Accounting Smartbook Chapter 9 Study Guide Mc Graw Hill

A company purchased equipment for $10,000 and, in addition, incurred the following: a delivery cost of $400, an installation cost of $500, a cost to repair damage during shipment of $700, and a first-year maintenance cost of $600. What is the cost of the asset for purposes of depreciation over the equipment's estimated useful life?

$10,000 + $400 + $500 = $10,900

A company acquires equipment for $100,000, which it expects to use for 5 years. At the end of that period, the company expects to receive a trade-in value of $10,000 on new equipment at that time. How much is the first-year depreciation under the double-declining-balance method?

$100,000 × 40% = $40,000

A company acquires land for $150,000 and immediately incurs costs for a driveway ($10,000) and fencing ($12,000). What is the cost basis of the land in the accounting records?

$150,000

A company purchased a crane for use in its construction building activity at a cost of $150,000. The crane was used for 5 years when its accumulated depreciation was $60,000, and it was replaced with a new model at a cost of $200,000. The old crane was sold for $80,000. What was the gain or loss on the sale of the old crane?

$150,000 - $60,000 = $90,000 book value; $80,000 sale price - $90,000 book value = $10,000 loss

A company acquires land for $150,000 and immediately incurs costs for a driveway ($10,000) and fencing ($12,000). What is the cost basis of the land in the accounting records?

$150,000. Driveway and fencing are in separate accounts that are depreciated

A company acquires equipment that it expects to use for 10,000 machine hours over a 5-year period. The cost is $20,000 and the estimated salvage value after 10,000 hours of use is $2,000. If the company uses the units-of-output method of depreciation, how much is depreciation expense in the second year in which the machine is used for 1,250 hours?

$2,250

A company purchases land and a building for $150,000, with $80,000 allocated to the land and $70,000 allocated to the building. Before occupying the building, $20,000 was spent on renovations. Thereafter, $5,000 was spent on maintenance during the first year of occupying the building. What is the cost of the building for purposes of depreciating the asset?

$70,000 + $20,000 = $90,000

A company purchases equipment for $100,000 and expects to use it for 5 years. The expected salvage value at the end of that period is $20,000. What is the annual depreciation under the straight-line method?

($100,000 - $20,000)/5 = $16,000

A company acquired a warehouse for $500,000, which it expects to use for 25 years with an estimated residual value of $100,000 at the end of that time. If the company employs the half-year convention, how much is depreciation expense for the year of acquisition?

($500,000 - $100,000)/25 = $16,000)/2 = $8,000

A company has equipment that cost $250,000 and has updated accumulated depreciation of $100,000 when it sells the asset for $125,000. What is the income statement effect of this transaction?

-$25,000 Loss$250,000 - $100,000 = $150,000 book value; $125,000 sale price - $150,000 book value = $25,000 loss

A company had a truck that cost $30,000 and had accumulated depreciation at the end of the previous year of $18,000. Depreciation for the 3 months of the current year that has not been recognized was $1,000. The truck was sold for $15,000. What was the gain or loss, if any, on the sale?

-$4,000 Gain$30,000 - $19,000 = $11,000 book value; $15,000 sale price - $11,000 book value = $4,000 gain

A company had equipment that cost $10,000 and had $8,000 of accumulated depreciation when the company sold it for $2,500. What was the amount of the gain or loss, if any, on the disposal?

-$500 Gain

A company that reports on the calendar year acquires a major piece of equipment at $75,000. It is expected to be used for 5 years with a salvage value of $15,000. The purchase was made on May 1. If partial-year depreciation is calculated to the nearest month, how much is depreciation for the year of acquisition?

-$8,000 ($75,000 - $15,000)/5 = $12,000 or $1,000 per month; $1,000 × 8 months = $8,000

A company purchased a truck for $30,000, which it expects to use for 50,000 miles and then sell for $8,000. If the units-of-output method of depreciation is used and depreciation expense for a year is $3,960, how many miles was the truck driven?

-9,000 miles($30,000 - $8,000)/50,000 hours = $0.44; $3,960/$0.44 = 9,000 miles

Depreciation is best described by which of the following statements?

-A process of cost allocation.

A company purchases a truck and records the cost in an asset account. That cost is gradually moved into an expense account as the truck benefits the company over several accounting periods. This process is referred to as

-Depreciation

Which of the following describes the acceptable accounting practice for research and development costs?

-Expense as incurred

True or false: The cost of a plant asset is initially recorded in the income statement and, over the asset's life, is gradually transferred to the balance sheet.

-False

Which of the following is NOT an accurate description of the asset goodwill?

-Goodwill is a separate asset that can be bought and sold apart from other assets.

A company had equipment that originally cost $50,000, was used for 5 years, and then was sold for $10,000, at which time the accumulated depreciation was $37,500. The amount of the ______ (gain or loss) on the sale was $_____

-Loss -$2,500

A company purchases equipment for $75,000 and expects to use it for 5 years. What additional information is needed to compute straight-line depreciation for each year?

-The estimated salvage value after 5 years.

True or false: The cost of a plant asset includes not only the acquisition price but also all reasonable and necessary expenditures to prepare the asset for use.

-True

True or false: As a general rule, all research and development costs are expensed as incurred.

-True R&D costs are generally not capitalized as assets due to their uncertain future value.

The systematic write-off of the cost of an intangible asset is referred to as _____

-amortization

Allocating the cost of a plant asset to expense over its useful life is referred to as ______

-depreciation

Small expenditures related to plant assets the benefits from whom will be used up in the current period should be recorded in _____ accounts.

-expense

The intangible asset that often results from superior management, a positive reputation, and high market share is called

-goodwill

The asset goodwill may result from all of the following except

-high employee turnover.

The cost of a natural resource is gradually transferred to the asset _____ as the resource is extracted.

-inventory

Which of the following cause(s) depreciation?

-obsolescence -physical deterioration

Long-lived assets that are expected to provide service over several years are referred to as _____ assets

-plant

A company purchases a patent for $100,000. The patent has 15 years of legal life remaining. The company expects the patent to be used in its business for 10 years from the date of purchase. The annual amortization for a full year, if any, is $

10,000

A company purchases a franchise for $120,000, which stipulates a 10-year term. Past experience indicates that the franchise can be expected to be used to generate revenue for only 8 years. The amount of the annual franchise amortization is

15,000

A company purchases a computer system at a cost of $100,000, which is expected to have a 5-year life and a residual value of $20,000 at the end of 5 years. What is the fixed percentage that will be used to calculate double-declining-balance depreciation?

40%

A company has equipment that cost $100,000 and has $40,000 of accumulated depreciation as a result of past depreciation charges. Management determines that the current fair value of the asset is $35,000. What accounting treatment should be implemented at this time?

An impairment loss of $25,000 is recognized and the $35,000 book value is depreciated over the remaining useful life.

A company purchased land and a building for a total price of $90,000. Estimates of the separate market value of the 2 assets acquired are $60,000 for the land and $40,000 for the building. The amount that should be recorded in the building account is $.

Blank 1: 36,000

Building maintenance costs are treated as ___ of the current period.

Blank 1: expenses or expense

The cost of a natural resource is gradually transferred to the asset ____ as the resource is extracted.

Blank 1: inventory

A bundle of future services that can be thought of as long-term prepaid expenses are referred to as goodwill ___ assets.

Blank 1: plant

Cash effects of plant asset transactions are recognized in the statement of cash flows when which of the following transactions occur(s)? (Select all that apply).

Cash is received on the sale of a plant asset. Cash is paid to acquire a plant asset.

The book value of the fixed assets depreciated by the fixed-percentage-of-declining-balance depreciation method decreases every year and represents the

Declining balance

True or false: In a lump-sum purchase of assets, the entire purchase price is recorded as an asset of the single asset that is assigned the highest value.

False

True or false: The cost of a plant asset is initially recorded in the income statement and, over the asset's life, is gradually transferred to the balance sheet.

False

A company has a truck that cost $18,000 and has accumulated depreciation of $12,000 at the time it is traded in. If granted a trade-in allowance of $7,500, the company has a

Gain; $1,500

Which of the following correctly describe(s) goodwill or accounting for goodwill? (Select all that apply).

Goodwill is the excess paid over the fair value of the net assets of another company. Existence of goodwill is implied by the ability of a company to earn an above-average return. Goodwill may result from such factors as favorable reputation, positive market share, and a reputation for high-quality and loyal employees.

A trademark is granted for what period of time?

It's permanent.

Land and a building may be purchased with the intent to immediately replace the building. The entire purchase price should be recorded in the ___ account.

Land

Which of the following is an example of a lump-sum purchase of plant assets?

Purchasing land and a building in a single transaction.

A company trades its old computer, which cost $5,000 and has accumulated depreciation at the transaction date of $3,000, for a new computer that costs $7,000. The trade-in allowance on the old computer is $1,200. What is the gain or loss, if any, on the trade-in of the old computer?

Reason: $5,000 - $3,000 = $2,000 book value; $1,200 trade-in allowance - $2,000 book value = $800 loss

Which of the following best describes accounting for the impairment of a plant asset?

The asset is written down to its fair value and an impairment loss is recognized in income.

If a trademark is purchased from another company and expected to be used to generate revenue for at least 20 years, which of the following describes the appropriate accounting?

The cost is capitalized and amortized over the periods expected to benefit from the trademark's use.

Under the declining-balance method, which of the following is NOT correct?

The depreciation percentage changes each year.

A company purchases equipment for $75,000 and expects to use it for 5 years. What additional information is needed to compute straight-line depreciation for each year?

The estimated salvage value after 5 years.

A copyright is granted for what period of time?

The life of the creator plus 70 years.

Which of the following best describes accounting for a change in the estimated life of a plant asset?

The remaining undepreciated cost is spread over the remaining useful life.

When the cost of developing a franchise is a material amount, that cost is capitalized and amortized over what period of time?

The shorter of the franchise agreement and the estimated useful life of the franchise.

Which of the following characterize(s) research and development costs in U.S. industry? (Select all that apply).

They represent a substantial percentage of total expenses for some companies. They are important for the development of new products. Current accounting practice is intended to standardize accounting for R&D costs.

Which of the following is NOT included in the cost of land?

a building that will be retained and used

The depreciation method most widely used for income tax purposes is ___ depreciation

accelerated

Which of the following depreciation methods is more conservative in the preparation of financial statements?

accelerated depreciation

Plant assets include all of the following except

accounts and notes receivables from customers.

Plant assets represent: (Select all that apply).

advance purchases of services. a bundle of future services. long-term prepaid expenses.

The distinguishing characteristic of natural resources is that they

are converted into inventory if they are extracted and held for sale or use. are gradually depleted as they are removed and either used or sold.

The difference between the cost of an asset and its accumulated depreciation is referred to as the ___ value.

book

Which plant asset type would you generally expect to have the longest useful life?

buildings

Examples of plant assets are: (Select all that apply).

buildings. equipment.

The distinction between capital and revenue expenditures is that ___ expenditures are recorded in asset accounts.

capital

The accounting principle of ____ generally requires companies to use the same depreciation method in successive accounting periods.

consistency

The book value of a plant asset represents

cost less accumulated depreciation.

The basis for recording an intangible is

cost.

Which of the following is included in the cost of a plant asset?

delivery and installation costs

Allocating the cost of a plant asset to expense over its useful life is referred to as

depreciation

A company purchases a truck and records the cost in an asset account. That cost is gradually moved into an expense account as the truck benefits the company over several accounting periods. This process is referred to as

depreciation.

The process of depreciation gradually moves the asset's cost from the balance sheet to the income statement as a(n)

expense

Registration of a patent with the federal government gives the holder the exclusive right to use the product or process

for 20 years.

The cost of a natural resource that is extracted and held for use or sale is included in the statement of financial position (balance sheet) as

inventory

The cost of equipment includes all of the following except

maintenance costs.

Estimating the useful life of a plant asset for accounting purposes is the responsibility of

management of the company that owns and uses the asset.

Maintaining a plant asset

may lengthen the useful life of the asset.

Which of the following cause(s) depreciation?

obsolescence physical deterioration

A bundle of future services that can be thought of as long-term prepaid expenses are referred to as ___ assets.

plant

Intangible assets include all of the following except

receivables

Expenditures for repair and maintenance of plant assets are referred to as

revenue expenditures

Expenditures for repair and maintenance of plant assets are referred to as

revenue expenditures.

Which depreciation method is most widely used in financial statements?

straight-line

The method of amortization typically used for intangible assets is

straight-line amortization.

The most common combination of depreciation methods used is

straight-line in the financial statements and accelerated in the tax return.

Depreciation and amortization

tend to make net income less than net cash provided by operations.

Copyrights are granted by

the federal government.

Straight-line depreciation results in

the same amount of depreciation each year in the asset's life.