AC210 Final (Ch. 9)

Depreciable cost

The portion of the asset's cost that will be used in generating revenue; calculated as an asset cost minus residual value

If a cost is capitalized, it is recorded as an

asset instead of an expense

An asset's cost - accumulated depreciation is its

book value

If a company buys land, a building, or a piece of equipmnent and incurs demolition, renovation, repair costs before it can be used, these additional costs would be

capitalized as a cost of the land, building, or equipment.

An asset's book value or carrying value is its

cost - accumulated depreciation

The journal entry to record the amortization of an intangible asset includes a

debit to Amortization expense

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

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

total expenses and accumulated depreciation

The asset's book value (or cost minus accumulated depreciation) must equal its residual value at the end of its useful life using which depreciation methods?

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

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

Unlimited

When does impairment occur?

When the future cash flow expected from using an asset is less than the asset's book value

Under the cost principle, a company capitalizes

all reasonable and necessary costs of acquiring an asset and preparing it for use

Another term for long-lived tangible assets is

fixed assets

The declining-balance depreciation method assigns

higher depreciation expense to the early years of asset ownership

A company might record an involuntary disposal of an asset

if the asset was seriously damaged in a fire

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

immaterial

The "least and latest rule" is

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

Residual value

the estimated amount to be recovered at the end of the company's estimated useful life of an asset

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

Useful life

The expected service life of an asset to the present owner

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

What expenditures of a US pharmaceutical company would be capitalized?

Goodwill, Patents purchased for new drugs, and purchased patents

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

When recording losses on the sale of fixed assets, the account, Loss on Disposal, is increased with a

debit

Formula for calculating units-of-production depreciation

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

Formula for calculating the straight-line method of depreciation

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

IFRS and GAAP rules to account for long-lived asset values differ in that

-IFRS allow development costs to be capitalized -IFRS allow asset values to be increased to fair values

Costs of long-lived assets that are expensed

-Interest on loans to purchase the assets -Immaterial repairs and maintenance -Ordinary repairs and maintenance

What is the effect of an impairment loss on the accounting equation?

-It decreases total assets -It decreases total stockholders' equity

What financial statement totals are reduced by the adjusting entry to record amortization?

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

Why might a company dispose of a long-lived tangible asset?

-The asset was seriously damaged -The company doesn't need the asset anymore -The asset is replaced with a newer, more efficient model -The asset has reached the end of its useful life

Examples of intangible assets

-Trademarks -Patents -Brand names

The adjusting entry to record amortization includes

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

Amortization

-is calculated using the straight-line method -spreads the cost of intangible assets to expense over their useful lives -is in accordance with the expense recognition (matching) principle

Which account is credited in a journal entry to record depreciation on machinery?

Accumulated depreciation

Expense or Capitalize?: Replacing electrical wiring throughout a building

Capitalize because it extends life

Expense of Capitalize?: Making major structural improvements to a clubhouse

Capitalize because it extends the life

Examples of long-lived productive assets

Delivery equipment and Machinery

When a company records depreciation it debits

Depreciation expense and credits a contra asset account

Expense or Capitalize?: Yearly cleaning of the building's air conditioning filters

Expense b/c it does not increase usefullness

Expense or Capitalize?: Repairing the hinge on the front door of a building

Expense b/c it does not increase usefulness

T/F a company will always capitalize the cost of a long-lived asset

False

Capitalizing costs does what?

Increases assets on the balance sheet and decreases expenses on the income statement

Intangible assets

Long-lived assets that have special rights but no physical substance. The existence of most are indicated only by legal documents that describe their rights. Examples: trademarks, brand names, licensing rights, etc.

Long-lived tangible assets/ fixed assets are found on the

balance sheet

Which financial statement shows tangible assets?

balance sheet

All costs to get an asset in place and ready for 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

Deferred income tax is a _________ account if the different is due to an accelerated tax depreciation

liability

Tangible assets

long-lived assets that have physical substance. Examples: land, buildings, machinery, vehicles, office equipment, and furniture.

Formula for fixed asset turnover ratio

net sales/ avg net fixed assets

Loss on Impairment is an

operating expense that appears on the income statement

Ordinary repairs and maintenance are

recorded as expenses in the current period and are sometimes called revenue expenditures.

Another term for residual value

salvage