Chapter 9 Learnsmart

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

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.

Revenue expenditures are recorded with a debit to ______.

an expense when they relate to ordinary repairs and maintenance

If a cost is capitalized, it is recorded as a(n) ______ not an expense

asset

The difference between the Equipment account and its Accumulated Depreciation is called the _______ value.

book (carrying)

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

capitalized

Sunny Skys, Inc. bought a derelict hunting lodge, which it tore down at a cost of $45,000 and replaced with a new lodge. The demolition cost should be ______. Multiple choice question.

capitalized

All reasonable and necessary costs to acquire and prepare an asset for its intended use should be ______.

capitalized as an asset

A company should depreciate a long-lived tangible asset to ______.

match part of the cost of the asset with the revenues generated by the asset - Depreciation is a systematic allocation of the depreciable cost of the asset over its estimated life and does not reflect the current market value of the asset.

An asset's useful life ______.

may be expressed in terms of time or units of capacity

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

true - 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

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

units-of-production

True or false: Long-lived assets (except land) are expensed over their useful lives.

True - Long-lived assets are depreciated (expensed over their useful lives.)

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

Units-of-production

Tangible assets are first recorded at ______.

all costs to acquire them and prepare them for use

On January 1, Busy Beaver bought a new industrial lathe for $210,000. It expects to use the lathe for 10,000 hours over the next 5 years and then sell it for $10,000. Busy Beaver used the lathe for 2,000 hours in its 1st year and 2,500 hours in its 2nd year. Using units-of-production, Depreciation Expense will be ______.

greater in the 2nd year since the lathe was used more

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

Depreciation Expense is reported on the ______.

income statement as an operating expense

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 - Depreciation Expense, a temporary account, is closed into Retained Earnings at the end of each accounting period and thus reports the amount of usefulness used in the current period only. Accumulated Depreciation, a permanent account on the balance sheet, accumulates and thus will be larger than the amount on the income statement.

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

increase to long-lived assets - A cost that is capitalized is recorded with a debit to an asset (+A) instead of debit to an expense (+E,-SE).

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 cost principal requires assets to be reported at the cost, not the individual appraised values. The land is 25% of the appraised value (=$25,000/($25,000 + 75,000)) and the building is 75% (=$75,000/($25,000 + 75,000)). Thus, 25% of the $80,000 cost or $20,000 is debited to Land and 75% of the $80,000 cost or $60,000 is debited to Building.

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

What effect does the residual value have on a long-lived asset's depreciable cost?

The greater the residual value the smaller the depreciable cost.

How does management estimate useful lives and residual values?

They use professional judgment.

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 - the 3 months of depreciation equals $3,750 (=$30,000 x 2/4 x 3/12).

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

Declining-balance

Depreciation ______.

decreases an asset's book value which is not necessarily equal to its current market value

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 - Land does not depreciate and has an unlimited useful life.

When does impairment occur?

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

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

cost minus accumulated depreciation - An asset's book value equals the cost minus accumulated depreciation and represents the amount of usefulness left plus the residual value. An asset's depreciable cost equals the cost minus residual value and represents the asset's total usefulness to the company that should be depreciated over the asset's useful life.

Ordinary repairs and maintenance costs should be ______.

expensed as incurred

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 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 productive asset ______.

is used to produce goods or services that will be sold to customers

The list price of a computer was $100,000. The sales tax on the computer was 5%. The delivery cost was $1,000. The cost to assemble the computer was $500. The Equipment account should be debited for a total of ______.

$106,500 - All of these costs (sales tax, delivery and assembly costs) were incurred to get the computer in place and ready for its intended use and thus all should be debited to the Equipment account.

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 1st year using double-declining-balance equals ______.

$15,000 - The expense equals $15,000 (=($30,000 cost - $0 Accumulated Deprecation) x 2/4.

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 - An asset's depreciable cost equals the asset's cost, $2,500, minus the residual value, $200. The depreciable cost equals $2,300 and represents the total amount of usefulness that will be expensed (depreciated) over the asset's useful life.

On January 1, Busy Beaver, Inc., signed a $315,000, 5-year note payable to buy a new industrial veneer cutter. Busy Beaver plans to use the machine for 10 years and then sell it for its scrap value of $5,000. Using straight-line depreciation, Depreciation Expense for the 1st year ended December 31 equals ______.

$31,000 * Straight-line depreciation equals $31,000 or ($315,000 - 5,000 x 1)/10 years.

On January 1, X-it Company bought a new delivery truck for $30,000. X-it plans to use the truck for 4 years, during which it will be driven 50,000 miles. The truck will be worthless at the end of the 4 years. If the truck was driven 15,000 miles in its 1st year, Depreciation Expense for the year using units-of-production is ______.

$9,000 ($30,000 x (15,000 miles/50,000 miles))

On January 1, Busy Beaver bought a new industrial lathe for $210,000. It expects to use the lathe for 10,000 hours over the next 5 years and then sell it for $10,000. Busy Beaver used the lathe for 2,000 hours in its 1st year and 2,500 hours in its 2nd year. Accumulated Depreciation at December 31 of the 2nd year, using units-of-production, equals ______.

$90,000 - Depreciation Expense for year 1 equals $40,000 (=($210,000-10,000) x 2,000/10,000). For year 2, Depreciation Expense equals $50,000 (= ($210,000 - 10,000) x 2,500 hours/10,000 hours). The Accumulated Depreciation is $40,000 + 50,000 or $90,000.

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 ______.

(100/ 40,000 + 60,000 + 100,000) x 160 = 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)

What is the formula for calculating units-of-production depreciation?

(Cost - residual value) x (actual production this period/estimated total production)

The formula for calculating straight-line depreciation is ______.

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

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

- $100 oil change on van - $900 for cleaning the van during the year This is a capitalized cost because it is a cost to acquire it and place it in service. (cost of van and cost of shelves instillation)

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

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

Which of the following may lead to a revision of an estimate of a company's depreciation expense?

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

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

- Accumulated Depreciation - Total Expenses

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

- Add the delivery costs - Add the sales tax - Add the list price - Add the installation costs - Subtract the purchase discount

If management was to unethically capitalize costs that should not have been, which of the following would be misstated?

- Assets would be overstated. - Stockholders' equity would be overstated.

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

- Credit Accumulated Depreciation - Debit Depreciation Expense

Which of these depreciation methods are allowed by GAAP?

- Declining-balance - Straight-line - Units-of-production

Which of the following statements are true?

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

Which of the following may cause net income to differ among companies?

- Estimated useful lives - Depreciation methods - Estimated residual values

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?

- Expenses were too low. - Net income was too high.

Which of the following costs associated with long-lived assets are expensed, not capitalized?

- Immaterial repairs and maintenance - Ordinary repairs and maintenance

Which of the following statements are true?

- Impairment loss on an asset arises from a precipitous decline in the current value of the asset. - Depreciation of a truck equals the decline in the estimated usefulness of the truck.

Cedar Fair purchased land; which of the following should be debited to the Land account?

- Legal fees for the land's title search - Fees for surveying of the land - Commissions paid to brokers when purchasing the land

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?

- Machinery, an asset, increases $503,000. - Total assets increase $500,000. - Total liabilities increase $500,000.

Computit bought a new copier machine. Which of these costs should be expensed?

- Replacement of the toner for the copy machine - Annual maintenance cost

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?

- Retained earnings were too high. - Total assets were too high.

If management was to unethically capitalize costs that should not have been, which of the following would be misstated?

- Stockholders' equity would be overstated. - Assets would be overstated.

Busy Beaver, Inc. signed a $315,000, 5-year note payable to buy a new $315,000 industrial veneer cutter. Busy Beaver paid $5,000 cash for transportation of the machine and $750 cash for installation costs. What is the overall effect of this transaction on the accounting equation?

- Total liabilities increase $315,000. - Machinery, an asset, increases $320,750. - Total assets increase $315,000.

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 ______.

- assets to be overstated - net income to be overstated

Miss Hap, the bookkeeper, forgot to record the depreciation for the year. This error will cause ______.

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

Amortizing intangible assets affects the accounting equation by causing ______.

- assets to decrease - stockholders' equity to decrease Amortization is recorded with a debit to Amortization Expense (+E,-SE), which decreases net income, and a credit to Accumulated Amortization (+xA,-A).

Sunny Skys, Inc. bought a derelict hunting lodge, which it tore down at a cost of $45,000 and replaced with a new lodge. The demolition cost should be ______.

- capitalized The demolition cost should be capitalized as an asset because the costs are necessary to get the asset in place and ready for its intended use.

Which of these assets are not depreciated?

- cash - land - inventory Inventory is expensed when sold and is thus not depreciated.

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

- debit to Equipment - credit to Cash

In the case of a basket purchase, the cost of the land and building is ______.

- split among the assets purchased in proportion to the market value of the assets as a whole If the building's and the land's fair market values were $800,000 and $200,000 respectively but were bought together for $900,000, the $900,000 cost would be split based on the proportion to the market value of the assets as a whole. Thus, $720,000 (=$900,000 x 80% (=$800,000/$1,000,000)) would be allocated to the Building account and $180,000 (=$900,000 x 20% (=$200,000/$1,000,000)) to the Land account.

An asset's residual value is ______.

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

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?

-Expenses were too low. - Net income was too high.

(Cost - _________ value) x (________ production this period/estimated total production) is the formula for calculating units-of-production depreciation

1- Residual 2- Actual

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

Accumulated Depreciation

Which of the following is true?

Capitalized costs increase long-lived assets.

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. - Company B would have the higher net income because the depreciation expense is less than Company A because the lack of a residual value makes the numerator higher and thus the expense higher. - double-declining balance, an accelerated method, results in higher depreciation expense in the early years of the life of the asset.

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

Depreciation Expense - Depreciation is recorded with a debit to Depreciation Expense (+E, -SE) and a credit to Accumulated Depreciation (-A).

On which financial statement are the line items reported?

Depreciation Expense -----> Income Statement Accumulated Depreciation -----> Balance Sheet

What effect will the units-of-production depreciation method have when the actual production is higher than in other periods?

Depreciation Expense will be higher.

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

Match each depreciation method with the applicable description: - Straight-line depreciation

Does the best job of matching the expense with the related revenue when an asset is used evenly over its useful life

Match each depreciation method with the applicable description: - Declining-balance depreciation

Is the best method to use when an asset is productive in its earliest years but quickly loses its usefulness

Match each depreciation method with the applicable description: - Units-of-production depreciation

Is the best method to use when the amount of an asset's use varies significantly from one accounting period to another

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

Accumulated Depreciation is reported on the ______.

balance sheet netted against the related long-lived asset

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

constant

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

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

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

decrease to assets on the balance sheet decrease to net income on the income statement - Amortization is recorded with a debit to Amortization Expense (+E,-SE), which decreases net income, and a credit to Patent (-A).

The straight-line depreciation method ______.

reports an equal amount of depreciation expense each year

The estimated amount a long-lived asset is expected to be sold for at the end of its useful life is the _______ value.

residual / salvage

The formula for the fixed asset turnover ratio equals net _____ divided by average net fixed assets.

sales