ACT 211... Chapter 8 LMS

The journal entry to record Pulpit, Inc.'s depletion of its timberlands for the accounting period includes a ___.

debit to inventory

WorldCom improperly capitalized costs that should have been expensed. The effect of this fraud on its accounting equation resulted in ____.

- assets being overstated - stockholders' equity being overstated

Depreciation expense is an estimate because it is based on the asset's estimated ___ and ____ value.

useful life and residual value

Which method should be used to calculate depletion for a natural resource company?

Units-of-Production

What is the formula for calculating double-declining-balance depreciation?

[(Cost - Accumulated Depreciation) x 2/Useful Life]

Under IFRS, the cost of a long-lived asset is ____.

allocated among the asset's significant components and then depreciated separately

The proper accounting for natural resources is to record the original cost as an ____.

asset, then later transfer amounts to Inventory as the resource is depleted, and finally expense the cost as the resources are sold.

GAAP requires assets to be reviewed for impairment ____.

at least once a year

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

immaterial

Goodwill is recorded when ____.

the amount paid for a company is greater than its purchased net assets

How does management estimate useful lives and residual values?

They use professional judgment.

Technology intangible assets include costs incurred to ____.

- develop web designs internally - develop software internally

Ace, Inc. just bought a new delivery truck. Which of these costs should be capitalized? 1. The $500 for insurance on the truck for the next 12 months 2. The $25,000 cost of the truck 3. The $2,000 paid to install shelves inside the truck 4. The $50 a week for gas to run the truck.

2. The $25,000 cost of the truck 3. The $2,000 paid to install shelves inside the truck

Declining-balance depreciation methods are also called _____ depreciation methods.

Accelerated

Which account is credited in a journal entry to record depreciation on machinery?

Accumulated Depreciation

Which of the following will result in the recording of goodwill>

Company A purchases Company B and pays more than the fair value of Company B's assets and liabilities.

Depreciation Expense is added back to net income when preparing the cash flow from operating activities section because depreciation represents a(n) ____ reduction to net income.

Noncash

Which of the following expenditures of a US pharmaceutical company would NOT be capitalized?

Research Costs Development costs related to new untested drugs

Why can depreciation expense be a different amount each year using the units-of-production method?

The method calculates expense based on the relationship between each year's output and total estimated output.

[((Cost-residual value)/estimated total production) x actual production this period] is the formula for calculating ____ depreciation.

Units-of-Production

The asset's book value (or cost minus accumulated depreciation) must equal its residual (salvage) value at the end of its useful life using which depreciation method?

Units-of-product, double-declining-balance, and straight-line

In accordance with the expense principle, the term ____ describes the process of expensing natural resource's cost in the period related revenues are earned.

depletion

The rules to account for long-lived asset values are ___.

different under GAAP (than under IFRS), which require assets to be valued at cost and not fair value.

Trademarks ____.

have an unlimited life and hence are not amortized

Another term for residual value is ____ value.

salvage

The notes in the annual report, which follow the financial statements, should be reviewed to determine whether a company that follows IFRS chose to record its intangible and tangible assets at historical ___ or ____ value.

cost fair

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

cost minus accumulated depreciation

The entry to record the depletion of natural resources extracted causes a(n)...

increase in one asset and a decrease in another asset

On January 1, 2015, 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 2018, the fourth year of use, using double-declining-balance equals _____.

$0. Don't depreciate the truck below its residual value. Accumulated depreciation should not be credited for more than $24,000 (=$30,000-$6,000) over the asset's useful life.

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

On January 1, 2018, Whittle, Inc. purchased timber rights for $2,000,000, which are expected to produce a total of 2,000,000 cords of wood over 4 years, after which it will be sold for $500,000. The cords of wood cut were 200,000 in 2018 and 280,000 in 2019. Depletion for 2018 equals ____.

$150,000 Depletion equals $150,000 or ((2,000,000 - 500,000) x (200,000 cords/2,000,000 cords)).

Busy Beaver, Inc. signed a $315,000, 5-year note payable to buy a new industrial veneer cutter. Busy Beaver paid $5,000 cash for transportation of the machine and $750 cash for installation costs. The journal entry to record this transaction will include a ___.

$315,000 credit to Note Payable $320,750 debit to Machinery $5,750 credit to Cash

Sunny Sky bought a $30,000 piece of land to be used for a new corporate headquarters building in exchange for 1,000 shares of $1 par value common stock with a market value of $30 per share. The journal entry to record this transaction will include a ___.

- $29,000 credit to Additional Paid-in Capital - $1,000 credit to Common Stock - $30,000 debit to land

Identify the amounts required to calculate the depreciation of an asset.

- Estimated residual value at the end of the asset's useful life - acquisition cost - estimated useful life to the company

Mr. Fixit, Inc.'s fixed asset turnover was 3.0 in 2016 and 2.4 in 2015. This increase in its fixed asset turnover may indicate that the company ____.

- Used its fixed assets more efficiently - Had a greater increase in sales relative to its fixed assets

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

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

Which of the following changes in estimates may cause net income to differ?

- estimated residual lives - estimated useful lives

Land improvements reported on a company's balance sheet might include ___.

- trees planted to provide shade for the customer parking lot - sidewalks outside the corporate headquarters - the fence around a factory parking lot

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

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

Which of these are parts of the journal entry to record depreciation? 1. Debit Depreciation Expense 2. Debit Accumulated Depreciation 3. credit Depreciation Expense 4. Credit Accumulated Depreciation

1. Debit Depreciation Expense 4. Credit Accumulated Depreciation

1. An asset's cost minus its accumulated depreciation is equal to its selling price. 2. An asset's book value is always less than it's selling price. 3. Depreciation is not intended to report an asset at its current value. 4. Depreciation expense reflects the decrease in the current value of an asset over time.

1. False 2. False 3. True - Correct 4. False

IFRS and GAAP rules to account for long-lived asset values differ in that ____. 1. IFRS allow development costs to be capitalized 2. GAAP allow development costs to be capitalized 3. GAAP allow asset values to be increased to fair values 4. IFRS allow asset values to be increased to fair values

1. IFRS allow development costs to be capitalized 4. IFRS allow asset values to be increased to fair values

On January 1, 2015, Whittle, Inc. purchased timber rights for $2,000,000 which is expected to produce a total of 2,000,000 cords of wood over 4 years, after which it will be sold for $500,000. The cords of wood cut were 200,000 in 2015. The effect of recording the 2015 depletion (not the sale of the wood) on the accounting equation is ______.

1. The asset, Timberland, is decreased. 2. The asset, Inventory, is increased.

Which of the following costs incurred due to the construction of a building would be capitalized as part of the cost of the building? 1. materials 2. interest 3. labor 4. repairs to the building after it is in use 5. cost of the land

1. materials 2. interest 3. labor

An intangible asset may be recorded when a company ___. 1. pays more than the net assets of the company purchased 2. internally creates an asset with no physical properties, such as outstanding customer loyalty 3. trains its employees 4. purchases a trademark

1. pays more than the net assets of the company purchased 4. purchases a trademark

An intangible asset may be recorded when a company... 1. purchases a trademark 2. trains its employees 3. internally creates an asset with no physical properties, such as outstanding customer loyalty 4. pays more than the net assets of the company purchased

1. purchases a trademark 4. pays more than the net assets of the company purchased

Which of the following result in an increase to intangible assets: 1. $10,000 was spent on research and development 2. A company purchased another company for $10,000 more than its net assets 3. $10,000 was spent to purchase a patent. 4. A company increased the number of clients on its customer list. 5. A company purchased a franchise for $100,000.

2. A company purchased another company for $10,000 more than its net assets 3. $10,000 was spent to purchase a patent. 5. A company purchased a franchise for $100,000.

Potients, Inc. amortizes its patents over ten years. The entry to record the amortization of its patent may include a ____. 1. Debit to Patents (or Accumulated Amortization) 2. Debit to Amortization Expense 3. Credit to Amortization Expense 4. Credit to Patents (or Accumulated Amortization)

2. Debit to Amortization Expense 4. Credit to Patents (or Accumulated Amortization)

Which of the following costs associated with long-lived assets are expensed, not capitalized? 1. Delivery Costs 2. Interest on loans to purchase the assets 3. Ordinary repairs and maintenance 4. Immaterial repairs and maintenance 5. Installation costs

2. Interest on loans to purchase the assets 3. Ordinary repairs and maintenance 4. Immaterial repairs and maintenance

Acme Enterprises just bought a new manufacturing machine. Which of these costs should be capitalized? 1. The $100 increase in monthly utility bills to operate the machine 2. The $8000 cost of tearing down Acme's factory wall to get the machine inside 3. The $500 annual increase in insurance premiums, based on the cost of the machine 4. The $500,000 invoice price of the machine 5. The $200 annual increase in personal property taxes, based on the cost of the machine 6. The $15,000 freight bill to deliver the machine to Acme's factory.

2. The $8000 cost of tearing down Acme's factory wall to get the machine inside 4. The $500,000 invoice price of the machine 6. The $15,000 freight bill to deliver the machine to Acme's factory.

The old Metropolitan Theater, which had been unused for years, was purchased for $1, renovated at a cost of $3.5 million, and then reopened for business. The renovation cost should be ____.

Capitalized as part of the cost of the theater.

All costs to get an asset in place and ready for its intended use should be ______.

Capitalized.

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.

____ and ____ on sales or disposals of plant assets must be removed from the operating activities section because they do NOT represent cash inflows for the company if using the indirect method and omitted if using the direct method.

Gains Losses

The sale of property, plant, and equipment results in a cash ___ (inflow/outflow) to the ____ activities section of the statement of cash flows.

Inflow Investing

An asset's cost minus appreciated depreciation is its ___ value.

book

The journal entry to record the amortization of an intangible asset includes a ____.

debit to Amortization Expense

A higher residual value will result in a(n) ____ depreciation expense per year and a(n) ___ net income.

lower higher

Assuming straight-line depreciation is used, a higher estimated useful life will result in a(n) ____ depreciation expense per year and a(n) ______ net income.

lower higher

If a company wants to receive exclusive rights to a manufacturing process, it should purchase a ___.

patent