50 Reason: Salvage value is not subtracted up front with the double-declining balance method. (100%/8=.125) x 2=25%. 15,000 x 25%=3,750 for first year. Second year=(15,000-3750) x 25% =2812.50. The question asked for the second year depreciation expense.

PT Co. purchased land and an existing building for $200,000. In addition, PT paid real estate commissions of $15,000. PT removed the unwanted building and graded the land for a total cost of $35,000. PT should record the cost of the land at:

$250,000 Reason: 200,000+15,000+35,000=250,000

_______ assets purchased as a group in a single transaction for a lump-sum price are allocated the purchase price based on their relative market values.

Blank 1: Plant

When considering the sale of a plant asset, match the following outcomes to the appropriate situations. Instructions

Book value is greater than the selling price: Loss on sale of asset Book value is less than the selling price: Gain on sale of asset Book value is equal to the selling price: No gain or loss recognized

Forward Co. discarded a machine that cost $5,000 and was fully depreciated. The entry to record this transaction would include a credit to the Blank______ account.

Machinery

When a company revises an estimate used to record depreciation expense, the company should revise depreciation by using the formula (Blank______ - revised salvage value)/revised remaining useful life.

book value

The purchase of a group of plant assets for one price is called a Blank______ purchase.

lump-sum

The method of depreciation that charges a varying amount to depreciation expense for each period depending on its usage is called the ___________ method

units-of-production

Bina Co. purchased a machine on January 1st for $15,000 and estimates it will use the machine for three years with a $3,000 salvage value. Bina estimates that they will produce 1,500 units during year one, 1,000 units during year two, and 1,250 units during year three. Using the units-of-production method, compute the machine's second year depreciation expense.

$3,200 Reason: $15,000 - $3,000 = $12,000. Total units = 1,500 + 1,000 + 1,250 = 3,750. $12,000 / 3,750 = $3.20 per unit. Year two 1,000 x $3.20 = $3,200.

If an asset exchange has commercial substance, a gain or loss is recorded based on the difference between the ___________ value of the asset given up and the market value of the asset received.

Blank 1: book