ACCT pre Ch 7

The depreciation rate we use under the declining-balance method is a multiple of the _____ _____ method.

straight line

The residual value of an intangible asset is usually _____.

zero

If a company generates its own goodwill through advertising or training, how should these costs be treated?

Expense the costs as incurred.

What is the formula for the profit margin ratio?

Net income divided by net sales.

True or false: Repairs and maintenance expenditures related to an asset do not increase future benefits.

True

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

capitalized

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

residual

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.

Long-term tangible assets include

Buildings, land and equipment

An asset that has no physical substance is called a(n) _____ assett.

intangible

Berner Inc. internally develops a patent, which has an estimated value of $25 million. Related legal, design and registration fees were $155,000. The amount reported on Berner's balance sheet should be

$155,000

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

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

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

Accumulated Depreciation

Wall corp exchanges old equip for new eqiup. The original cost of the old equip was 100,000 and its accumulates depreciation at the date of exchange was 60,000. the new asset recieved had a fair value of 80,000 and a book value of 65,000. the journal entry to record this exchange will include

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

Which of the following are commonly used depreciation methods?

Declining-balance Activity-based Straight-line

Match the accounting treatment of costs associated with intangible assets with the description.

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

True or false: Goodwill acquired in a business combination is amortized over its estimated service life.

False

True or false: Goodwill is the intangible value of a company's employees, management team, and business location that is recorded by the company.

False

True or false: Internally developed goodwill should be capitalized as an asset.

False

The cost of successfully defending a patent should be added to:

Patent account

Cray uses the activity-based depreciation method. Cray purchases equipment for $210,000 and expects to use the equipment for 60,000 machine hours. The machine has a residual value of $30,000. The depreciation rate is

Rationale: $210,000 - $30,000 = $180,000/60,000 machine hours = $3.00 per machine hour.

Blake uses the activity-based depreciation method. Blake purchases equipment for $100,000 and expects to use the equipment for 40,000 machine hours. The machine has a residual value of $20,000. The depreciation rate is

Rationale: ($100,000 - 20,000)/40,000 machine hours = $2.00 per machine hour.

Which of the following costs should be capitalized in the costs of acquiring a building?

Realtor commissions Remodeling building Legal fees to obtain title

Which of the following costs may be capitalized into the cost of a trademark?

Registration fees Fees for a successful legal defense Design costs

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

Research and development costs Advertising costs

What are the two steps in the two-step process of measuring impairments?

Test for impairment using the future cash flows. Measurement of the impairment and record the loss.

Which of the following are classified as natural resources?

Timber tracts Mineral deposits

Larry purchases land to be used for a new corporate headquarters. Which of the following items are capitalized in the cost of land?

Title insurance Legal fees to secure title Costs to remove an old building Grading the land

Which of the following does not differ among the different depreciation methods?Total depreciation recognized over the asset's service life.

Total depreciation recognized over the asset's service life.

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

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

Green Inc. expenses the cost of small tools provided that the amount is less than $1,000. This accounting treatment is:

acceptable if the amount is considered immaterial

Goodwill is recognized only when one company _____ another company.

acquires

On January 1, 20X1, Claire Corp. purchases a patent. One month after acquiring the patent, Claire paid $3,000 in legal fees to successfully defend its right to the patent. The $3,000 should be:

added to the Patent account

Attorney fees and other costs necessary to secure a patent should be

added to the patent account.

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

allocation

When assets are purchased in a group for a single sum, it is referred to as a

basket purchase

The original cost of an asset minus accumulated depreciation is

book value

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

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

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

A(n) _____ is protected by law and gives the creator of a published work the exclusive rights to reproduce and sell the work for the life of the creator plus 70 years.

copyright

The allocation of the cost of a tangible asset over its service life is referred to as _____.

depreciation

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

patent, 20

The distinction between land and land improvements is that:

land has an indefinite life

Which of the following costs should be capitalized in the costs of acquiring a building?

legal fees to obtain title purchase price realtor commissions

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

less

The formula for straight-line depreciation is

(cost - residual value)/service life.

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

Machines used in manufacturing, computers, printers, vehicles, furniture, and fixtures generally are classified as _____.

equipment

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

the same regardless of the depreciation method used

On January 1, year 1, LaRose Corp. purchases equipment for $100,000. LaRose uses the double-declining-balance method of depreciation. The asset has a 5-year service life and a $10,000 residual value. What is depreciation expense for year 1?

Rationale: The depreciation rate is 2 x 1/5 = 40%. $100,000 x 40% = $40,000 depreciation expense in year 1.

For a patent developed internally, the research and development costs are

expensed as incurred.

A(n) _____ is 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.

franchise

The key factor in classifying items as repairs and maintenance is that

future benefits are not provided beyond those originally anticipated from the asset.

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

(cost - residual value)/estimated total production.

Which of the following items are capitalized into the cost of a patent?

Attorney fees to secure patent Purchase price Filing fees

What is the accounting treatment for goodwill acquired in a business acquisition?

Capitalize the goodwill Test for impairment Do not amortize

Which items are considered changes in estimates that would be treated on a prospective basis in the current period and future periods?

Change in residual value of an asset Change in service life of an asset

Which of the following are long-term tangible assets?

Equipment Property

Which of the following items typically are classified as equipment?

Furniture and fixtures Machinery used in manufacturing Computers and printers used in office

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.

What are the financial statement effects of using the declining balance method of depreciation as compared to the straight-line method in the first year of an asset's life?

Net income is lower. Total assets are lower.

The accounting for copyrights uses the same accounting rules as

Patents

Which of the following items should be capitalized in the cost of equipment?

Purchase price Installation and testing of equipment Freight to deliver the equipment to its location Insurance on equipment during shipping

On January 1, year 1, Mark Corp. purchases equipment for $300,000. The equipment has a 10-year service life and a $50,000 residual value. Mark uses the double-declining-balance method of depreciation. What is depreciation expense for year 1?

Rationale: 2 x 1/10 x $300,000 = $60,000 depreciation expense in year 1.

On January 1, year 1, Roark Corp. purchased equipment for $120,000. The equipment has a residual value of $20,000, and has a life of 1,000,000 hours. Roark uses the activity-based method of depreciation. In year 1, Roark used the machine 30,000 hours, and in year 2, Roark used the machine 50,000 hours. What is the depreciation expense for year 2?

Rationale: The depreciation rate per unit is ($120,000 - $20,000)/1,000,000 hours = $0.10 per machine hour. Year 2 depreciation is 50,000 hours x $0.10 = $5,000.

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

amortization

For accounting purposes, depreciation is

an allocation of a cost of an asset.

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

capitalized

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

current-year activity or production

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

The rationale for expenditures being capitalized as assets is based on whether the expenditures benefit ______.

future periods

When a company purchases another company and the purchase price is greater than the fair value of the net assets acquired, this excess is referred to as ______.

goodwill

Goodwill may only be recognized

in a business acquisition.

A change in accounting estimate requires a company to account for the change

in the current and future years

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

intangible asset.

Companies use accelerated depreciation for tax purposes because

it reduces taxable income in the early years of the asset's life and provides better cash flows.

In a business acquisition, goodwill equals the purchase price

less the fair value of net assets acquired.

The cost of land improvements are capitalized separately from land because land improvements tend to have a _____ useful life.

limited

Expenditures subsequent to acquisition may be properly capitalized when they increase the asset's service life or increase its productive capacity. However, most companies set thresholds for capitalizing these expenditures based on

materiality

When an asset is no longer useful, but cannot be sold, we have a _____.

retirement

The declining balance method of depreciation is a multiple of the

straight-line rate of depreciation.

Amortization refers to the allocation of the cost of _____ assets to expense.

tangible

The measurement of an impairment loss in step 2 is the difference between

the asset's book value and its fair value.

In a basket purchase of assets, the cost must be allocated to the individual assets because

the assets have different useful lives

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

the book value at the beginning of the year

The depreciable cost is

the cost of the asset minus the residual value.

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.

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; use

A(n) _____ is an exclusive right to display a word, slogan, symbol, or emblem that distinctively identifies a company, product, or service.

trademark

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

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

As a contra account to equipment on the balance sheet

Which of the following costs are capitalized as an asset for an internally developed patent?

Legal fees Filing fees

Which of the following items should be capitalized in the cost of equipment?

Legal fees to establish title Installation and testing equipment Sales tax Freight to deliver the equipment

On January 1, year 1, Clem Corp. purchased equipment for $160,000. The equipment has a residual value of $10,000, and has a life of 100,000 hours. Clem uses the activity-based method of depreciation. In year 1, Clem used the machine 2,000 hours, and in year 2, Clem used the machine 3,000 hours. What is the depreciation expense for year 2?

Rationale: The depreciation rate per unit is ($160,000 - $10,000)/100,000 hours = $1.50 per machine hour. Year 2 depreciation is 3,000 hours x $1.50 = $4,500.

In a business combination, goodwill is recognized to the extent that the purchase price of the company is _____ than the _____ value of the acquired company's identifiable net assets.

greater; fair

Using the declining balance method, depreciation will be

higher in earlier years, but lower in later years.

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

units of production method units of output method

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

useful

Sarah purchases land to be used for a new storage facility. Which of the following items are capitalized in the cost of land?

Commissions Legal fees to secure title Costs to remove an old building

Clarion purchases land and prepares it for use. Which of the following items should be capitalized as land improvements?

Cost of driveways Cost of lawn sprinkler system Cost of sidewalks

Which of the following items should be capitalized as land improvements?

Cost of fences Cost of parking lots Cost of sidewalks