CH 8 - LT Assets

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

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.

$3000 Reason: $10,000 - 2,000 = $8,000. $8,000 / 8000 units = $1.00 per unit. Year one 3,000 x $1.00 = $3,000.

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.

Ella Co. owns a mineral deposit and recognizes $15,000 of depletion expense during the period. This entry will be recorded with a credit to:

Accumulated Depletion - Mineral Deposit

Modified Accelerated Cost Recovery System (MACRS) is a depreciation method that allows companies to delay depreciation expense for tax purposes.

False

Which of the following expenses would not be considered an ordinary repair?

Replacing an engine

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 ____ depreciation method.

declining-balance

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

Daley Co. owns a mineral deposit with an estimated 600,000 tons of available ore. It was purchased for $300,000 and has no salvage value. During the current period, Daley mined and sold 40,000 tons of ore. Depletion expense for the period will be how much?

$20,000 Reason: $300,000/600,000 x 40,000=20,000

Which of the following factors determine depreciation?

Useful life Cost of asset Salvage value

Depreciation

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

Ironworks Co. sells a machine that cost $5,000 with a current book value of $1,500 for $2,000 cash. Ironworks will record a debit to which account and for how much?

Accumulated Depreciation - Equipment for $3,500

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.)

Assembling Shipping charges Testing

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

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

(Capital/Revenue) expenditures are additional costs of plant assets that provide benefits extending beyond the current period, such as a plant expansion, or major machine overhaul.

Capital

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

Equipment used in operations Building used for operations

______ are expenditures that extend the asset's useful life beyond its original estimate.

Extraordinary repairs

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.

Teshin Co. purchases a piece of land with several land improvements for $180,000. The land appraises at $120,000 and the land improvements appraise at $80,000. The land should be recorded at what cost?

$108,000 Reason: The land will be recorded based on the relative market value of the lump-sum purchase at $108,000. [120,000/(120,000+80,000)] x 180,000 = 108,000

Arc Co. purchased a piece of equipment for $25,000. At the end of the year, the book value of the equipment is $12,000. The salvage value is 0. How much is accumulated depreciation, using the straight-line method, at the end of the period?

$13,000

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.

Ring Co. owns a delivery van that was purchased two years ago for $25,000. Ring has depreciated the van for two years at a straight-line amount of $4,000 per year. The book value of this van at the end of the second year would be $

17000

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 $

495000

A company sells a machine that cost $7,000 for $500 cash. The machine had $6,500 accumulated depreciation. The entry to record this transaction will include which of the following entries? (Check all that apply.)

Debit to Accumulated Depreciation - Machinery for $6,500. Credit to Machinery for $7,000. Debit to Cash for $500.

______ are nonphysical assets used in operations that give companies long-term rights, or competitive advantages.

Intangible assets

Sioux Co. replaced the roof on its existing building, therefore increasing the building's life by 10 years. The cost of the roof is considered a(n):

extraordinary repair

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 ____ account

Machinery

Which of the following asset(s) are not considered intangible assets? (Check all that apply.)

Mineral deposit Copy machine

Determine which of the following expenses related to a building would be classified as a capital expenditure. (Check all that apply.)

Room addition New air conditioning system

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

Taxes Purchase price Installation Shipping fees

book value

The asset's acquisition costs less its accumulated depreciation is called:

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

book value

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

book value

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

An oil company recognizes the cost of discovering and operating oil wells by recording______ expense for each unit of oil used.

depletion

The process of allocating the cost of a natural resource to a period when it is consumed requires a debit entry to the ____ account

depletion expense

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

depreciation

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

discarded

The amount by which a company's value exceeds the value of its individual assets and liabilities is called

goodwill

Land ______ are assets that are additions to land and have limited useful lives, such as walkways and fences.

improvements

T. Chung Co. sold a computer for $500 cash. The computer cost $3,000 and had accumulated depreciation of $2,200 at the time of the sale. Chung will record the sale with an entry to the (Gain/Loss) on Disposal of Equipment account in the amount of $

loss, 300

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

lump-sum

Brice Co. purchases land in order to drill oil. This oil field would be classified as a(n) ______ on the balance sheet.

natural resource

Modified Accelerated Cost Recovery System is _____ acceptable for financial reporting purposes.

not

Straight-line depreciation is calculated by taking cost minus _____ value divided by useful life.

salvage

A symbol, name, phrase or jingle identified with a company, product or service is called a

trademark

Wyatt Co. purchased a popular symbol that doubled its sales in the first year. The cost of this symbol is an asset called a:

trademark

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

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.

A delivery van that cost $45,000 with accumulated depreciation of $15,000 is sold for $20,000. How much gain or loss will be recognized on this sale?

$10,000 loss Reason: 45,000-15,000 =30,000-20,000 =10,000.

Seven Co. owns a coal mine with an estimated 1,000,000 tons of available coal. It was purchased for $300,000 and has $50,000 salvage value. During the current period, Seven mined and sold 200,000 tons of coal. Depletion expense for the period will be how much?

$50,000 Reason: (300,000 - 50,000)/1,000,000 x 200,000 = 50,000.

A company acquires a patent for $20,000 to manufacture and sell an item. The company intends to hold the patent for 5 years. Amortization for the first year will be recorded with a debit to Amortization Expense for $

4000

______ are expenditures that make a plant asset more efficient or productive, but do not always increase an asset's useful life.

Betterments

plant assets

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

plant

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.

Niren Co. made modifications to a manufacturing machine that increased its productivity by 40%. Niren would classify this expense as a(n):

betterment

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 ______ the asset by recording an entry to remove it from the balance sheet.

discard

Sanson Co. sells equipment for $1,000 cash. The equipment cost Sanson $6,500 and has accumulated depreciation of $2,000 at the time of sale. Sanson will record the sale with a debit to which account and for how much?

Loss on Sale of Equipment for $3,500. Reason: Equipment will be credited for $6,500. Cash received is $1,000. Book value of equipment is $4,500, so there will be a loss of $3,500. This loss is debited.

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.

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.

Cen Co. purchases land and a building for $130,000. The land is appraised at $100,000 and the building at $150,000. Allocating the cost based on market values, the land should be recorded at what amount?

$52,000 Reason: [100,000/(100,000+150,000)] x 130,000

Straight-line depreciation can be calculated by taking:

(cost minus salvage value)/useful life

land improvements

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

Determine which of the following expenses are considered revenue expenditures related to a company vehicle.

Car wash Oil change Dent repair

ATZ Co. sells equipment that cost $9,000 with current accumulated depreciation of $8,000 for $2,000 cash. To record this transaction, ATZ will credit which accounts? (Check all that apply.)

Equipment Gain on Disposal of Equipment

Sangmoon Co. sells equipment for $1,000 cash. The equipment cost Sangmoon $6,500 and has accumulated depreciation of $2,000 at the time of sale. Sangmoon will record the sale with a credit to which account and for how much?

Equipment for $6,500. Reason: Equipment will be credited for $6,500. Cash received is $1,000. Book value of equipment is $4,500, so there will be a loss of $3,500. The loss will be debited.

______ is measured as the excess of the cost of an acquired entity over the value of the individual assets and liabilities.

Goodwill

To calculate depletion expense, first determine the depletion per unit. Depletion per unit can be calculated by taking (cost ______)/total units of capacity.

Minus salvage value

______ are assets that are physically consumed when used, such as mineral deposits and oil and gas fields.

Natural resources

The book value of an asset when using straight-line depreciation is always greater than the book value from using double-declining-balance, except at the beginning and end of the asset's useful life, when it is the same.

True

______ is the process of allocating the cost of a natural resource to the period when it is consumed.

Depletion

______ are expenditures that keep an asset in good operating condition. They are necessary if an asset is to perform to expectations over its useful life.

Ordinary repairs

Ordinary repairs, such as normal repairs and maintenance to a vehicle, would be recorded with a debit to which of the following accounts?

Repairs 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

(Revenue/Capital) expenditures are additional costs of plant assets that do not materially increase the asset's life or capabilities.

Revenue

Martinez Co. sells a machine that cost $10,000 with accumulated depreciation of $8,000 for $2,000 cash. The entry to record this transaction will recognize a gain or loss of how much?

There is no gain or loss. Reason: Book value is equal to the selling price so there is no gain or loss. Book value = $10,000 minus accumulated depreciation of $8,000 = $2,000.

Book value can be calculated by taking an asset's acquisition costs less its

accumulated depreciation

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 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.

To calculate depletion expense in a period, a company should multiply the depletion per unit by:

units extracted and sold in the period

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.

On January 1, Enco Co. purchases a milling machine for $15,000. The machine is expected to last seven years and have a salvage value of $1,000. Assuming the company uses the straight-line method, depreciation expense should be $____ per year

2000

Which depreciation method will compute the most depreciation expense over the life of the asset?

All methods will produce equal depreciation expense over the life of the asset.

Trio Co. reported that maintenance and normal repair costs are expensed as incurred. If Trio's current year machinery and equipment repair costs are $8,200, which accounts would be impacted to complete the journal entry? (Check all that apply.)

Debit Repairs expense Credit Cash

The cost of plant assets should include all of the normal and reasonable expenditures necessary to get the asset in place and ready for its intended use, including repairs to damages incurred after installation

False

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 Reason: The equipment was disposed of, so no cash was received. Loss on disposal of equipment is debited for the difference between cost and accumulated depreciation.

The exclusive right to publish or sell a musical, literary, or artistic work during the life of the creator plus 70 years is called a

copyright

A ______ is an exclusive right granted to its owner to manufacture and sell an item or use a process for 20 years.

patent

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

units-of-production

The factors necessary to compute depreciation include _____, salvage value and useful life.

cost