Acc210 SmartBook Chapter 7

Other terms used for an activity-based depreciation method are:

- units of output method - units of production method

A(n) ______ is the exclusive right to manufacture a product or use a process granted for a period of ______ years.

patent; 20

Where is the account accumulated depreciation on equipment found on the financial statements?

As a contra account to equipment on the balance sheet

When we recognize depreciation, we allocate a portion of the asset's cost to each year in which the asset

provides benefits to the company.

Cheng Corporation exchanges old equipment for new equipment. The original cost of the old equipment was $90,000, and its accumulated depreciation at the date of exchange was $40,000. The new equipment received had a fair value of $40,000 and a book value of $35,000. The journal entry to record this exchange will include which of the following entries?

- Debit accumulated depreciation $40,000 - Debit loss on exchange $10,000 - Credit equipment $90,000 - Debit equipment $40,000

The depreciable cost is

the cost of the asset minus the residual value.

Straight-line deprecation is calculated as the depreciable cost divided by

the estimated service life of the asset.

The service life or useful life of an asset is

the estimated use that the company expects to obtain from the asset before disposing of it.

The term used to describe the amount the company expects to receive for an asset at the end of its service life is

residual value

An asset ______ occurs when an asset is no longer useful, but cannot be sold.

retirement

For accounting purposes, depreciation is

an allocation of a cost of an asset.

In accounting, the term impairment refers to

an asset's significant decline in value.

Recording depreciation results in the allocation of the cost of a long-term asset to the years during which the asset provides ______.

benefits, revenues, value

When selling a fixed asset, the seller recognizes a gain or loss for the difference between the amount received and the ______ value of the asset sold.

book

Which of the following are commonly used depreciation methods?

- Straight-line - Activity-based - Declining-balance

The journal entry to retire old equipment that is not fully depreciated includes a:

- debit to accumulated depreciation - credit to equipment - debit to loss

Which depreciation methods allocate the cost of long-term assets based on time?

- declining-balance - straight-line

Units of production or units of output are alternative terms for the ______ ______ depreciation method

activity based

Depreciation is a process of cost ______, and not a process of valuation.

allocation

Allocating the cost of intangible assets to expense is referred to as

amortization

The original cost of an asset minus accumulated depreciation is

book value

The original cost of the asset less the accumulated depreciation is the ______ ______ of the asset.

book value

The formula for calculating the double-declining-balance method is

book value at beginning of year x 2/estimated service life

The term ______ means to record an expenditure as an asset.

capitalize, capitalization, capital, or capitalized

An asset that has no physical substance is referred to as a(n)

intangible asset.

Long-term assets are classified as

tangible and intangible

On January 1, 2018, Lennox Corporation purchased equipment for $100,000. Lennox depreciated the equipment straight--line over 10 years with no residual value. What is the book value of the equipment on January 1, 2021?

70,000 b/c $100,000/10 years = $10,000 depreciation per year. Historical cost of $100,000 less $30,000 depreciation (for 2018, 2019, and 2020) = $70,000.

True or false: The initial cost of property, plant, and equipment includes the purchase price and all expenditures necessary to bring the asset to its desired condition and location for use.

True, b/c all costs should be capitalized to bring the asset to its intended and useful state.

A contractual arrangement in which one entity grants the purchaser the exclusive right to use the trade name, formulas, and product rights within a specific geographic area for a specific period of time is called a

franchise

On January 1, 2018, Pritchett Corporation purchased equipment for $50,000. The equipment had a five-year life with a $10,000 residual value. Pritchett uses the straight-line depreciation method. What is the book value of the equipment on January 1, 2021?

$26,000 b/c depreciation expense is ($50,000 - 10,000)/5 = $8,000 per year. $50,000 less accumulated depreciation of $24,000 = $26,000.

The formula to calculate an activity-based depreciation rate is:

(cost - residual value)/estimated total production.

Which of these are parts of the journal entry to record depreciation?

- Debit Depreciation Expense - Credit Accumulated Depreciation b/c depreciation is recorded with a debit to Depreciation Expense (+E, -SE) and a credit to Accumulated Depreciation (-A).

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

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

Which of the following items are initially recorded as an expense on the income statement?

Advertising costs Research and development costs

Expensed: Research and development costs

Capitalized: Purchase price plus costs necessary to get asset ready for use

True or false: Depreciation is a valuation method for property and equipment.

False, b/c depreciation is a process of cost allocation, not valuation.

Which statement is true about the straight-line method of depreciation?

It allocates an equal amount of depreciation to each year the asset is used.

The gain or loss on disposal of an asset is calculated as:

amount received less the book value of asset sold

In accounting, expenditures recorded as assets are said to be _____.

capitalized

The purchase price and all costs to bring an asset to its desired condition and location for use should be ______.

capitalized

The accumulated depreciation account is classified as a(n)

contra asset

A(n) ______ is an exclusive right of protection given to a creator of a published work, such as a song, film, painting, photograph, or book.

copyright

The formula to calculate the depreciation for the units-of-production method or activity-based depreciation, is ((cost - residual value)/total estimated production) x ______.

current-year activity or production

Straight-line, declining-balance, and activity-based refer to methods commonly used to ______ property, plant, and equipment.

depreciate

When an asset has a significant decline in value and is written down, this is called

impairment

Amortization refers to the allocation of the cost of ______ assets to expense

intangible

An asset that has no physical substance is called a(n) _______ asset

intangible

A retirement or abandonment of an asset is different from a sale of an asset because

no cash is received. a loss must be recognized for the remaining book value.

Otto Inc. retires old equipment with a book value of $2,400. Otto should

recognize a loss of $2,400

The depreciable cost of an asset is the asset's cost minus its estimated ______ value.

residual

______ value is the amount the company expects to receive for the asset at the end of its service life.

residual

Long-lived assets are typically classified in two categories: ______ and ______. (Enter one word per blank)

tangible; intangible

The formula for calculating declining balance depreciation is the depreciation rate per year times

the book value at the beginning of the year.

Total depreciation recorded over an asset's service life is:

the same regardless of the depreciation method used

Straight-line and declining balance methods allocate the cost of a long-term asset based on ______, while an activity-based method allocates the cost of an asset based on its ______

time/life use/activity

An exclusive right to display a word, slogan, symbol, or emblem that distinctively identifies a company, product, or service is referred to as a

trademark

The estimated use the company expects to obtain from an asset before disposing of it is referred to as the ______ life of the asset

service or useful

The depreciation method that allocates an equal amount of the depreciable base to each year of the asset's service life is the

straight-line method.

Pearce Corporation exchanges old equipment for new equipment. The original cost of the old equipment was $120,000, and its accumulated depreciation at the date of exchange was $40,000. The new equipment received had a fair value of $50,000 and a book value of $32,000. The journal entry to record this exchange will include which of the following entries?

- Debit accumulated depreciation $40,000 - Credit equipment $120,000 - Debit equipment $50,000 - Debit loss on exchange $30,000

Which of the following are expenditures for assets subsequent to acquisition?

- Repairs and maintenance - Improvements - Additions

The types of expenditures that can occur subsequent to an asset's acquisition are

- repairs and maintenance. - improvements. - additions.

The profit margin ratio is defined as ______ ______ divided by net sales.

net income

Use of MACRS for tax purposes usually results in ______ income tax in the earlier years of an asset's life.

less/lower

What is the formula for the profit margin ratio?

net income divided by net sales

Wall Corporation exchanges old equipment for new equipment. The original cost of the old equipment was $100,000, and its accumulated depreciation at the date of exchange was $60,000. The new asset received had a fair value of $80,000 and a book value of $65,000. The journal entry to record this exchange will include which of the following entries?

- Debit accumulated depreciation $60,000 - Credit gain on exchange of asset $40,000 - Credit equipment $100,000 - Debit equipment $80,000

Which of the following does not differ among the different depreciation methods?

Total depreciation recognized over the asset's service life.

The allocation of the cost of a tangible fixed asset is referred to as ______, whereas the allocation of the cost of an intangible asset is referred to as ______

depreciation; amortization