Ch 6 Notes

Assume that land, buildings, and equipment were acquired for a lump-sum purchase price of $100,000. Appraised values were as follows: land, $40,000; buildings, $100,000; and equipment, $20,000. Equipment would be recorded for:

$12,500 Reason: $12,500 = ($20,000 / ($40,000 + $100,000 + $20,000)) = 12.5% × $100,000

Velco purchased a delivery truck at the beginning of Year 1 at a cost of $60,000. The truck is estimated to have a useful life of 5 years to Velco and an estimated salvage value of $10,000. It is estimated that the truck will be driven 100,000 miles during Velco's ownership period. The balance of the Accumulated Depreciation account at the end of Year 3 (the third year of the asset's life) under the units-of-production method would be:

($0.50 per mile × total miles driven from Year 1 to Year 3)

Which of the following factors are normally considered in determining whether to capitalize or to expense an expenditure?

- The potential income tax reduction in the current year that results from expensing the item - Whether the purchased item will provide economic benefits to the entity that extend beyond the current year - Whether the purchased item represents a material expenditure to the company

Buildings and equipment are recorded at their original cost, which includes the purchase price plus:

-material labor and overhead costs for equipment made by employees -interest costs incurred during the construction phase of a building - installation and shakedown costs

Land

-shown in balance sheet at original cost - all ordinary and necessary costs the firm incurs are part of orig. cost 1. price of land 2. title fees 3. legal fees 4. costs related to acquisition 5. cost of razing

Primary issues related to the accounting for noncurrent assets are the following

1. accounting for the acquisition of assets 2. for the use (depreciation) of assets) 3. for the maintenance and repair costs 4. for the disposition of assets

Velco purchased a delivery truck at the beginning of Year 1 at a cost of $60,000. The truck is estimated to have a useful life to Velco of 5 years and an estimated salvage value of $10,000. It is estimated that the truck will be driven 100,000 miles during Velco's ownership period. Depreciation expense for Year 1 (the first year of the asset's life) under the straight-line method would be:

10,000 Reason: ($60,000 - $10,000) / 5 = $10,000

Velco purchased a delivery truck at the beginning of Year 1 at a cost of $60,000. The truck is estimated to have a useful life to Velco of 5 years and an estimated salvage value of $10,000. It is estimated that the truck will be driven 100,000 miles during Velco's ownership period. Depreciation expense for Year 3 (the third year of the asset's life) under the straight-line method would be:

10,000 Reason: ($60,000 - $10,000) / 5 = $10,000

Velco purchased a delivery truck at the beginning of Year 1 at a cost of $60,000. The truck is estimated to have a useful life of 5 years to Velco and an estimated salvage value of $10,000. Depreciation expense for Year 1 (the first year of the asset's life) under the double-declining-balance method would be:

24000 Reason: 5-year life = 20% per year × 2 = 40% rate × $60,000 = $24,000

Assume that land, buildings, and equipment were acquired for a lump-sum purchase price of $100,000. Appraised values were as follows: land, $40,000; buildings, $100,000; and equipment, $20,000. Land would be recorded for:

25000 Reason: $25,000 = ($40,000 / ($40,000 + $100,000 + $20,000)) = 25% × $100,000

Over the life of a financing lease, which of the following effects occur on the balance sheet of the lessee?

Cash is credited (decreased) as lease payments are made. Financing Lease Liability is debited (decreased) as lease payments are made. The net book value of the leased asset is reduced as Accumulated Depreciation is credited (increased).

Which of the following accounts are examples of intangible assets?

Customer lists Goodwill Leaseholds Copyrights

Under which depreciation method is the estimated salvage value ignored when making the depreciation expense calculation for the first year of an asset's use?

Double-declining-balance

The entry made to record the impairment of goodwill is:

Dr. Goodwill Impairment Loss Cr. Goodwill

Regarding the MACRS rules of calculating depreciation for income tax purposes, which of the following statements are true? (Check all that apply).

The MACRS rules simplify the calculation of the useful life of assets relative to the straight-line alternative. The MACRS rules eliminate the need to estimate an asset's salvage value. The MACRS rules provide accelerated deductions relative to the straight-line alternative.

Accumulated depreciation is:

contra asset account

The gain or loss on the sale of a depreciable asset is, in effect, a _____.

correction of the total depreciation expense that has been recorded over the life of the asset.

Towns Co. purchased Timber Inc. for $4,200,000 in cash. The fair value of the net acquired assets were as follows: Inventory = $700,000; Land = $1,000,000; Buildings = $2,000,000; and Notes Payable = $400,000 (Towns Co. assumed the note in full). As a result of this transaction, Towns Co. would:

debit Goodwill for $900,000

Relative to the straight-line method, the effects of using an accelerated depreciation method during inflationary times are:

greater amounts reported as depreciation expense and lower amounts reported as net income.

At the inception of a financing lease, the financial statements effects are to:

increase noncurrent assets and noncurrent liabilities by equal amounts with no effect on stockholders' equity.

If the book value of goodwill does not exceed its fair value, goodwill _____.

is not considered impaired

When using an accelerated depreciation method during inflationary times, in the later years of an asset's life, depreciation expense will be _____.

less than it would be using the straight-line depreciation method and net income would be higher.

all preparations of the land become...

part of the cost of land acquired and are capitalized (recorded as assets rather than expense)

For income tax purposes, most firms use the MACRS rates for determining depreciation deductions because:

the MACRS rates provide accelerated deductions relative to the straight-line alternative.

The gain or loss on the disposal of a depreciable asset is, in effect, a correction of the missed depreciation estimates because if the salvage value and useful life estimates had been correct, ______.

the net book value of the asset would be equal to the proceeds received from its sale or disposal