AC CHAP 9

When does impairment occur?

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

Deferred Income Tax is recorded when ______.

a company reports more depreciation (and less income tax) on its tax return than it reports on its income statement prepared under GAAP

Assuming straight-line depreciation, a long-lived asset's useful life ______. (Check all that apply.)

affects the amount of Depreciation Expense will cause Depreciation Expense to be higher if a shorter life is estimated

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

If a cost is capitalized it is recorded as an _________ not an expense

asset

Construction in progress is reported as a(n) ______.

asset on the balance sheet

Recording an asset impairment requires netting the ______.

asset with its Accumulated Depreciation and then reducing the asset's carrying value to its lower fair market value

intangible assets

assets that do not have physical substance

On which financial statement is accumulated depreciation reported?

balance sheet

Which financial statement shows tangible assets?

balance sheet

When calculating the amount of depreciation for assets purchased or sold during a month, it is assumed the assets were purchased or sold at the ______.

beginning of the month nearest the actual date

An asset's cost minus accumulated depreciation is its ______ value.

book

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

capitalized

IFRS ______.

divides the cost of an asset among its significant component parts and depreciates the components separately over their useful lives

Recording depreciation is an application of the ______.

expense recognition (matching) principle

Ordinary repairs and maintenance costs should be ______.

expensed as incurred

____________ repairs to long-lived assets are capitalized because they are large expenditures and increase the useful life of the asset.

extraordinary

True or false: The IRS allows super-sized deductions in the early years of an asset's life and allows a company to depreciate more than an asset's depreciable cost over its life.

false (Although the IRS allows large deductions in the asset's early years, it does not allow companies to depreciate more than the asset's depreciable cost.)

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

false (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.)

True or false: In accordance with US Generally Accepted Accounting Principles, a company will always capitalize the cost of a long-lived asset.

false: A company will not capitalize the cost of a long-lived asset if its cost is an immaterial amount.

An asset's useful life ______.

may be expressed in terms of time or units of capacity

category of long-lived assets that are depleted over time

natural resources

At the end of a depreciable asset's useful life, its book value equals its ______.

residual value

Accelerated methods of depreciation ______.

result in high depreciation expense in the earlier years of the life of the asset include double-declining balance methods result in lower book values in the earlier years of the life of the asset

Exclusive rights to a special name, image or slogan is a

trademark

T or F: Depreciation is not intended to report an asset at its current value.

true

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.)

Most companies use one method of depreciation for financial reporting and a different method for income taxes, which requires ______ sets of accounting records.

two

The write-down of equipment due to impairment will cause ______.

total assets to decrease net income to decrease

To record the disposal of a noncurrent asset, a company must first ______.

update Depreciation Expense to the date of sale

Six years ago, on January 1, Ace Electronics purchased a $310,000 machine with an estimated useful life of 10 years and a residual value of $10,000. Ace used the machine for 6 years and recorded straight-line depreciation each year. At the end of the 6th year, after depreciation expense had been recorded for the year, Ace found that the machine no longer had any future economic value because the product it makes is obsolete. Ace still owns the machine, but should make a journal entry that includes a ______. (Check all that apply.)

$130,000 debit to Loss on Impairment $130,000 credit to Machinery

Dew Drop Inn sold 10 beds that had originally cost $500 each for a total of $800 cash. The depreciation recorded on the beds at the time of sale equals $4,000. The entry to record the sale includes a ______. (Check all that apply.)

$200 debit to Loss on Disposal $4,000 debit to Accumulated Depreciation $800 debit to Cash $5,000 credit to Furniture

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 ______.

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

Shenandoah Skies bought land to be used for a new ski resort. Which of the following of expenditures made by Shenandoah Skies should be capitalized?

$5,000,000 to purchase the land $50,000 paid to cut down timber to make way for ski runs $5,000 paid to Jack Mogul for a title search

X-it Company, signed a $500,000, 5-year note payable to buy a new industrial machine. The company paid $2,000 cash for transportation of the machine and $1,000 cash for installation costs. The journal entry to record this transaction will include a ______. (Check all that apply.)

$500,000 credit to Note Payable $3,000 credit to Cash $503,000 debit to Machinery

units-of-production depreciation formula

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

straight-line depreciation formula

(cost - residual value) x (1/useful life) = depreciation expense

double-declining-balance depreciation formula

(cost-accumulated depreciation) x 2/useful life

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

Acme, Inc.'s balance sheet shows equipment at a cost of $5,000,000. Accumulated Depreciation is $2,000,000. Acme's income statement shows Depreciation Expense of $200,000 for the year. Which of the following statements is true?

4% of the equipment's economic benefit was used up this year. (=$200,000/$5,000,000)

which of these are intangible assets?

-patents -trademarks -brand names

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

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

On January 1, Ace Electronics bought a new cash register for $2,500 and estimates a useful of 4 years and $0 residual value. For tax purposes, the TOTAL depreciation expense that Ace can record over the cash register's useful life is ______.

2,500

Acme, Inc.'s balance sheet shows Equipment at a cost of $5,000,000. Accumulated Depreciation is $2,000,000. Acme's income statement shows Depreciation Expense of $200,000 for the year. The equipment has $0 salvage value. Which of the following statements is true?

40% of the equipment's economic benefits have been used up so far.

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

Accumulated Depreciation

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

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

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?

Assets will be overstated. Stockholders' equity will be overstated.

Which of the following would cause the balance sheet to appear stronger and income statement to appear more profitable than it should?

Capitalizing costs that should be expensed.

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

Credit Accumulated Depreciation Debit Depreciation Expense

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

Depreciation Expense over the periods the asset is used to generate revenue

Which of the following statements are true?

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

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

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

Quiche & Tell, Inc. has discovered that its goodwill has been impaired because the secret recipe it received when it purchased its competitor is no longer a secret. Recording this impairment will require a debit to ______.

Impairment Loss and credit to Goodwill

A company bought land and a building for $128,000. The building has a useful life of 20 years. Why should the company split the $128,000 cost between the land and the building?

Land is not depreciated, while the building will be depreciated over its 20-year useful life.

Sunny Sky paid $30,000 cash for piece of land to be used for a new corporate headquarters building. What is the effect of this transaction on the accounting equation?

One asset increases, while another asset decreases.

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

Repairs and Maintenance Expense

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?

Straight-line Units-of-production Double-declining-balance

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 ______.

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

Why should a company divide up the cost of a "basket purchase" among the different assets purchased?

The different assets might be depreciated over different useful lives.

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. (Depreciable cost equals the cost minus the estimated residual value.)

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 ______.

The recorded value of the brick house equals $80,000 or ($100,000/($40,000 + 60,000 + 100,000)) x $160,000.

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

Total Expenses Accumulated Depreciation

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?

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

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? (Check all that apply.)

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

Quiche & Tell, Inc. has discovered that its goodwill has been impaired because the secret recipe it received when it purchased its competitor is no longer a secret. Recording this impairment will ______.

cause a decrease in stockholders' equity

once the construction of a new building is completed it is moved out of the ______ and into the ______ account.

construction in progress; building

If a company wants exclusive rights to artistic material, it should purchase a

copyright

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

cost minus accumulated depreciation

Depreciable cost equals an asset's _______.

cost minus its residual (or salvage) value

The Mane Event, Inc. sold its barber chair for $500. The chair's original cost was $1,200, and its accumulated depreciation was $800. When recording the sale, Mane Event should ______.

credit Gain on Disposal for $100 credit Furniture for $1,200 debit Accumulated Depreciation for $800

The entry to record an equipment's impairment includes ______.

credit to Equipment debit to Impairment Loss

Declining-balance method of depreciation is used to report ______ depreciation in the early years of an assets life and is sometimes referred to as a(n) ______ method.

higher; accelerated

Some fixed asset costs are expensed instead of being capitalized in the interest of efficiency, this is allowed when the costs are ______.

immaterial and would not affect users' analysis of financial statements

Depreciation and impairment are different in that only ______.

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

On which financial statement is depreciation expense reported?

income statement

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

paving the parking lot and landscaping are recorded with a debit to ______

land improvements, an asset

The Accumulated Depreciation balance will be ______.

large relative to the asset's cost in the latter years of the asset's life

Deferred Income Tax is a(n) ______ account if the difference is due to an accelerated tax depreciation used for its tax returns and straight-line for financial reporting.

liability (The IRS allows companies to depreciate assets at accelerated amounts, thus a company reports more depreciation (and less income tax) on its tax return than it reports on its income statement prepared under GAAP in the early years of the asset's life. This tax savings is reported as Deferred Income Tax (a liability))

fixed assets are ______ and are found on the ______.

long-lived tangible assets; balance sheet

which of these are long-lived productive assets?

machinery and delivery equipment

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

patent

tangible assets

physical things, such as automobiles, clothing, land, or buildings

An asset's useful life is based on the ______.

professional judgement

The primary objective of financial reporting is to ______.

provide information about a business that is useful in projecting its future cash flows

The primary objective of income tax reporting is to ______.

raise enough revenue to pay for expenditures and to encourage certain social and economic behaviors

Thermal, Inc. bought a new computer system for $50,000 cash. What is the effect of this purchase on the company's total assets? Total assets ______.

remain the same

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

small, minimal

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

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

stockholders' equity to be overstated assets to be overstated

what are the two types of long-lived assets?

tangible and intangible

which are major types of long-lived assets?

tangible and intangible assets

_____________ assets are intangible assets that include software and web development work.

technology

The "least and latest rule" is ______.

that a taxpayer should pay the least tax legally permitted at the latest date allowed

residual value (salvage value)

the amount the company expects to receive from selling the asset at the end of its service life

Which are natural resources that are depleted over time?

timber and natural gas wells