ch.9 learnsmarts

On January 11, Ace Electronics bought a new cash register for $2,500. In calculating depreciation expense for the year ended December 31, Ace's accountant will assume that the cash register was purchased on ______.

January 1 Reason: Accountants typically assume the assets were purchased at the beginning of the month nearest to the actual purchase which is January 1.

When does impairment occur?

When circumstances interfere with the ability to recover the value of the asset through future operations

Which account is credited in an adjusting entry to record depreciation on machinery?

accumulated depreciation

The entry to record annual straight-line depreciation will increase a company's ______ and ______.

accumulated depreciation; total expenses

Which of the following is true?

capitalized costs increase long-lived assets

Accountants say costs have been .... when they are recorded as assets rather than as expenses. (Enter only one word per blank.)

capitalized or deferred

Ordinary repairs and maintenance costs should be ______.

expensed as incurred

An asset's useful life ______.

may be expressed in terms of time or units of capacity

Acme, Inc. bought land and a factory building for $80,000. The land was appraised at $25,000 and the building at $75,000. Using the basket purchase allocation, Acme would record the ______.

land at $20,000 and the building at $60,000

The formula for the fixed asset turnover ratio equals net ..... divided by average net fixed assets. (Enter only one word per blank.)

sales or revenue

Which of the following entries result in a decrease in total assets and stockholders' equity?

the adjusting entry to record the depreciation of long-live assets

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

True or false: Depreciation is not intended to report an asset at its current value.

true Reason: Depreciation matches a systematically, allocated portion of the cost of an asset with the revenues that it generates. Depreciation does not represent the reduction in the fair value of the asset.

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

units-of-production

Which depreciation method results in higher depreciation expense when the asset is used more?

units-of-production

Acme, Inc., bought land and a building for $150,000. Acme plans to use the building for 20 years and then sell it. What is the useful life of the land?

unlimited

Ace Electronics bought a new cash register for $2,500. Ace plans to use the cash register for 4 years and then sell it for $200. The cash register's depreciable cost equals ______.

$2,300

On October 1, 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. What is depreciation expense for the year ended December 31 that year using double-declining-balance?

$3,750 Reason: The truck was used for only 3 months of the year. Thus the 3 months of depreciation equals $3,750 (=$30,000 x 2/4 x 3/12).

On June 1, Ace Electronics bought a new cash register for $2,500. Ace plans to use the cash register for 4 years and then sell it for $100. If Ace uses straight-line depreciation, what is depreciation expense for the year ended December 31 that year?

$350 Reason: The cash register, purchased on June 1, was used for 7 months, not 6.

On January 1, Ace Electronics bought a new cash register for $2,500. Ace plans to use the cash register for 4 years and then sell it for $200. If Ace uses straight-line depreciation, depreciation expense for the 1st year ended December 31 equals ______.

$575

On January 1, 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 the 2nd year using double-declining-balance equals ______.

$7,500 Reason: The expense equals $7,500 or ($30,000 - 15,000) x 2/4. The formula is the book value (or cost minus Accumulated Depreciation) times 2 divided by the life. Year 1's $15,000 Accumulated Depreciation equals $30,000 x 2/4.

The Three Little Pigs purchased three houses for a total cost of $160,000. Appraisal values for the three completed houses were: straw house, $40,000; wood house $60,000; and brick house $100,000. Using the basket purchase allocation, the recorded value of the brick house should be ______.

$80,000

Assuming straight-line is used, which of the following is the formula for calculating revised annual depreciation?

(Book value-new residual value) x (1/remaining Useful life)

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

(Cost - Accumulated Depreciation) x (2/useful life)

The formula for calculating straight-line depreciation is ______.

(cost - residual value) x (1/useful life)

Shenandoah Skies built a new lodge for its ski resort. Which of the following costs should be capitalized? (Check all that apply.)

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

Vango, Inc. bought a new delivery van during the year. Which of these costs should be expensed as ordinary repairs and maintenance? (Check all that apply.)

- $900 for cleaning the van during the year - $100 oil change on van

Match the depreciation method with how the assets' economic benefits are assumed to be used and expensed over the asset's useful life. Instructions

- Straight Line > usage and depreciation expense are the same - Units-of-production > usages and depreciation expense varies depending on actual usage - declining balance > usage and depreciation expense decrease as efficiency decreases

Which of the following may lead to a revision of an estimate of a company's depreciation expense? (Check all that apply.)

- a change in the estimated useful life - a change in the estimated residual value - extraordinary repairs that significantly extend the asset's usefulness

Select all of the items below in determining the cost of purchased equipment.

- add the list price - add the installation costs - subtract the purchase discount - add the sales tax - add the delivery costs

The entry to record annual straight-line depreciation will decrease a company's ______.

- asset book value - total assets - net income

On-a-Roll, Inc. amortizes its copyright of $20,000 over 20 years. Miss Hap, the bookkeeper, forgot to record the amortization in the current year. The effect of this mistake causes ______. (Check all that apply.)

- assets to be overstated - net income to be overstated

Amortizing intangible assets affects the accounting equation by causing ______. (Check all that apply.)

- assets to decrease - stockholders' equity to decrease

Miss Hap, the company bookkeeper, recorded the annual repair costs on the company's machinery as an increase to the machinery account. As a result, which of the following is true? (Check all that apply.)

- assets will be overstated - stockholders' equity will be overstated

On-a-Roll, Inc. amortizes its patent of $20,000 over 20 years. The adjusting entry to record amortization results in a(n) ______. (Check all that apply.)

- decrease to net income on the income statement - decrease to assets on the balance sheet

Which of these are long-lived productive assets? (Check all that apply.)

- delivery equipment - machinery

Which of the following statements are true? (Check all that apply.)

- depreciation expense is an operating expense on the income statement - depreciation expense on the income statement reports only the current period's usefulness used - accumulated depreciation is netted against the related long-lived asset on the balance sheet - accumulated depreciation on the balance sheet reports the amount of usefulness used since the long-lived asset was first put into use

Which of the following may cause net income to differ among companies? (Check all that apply.)

- estimated useful lives - estimated residual values - depreciation methods

Which of these assets are not depreciated? (Select all that apply.)

- inventory - cash - land

Which of the following financial statement totals are reduced by the adjusting entry to record amortization? (Check all that apply.)

- net income on the income statement - total stockholders' equity on the balance sheet - total assets on the balance sheet

Executives at WorldCom committed an $11 billion fraud by capitalizing costs that should have been expensed. What was the effect of this fraud on WorldCom's income statement? (Check all that apply.)

- net income was too high - expenses were too low

Miss Hap, the bookkeeper, forgot to record the depreciation for the year. This error will cause ______. (Check all that apply.)

- stockholders' equity to be overstated - assets to be overstated

Acme Enterprises just bought a new manufacturing machine. Which of these costs should be capitalized? (Check all that apply.)

- the $8,000 costs of tearing down Acme's factory wall to get the machine inside - the $500,000 invoice price of the machine - the $15,000 freight bill to deliver the machine to Acme's factory

Which of the following line items will differ if an asset is depreciated using straight-line versus declining-balance method? (Select all that apply.)

- the book value on the balance sheet - depreciation expense on the income statement

An asset's residual value is ______. (Check all that apply.)

- the same as its salvage value - the estimated amount it can be sold for at the end of its useful life

Executives at WorldCom committed an $11 billion fraud by capitalizing costs that should have been expensed. What was the effect of this fraud on WorldCom's balance sheet? (Check all that apply.)

- total assets were too high - retained earnings were too high

X-it Company signed a $500,000, 5-year note payable to buy a new machine. The company paid $2,000 cash for transporting and $1,000 cash for installing the machine. What is the effect of this transaction on the accounting equation? (Check all that apply.)

- total liabilities increase $500,000 - machinery, an asset, increases $503,000 - total assets increase $500,000

What is the effect of recording depreciation expense on the accounting equation? (Check all that apply.)

- total stockholders' equity decreases - total assets decrease

X Circle Company purchased a computer system Black Box, Inc. with a list price of $100,000 plus 5% sales tax. The cost to deliver and install the computer was $10,000. The debit to Equipment equals .....

115,000

X-it Company bought a new delivery truck. The manufacturer says that the truck should last for ten years and 120,000 miles. X-it plans to use the truck for 4 years, during which it will be driven 50,000 miles. What is the useful life of the truck for depreciation purposes? (Check all that apply.)

4 years, 50,000 miles

Given each of the following start-up companies are identical except for the depreciation methods and estimates used, which company would report the higher net income in the first year?

Company B used straight-line and estimated useful lives of 5 years and $1,000 residual values.

Which of these is an accelerated depreciation method?

Declining-balance

Which of these depreciation methods are allowed by GAAP? (Select all that apply.)

Declining-balance Units-of-Production Straight-line

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.

Which of the following statements is correct?

Depreciation is not intended to report an asset at its current value.

Thermal, Inc. bought a new office computer for $5,000 cash. The journal entry to record this transaction will include a $5,000 ______. (Check all that apply.)

Dr. Equipment Cr. Cash

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 ______. (Check all that apply.)

Dr. Machinery $320,750 Cr. Note Payable $315,000 Cr. Cash $5,750

The journal entry to record depreciation include which of the following?

Dr. depreciation expense Cr. Accumulated Depreciation

Which of the following is a long-lived asset?

Land on which to build a new store

On October 21, X-it Company bought a new delivery truck for $30,000. In calculating depreciation expense for the year ended December 31, X-it's accountant will assume that the truck was purchased on ______.

November 1 Reason: Accountants typically assume the assets were purchased at the beginning of the month nearest to the actual purchase which is November 1.

Both Spam Am Airlines and TWB Airlines used straight-line depreciation for a $20 million jet. Spam Am used an estimated 35 year useful life and TWB Airlines used an estimated 25 year life for its planes but estimated similar residual values. As result of the differences in useful lives, which company will appear more profitable?

Spam Am

Tangible assets are first recorded at ______.

all costs to acquire them and prepare them for use

Revenue expenditures are recorded with a debit to ______.

an expense when they relate to ordinary repairs and maintenance

The effect of capitalizing a cost that should have been expensed causes ______.

assets to be overstated on the balance sheet and expenses to be understated on the income statement

Which method will report a lower net income in the first year of an asset's life?

declining-balance

The difference between the Equipment account and its Accumulated Depreciation is called the ...... value. (Enter only one word per blank.)

book (or carrying)

Depreciation Expense of a long-lived asset calculated using the straight-line depreciation method will be a ______ amount each year.

constant

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

cost - accumulated depreciation

Depreciable cost equals an asset's _______.

cost minus its residual (or salvage) value

..... is the allocation of the cost of a long-lived, tangible asset over its useful life creating an expense on the income statement that is matched against the revenue generated by using the asset. (Enter only one word per blank.)

depreciation

Matching part of the cost of a long-lived asset with the revenues generated by the asset is ______.

depreciation

On which financial statement are the line items reported? Instructions

depreciation expense - income statement accumulated depreciation - balance sheet

Depreciation allocates the cost of a long-lived asset to _____.

depreciation expense over the periods the asset is used to generate revenue

True or false: Land is not depreciated.

false Reason: Land is the only tangible asset that is assumed to have an indefinite life and thus is not depreciated.

The units-of-production depreciation method will result in ____ Depreciation Expense when the actual production is higher.

higher

Depreciation and impairment are different in that only ______.

impairment represents the decline in the current value of the related asset

For long-lived assets that have been in use for more than one accounting period, Depreciation Expense on the ______ Accumulated Depreciation on the ______.

income statement will be less than; balance sheet

The entry to record the purchase of $10,000 of equipment by signing an $8,000 note and paying the rest with cash causes total assets to ______.

increase by $8,000 Reason: The entry is recorded with a $10,000 debit to Equipment (+A) and $2,000 credit to Cash (-A) and $8,000 credit to Notes Payable (+L). Total assets increase by $8,000 (=$10,000 debit to Equipment - $2,000 credit to Cash).

Capitalized costs differ from expenses in that only capitalized costs result in a(n) ______.

increase to long-lived assets

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

lower; higher

The formula for the fixed asset turnover ratio equals ______.

net revenue/average net fixed assets

Ace Electronics bought a new cash register for $2,500. Ace originally planned to use the cash register for 4 years and then sell it for $200. After 4 years, Ace had recorded $2,300 of depreciation. If Ace continues to use the cash register, still planning to sell it eventually for $200, then Ace should record ______.

no additional depreciation

The expenditure incurred for changing the oil in the company's fleet of trucks is debited to ______.

repairs and maintenance expense

The estimated amount a long-lived asset is expected to be sold for at the end of its useful life is the ..... value. (Enter only one word per blank.)

residual or salvage