ACCT 251 - Chapter 7

The original cost of an asset minus accumulated depreciation is a. goodwill. b. book value. c. disposal value. d. residual value.

b. book value.

Goodwill is recognized only when one company _____ another company.

purchase

The residual value of an intangible asset is usually ____.

zero, nothing, 0, none, or indeterminable

The allocation of the cost of a tangible asset over its service life is referred to as ____ . (Enter one word per blank)

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

Match each term with its definition.

Depreciation - Allocation of the cost of a tangible fixed asset Depletion - Allocation of the cost of natural resources Amortization - Allocation of the cost of an intangible asset

True or false: Goodwill is the intangible value of a company's employees, management team, and business location that is recorded by the company. a. True b. False

False

____ value is the amount the company expects to receive for the asset at the end of its service life. (Enter one word per blank)

Residual or Salvage

Match the type of depreciation method with the reporting basis.

Straight-line - commonly used for financial statement purposes MACRS - commonly used for tax reporting

A(n) ____ is an exclusive right of protection given to a creator of a published work, such as a song, film, painting, photograph, or book.

copyright

A(n) ____ 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

The profit margin ratio is defined as ____ ____ divided by net sales.(Enter one word per blank)

net; income/profit

The depreciable cost of an asset is the asset's cost minus its estimated ____ value. (Enter one word per blank)

residual or salvage

An asset ____ occurs when an asset is no longer useful, but cannot be sold.

retirement, retire, retires, or retirements

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)

service

Which of the following are long-term tangible assets? a. Property b. Equipment c. Copyright d. Accounts receivable e. Trademark

a. Property b. Equipment

True or false: Repairs and maintenance expenditures that do not increase the future benefit of the asset are expensed. a. True b. False

a. True

Select all that apply Which depreciation methods allocate the cost of long-term assets based on time? a. valuation method b. activity methods c. declining-balance d. straight-line

c. declining-balance d. straight-line

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? a. $50,000 b. $100,000 c. $60,000 d. $70,000

d. $70,000

A(n) ____ is the exclusive right to manufacture a product or use a process granted for a period of ____ years.

patent; 20/twenty

The formula for calculating declining balance depreciation is the depreciation rate per year times a. the cost less the residual value. b. the book value at the beginning of the year. c. the cost less the residual value less the accumulated depreciation.

b. the book value at the beginning of the year.

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? a. $34,000 b. $26,000 c. $20,000 d. $30,000

b. $26,000

True or false: Internally developed goodwill should be capitalized as an asset. a. True b. False

b. False

When an asset's fair value falls below its book value, the difference between fair value and book value is a. recognized as a gain. b. recognized as an extraordinary loss. c. recognized as an impairment loss. d. recorded in a revaluation account in OCI.

c. recognized as an impairment loss.

The term used to describe the amount the company expects to receive for an asset at the end of its service life is a. lower of cost or market value. b. historical cost. c. residual value. d. impairment value.

c. residual value.

The service life or useful life of an asset is a. the time period from the purchase of the asset until it becomes impaired. b. determined by MACRS tables. c. the estimated use that the company expects to obtain from the asset before disposing of it.

c. the estimated use that the company expects to obtain from the asset before disposing of it.

Companies use accelerated depreciation for tax purposes because a. it does a better job of matching expenses to revenues of the period. b. it is required by the IRS. c. it reduces taxable income in the early years of the asset's life and provides better cash flows.

c. it reduces taxable income in the early years of the asset's life and provides better cash flows.

Total depreciation recorded over an asset's service life is: a. lowest when the straight-line method is used b. highest when the double-declining balance method is used c. the same regardless of the depreciation method used d. lowest when the activity-based method is used

c. the same regardless of the depreciation method used

The formula to calculate an activity-based depreciation rate is: a. (cost - residual value)/estimated total production. b. cost/actual production during the year. c. (cost - residual value)/actual production during the year. d. cost/estimated total production.

a. (cost - residual value)/estimated total production.

For accounting purposes, depreciation is a. the selling price of an asset. b. an allocation of a cost of an asset. c. a decline in value of an asset.

b. an allocation of a cost of an asset.

Goodwill may only be recognized a. when a company pays less than fair value for an intangible. b. in a business acquisition. c. when intangible assets are undervalued. d. when assets are impaired.

b. in a business acquisition.

Select all that apply Other terms used for an activity-based depreciation method are: a. productivity method b. units of production method c. base depreciation method d. units of output method

b. units of production method d. units of output method

If a company generates its own goodwill through advertising or training, how should these costs be treated? a. Capitalize the costs and amortize them over the expected life of the goodwill. b. Record as an extraordinary loss in the current year. c. Expense the costs as incurred. d. Capitalize the costs and test for impairment.

c. Expense the costs as incurred.

Select all that apply What are the two steps in the two-step process of measuring impairments? a. Percentage of assets test for total impaired assets. b. Timing test on when the cash flows are received. c. Measurement of the impairment and record the loss. d. Test for impairment using the future cash flows.

c. Measurement of the impairment and record the loss. d. Test for impairment using the future cash flows.

Which of the following does not differ among the different depreciation methods? a. Depreciation recognized during the last year of the asset's service life. b. Depreciation recognized during the earlier years. c. Total depreciation recognized over the asset's service life.

c. Total depreciation recognized over the asset's service life.

The key factor in classifying items as repairs and maintenance is that a. the invoice must be less than $1,000 for productive assets. b. the asset must be a current asset used in the normal course of business. c. future benefits are not provided beyond those originally anticipated from the asset.

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

The formula for straight-line depreciation is a. service life/(cost + residual value). b. cost/service life. c. (cost + residual value)/service life. d. (cost - residual value)/service life.

d. (cost - residual value)/service life.

Which statement is true about the straight-line method of depreciation? a. It is the preferred method for companies expecting to use the asset more in its early years of life. b. It recognizes expense proportionately with the amount of use of the asset. c. It is an accelerated method of depreciation. d. It allocates an equal amount of depreciation to each year the asset is used.

d. It allocates an equal amount of depreciation to each year the asset is used.

Use of MACRS for tax purposes usually results in income tax in ____ the earlier years of an asset's life.

less or lower

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/lifetime; use/usage/activity

A(n) ____ is an exclusive right to display a word, slogan, symbol, or emblem that distinctively identifies a company, product, or service.

trademark or tradename

Select all that apply A retirement or abandonment of an asset is different from a sale of an asset because a. a loss must be recognized for the remaining book value. b. the residual value is included as a gain. c. no cash is received. d. a gain is recognized for the undepreciated portion of the equipment.

a. a loss must be recognized for the remaining book value. c. no cash is received.

Select all that apply Long-term tangible assets include a. land. b. equipment. c. goodwill. d. patents. e. buildings.

a. land. b. equipment. e. buildings.

The depreciation method that allocates an equal amount of the depreciable base to each year of the asset's service life is the a. MACRS b. units-of-output method. c. double-declining-balance method. d. straight-line method.

d. straight-line method.

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

depreciate or depreciation

Select all that apply Sarah purchases land to be used for a new storage facility. Which of the following items are capitalized in the cost of land? a. Commissions b. Costs to remove an old building c. Legal fees to secure title d. Current year's property taxes

a. Commissions b. Costs to remove an old building c. Legal fees to secure title

Select all that apply Which of the following are commonly used depreciation methods? a. Declining-balance b. Activity-based c. Value-based d. Straight-line e. Increasing-balance

a. Declining-balance b. Activity-based d. Straight-line

Select all that apply Larry purchases land to be used for a new corporate headquarters. Which of the following items are capitalized in the cost of land? a. Grading the land b. Current year's property taxes c. Legal fees to secure title d. Title insurance e. Costs to remove an old building

a. Grading the land c. Legal fees to secure title d. Title insurance e. Costs to remove an old building

The formula for calculating the double-declining-balance method is a. book value at beginning of year x 2/estimated service life b. book value at beginning of the year less residual value x 2/ estimated service life. c. historical cost x 1/service life. d. historical cost less residual value x 2/estimated service life.

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

The depreciable cost is a. the cost of the asset minus the residual value. b. cost of the asset plus the residual value. c. cost of the asset minus depreciation expense. d. historical cost less accumulated depreciation.

a. the cost of the asset minus the residual value.

Straight-line deprecation is calculated as the depreciable cost divided by a. the estimated service life of the asset. b. the cost of the asset. c. the residual value of the asset.

a. the estimated service life of the asset.

The residual value of an intangible asset is usually a. zero. b. cost less amortization. c. the fair value at the date acquired. d. cost minus salvage.

a. zero

Units of production or units of output are alternative terms for the ____ - ____ depreciation method.

activity; based

The formula to calculate the depreciation for the units-of-production method or activity-based depreciation, is ((cost - residual value)/total estimated production) x ______. a. historical cost b. total activity or production c. current-year activity or production d. gross profit percentage

c. current-year activity or production

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 ______. a. identified intangible assets b. unidentifiable assets c. restricted intangible assets d. goodwill

d. goodwill