ACG 3

Which ratio is computed by dividing net income by net sales?

Profit margin

A company owns one depreciable asset. The balance in the company's Accumulated Depreciation account represents the

amount charged to depreciation expense since the acquisition of the depreciable asset.

A permanent decline in the market value of an asset is called

an impairment

On May 1, Year 1, Best Buy purchased an asset for $12,000, with a $1,500 estimated salvage value, and a 6-year useful life. How much is the Year 1 depreciation expense using the straight-line method?

($12,000 - $1,500)/6 x 8/12 = $1,167.

Corian Company purchased equipment and incurred these costs: Cash price, $24,000; Sales taxes, $1,200; Insurance during transit, $200; Annual maintenance costs, $400. What amount should be recorded as the cost of the equipment?

($24,000 + $1,200 + $200 = $25,400).

When equipment is sold for cash in an amount that is greater than its book value, the company debits the following

(i) Accumulated Depreciation and (ii) Cash

A company has the following asset account balances: Buildings and equipment, $8,900,000; Accumulated depreciation, $1,800,000; Patents, $850,000; Land Improvements, $1,200,000; and Land, $5,000,000. How much will be reported on the balance sheet under property, plant, & equipment?

(i.e., 8,900,000+1,200,000+5,000,000-1,800,000=13,300,000).

Coronado Company purchased land for $80,000. The company also assumes $15,000 of accrued taxes on the property, incurred $8,000 to remove an old building, and received $4,000 from the salvage of the old building. At what amount will the land be recorded in the accounting records?

99,000, 80+15+8-4

Which one of the following will maximize a company's reported net income in the first year of owning an asset?

A long estimated life, a high salvage value, and straight-line depreciation

Which of the following is an acceptable way to express the useful life of a depreciable asset?

All of these Expected number of miles a depreciable vehicle will be driven Expected life in years of the depreciable asset Expected number of hours the depreciable asset will remain productive Expected number of units to be produced by the depreciable asset

Banana Company paid $200,000 for a machine a few years ago. This year, the machine was completely destroyed in a fire. At the date of the fire, the accumulated depreciation on the machine was $80,000. An insurance check for $100,000 was received as a result of the fire. No journal entry for the casualty was recorded until Banana Company received the check from the insurance company. Banana Company's entry to record the insurance proceeds will include a

Debit cash for $100,000 Debit accumulated depreciation for $80,000 Debit loss on the disposal of plant assets for $20,000 Credit the equipment account for $200,000

At the beginning of the current year, a company purchased machinery for $50,000. It has a salvage value of $6,000 and an estimated useful life of 8 years. How much is depreciation expense for the first year under the straight-line method?

Depreciation expense per year = (50,000 - 6,000)/8 = 5,500 per year.

On May 1 of the current year, Fredericks Company purchases and places into service new equipment. The cost of the equipment is $115,000. The equipment has an estimated 10-year life and $15,000 salvage value at the end of its useful life. What is the depreciation expense for the current year ending December 31 if the company uses the straight-line method of depreciation?

Depreciation expense per year = (Cost - salvage value)/Life Depreciation expense per year = ($115,000 - 15,000)/10 years = $10,000 per yearDepreciation expense for May 1 through December 31 = $10,000 x 8/12 = $6,667

On July 1 of the current year, Fred Company purchases and places into service new equipment. The cost of the equipment is $90,000. The equipment has an estimated 10-year life and $15,000 salvage value at the end of its useful life. What is the depreciation expense for the current year ending December 31 if the company uses the straight-line method of depreciation?

Depreciation expense per year = (Cost - salvage value)/Life Depreciation expense per year = ($90,000 - 15,000)/10 years = $7,500 per yearDepreciation expense for July 1 through December 31 = $7,500 x 6/12 = $3,750

On May 1 of the current year, La Presa Company sells some equipment for $25,000. The original cost was $50,000, the estimated salvage value was $5,000, and the expected useful life was 5 years. Straight-line depreciation is used. On January 1 of the current year, the Accumulated Depreciation account had a balance of $18,000. How much is the gain or loss on the sale?

First, the accumulated depreciation must be brought up to date to the date of sale. Since the equipment has a $45,000 depreciable cost (i.e., Depreciable cost = Cost - salvage value = $50,000 - 5,000) and a life of 5 years, the depreciation is $9,000 per year. In the current year, depreciation expense is $3,000 (i.e., $9,000 per year x 4/12) which increases accumulated depreciation. The Accumulated Depreciation balance at the date of sale is $21,000 (i.e., $18,000 + 3,000). Book value equals cost minus accumulated depreciation. Book value is $29,000 (i.e., $50,000 - $21,000). A gain occurs if the selling price exceeds the book value, and a loss occurs if the selling price is less than the book value. Sales price - book value = $25,000 - 29,000 = ($4,000) (i.e., loss).

Able Towing Company purchased a tow truck for $60,000 on January 1 of its first year. The truck was originally depreciated on a straight-line basis over 10 years with an estimated salvage value of $12,000. At the end of the third year, before year-end adjusting entries have been recorded, the company decided to revise the estimated life of the truck to a total of 6 years and to change its estimated salvage value to $2,000. How much depreciation expense should be recorded for the third year?

For the first three years, the annual depreciation expense is ($60,000 - $12,000)/10 years = $4,800 per year. In the third year, before depreciation is recorded, the asset's book value is ($60,000 - 2 x 4,800 = $50,400), and this remaining book value should be depreciated to the asset's revised salvage value over the asset's remaining estimated useful life: ($50,400 - $2,000)/(6-2) = $12,100.

Which one of the following costs will not be included in the cost of equipment?

Maintenance costs

Welch Company's average total assets is $250,000, average total equity is $150,000, and net sales is $80,000. Its return on assets is 10%. What was the company's net income?

Net income = $250,000 x 10% = $25,000.

In the current year, Pierce Company incurred $150,000 of research and development costs in its laboratory to develop a new product. It also spent $20,000 in legal fees for a patent on that new product. Later in the current year, Pierce paid $15,000 for legal fees in a successful defense of that patent. What is the total amount that should be debited to the company's Patents account in the current year?

Only the $20,000 in legal fees and the $15,000 of successful defense costs should be debited to the Patents account; 35,000

In the current year, Pierce Company incurred $140,000 of research and development costs in its laboratory to develop a new product. It also spent $30,000 in legal fees for a patent on that new product. Later in the current year, Pierce paid $18,000 for legal fees in a successful defense of that patent. What is the total amount that should be debited to the company's Patents account in the current year?

Only the $30,000 in legal fees and the $18,000 of successful defense costs should be debited to the Patents account.

Joan's Jewelry Shop bought equipment for $100,000 on January 1 of its first year. The equipment's original estimated useful life is 10 years and its estimated salvage value is $25,000. The company uses the straight-line method of depreciation. On December 31 of its sixth year, before year-end adjusting entries have been recorded, Joan's decides to revise the estimated salvage value to $20,000 but the estimated useful life is unchanged. How much depreciation expense should be recorded for the sixth year?

Original depreciation per year: ($100,000 - 25,000)/20 years = $7,500 per year.Revised depreciation per year: ($100,000 - 5 x 7,500 - 20,000)/(10-5) = $8,500 per year

Jim's Coffee Shop bought equipment for $300,000 on January 1 of its first year. The equipment's original estimated useful life is 10 years and its estimated salvage value is $60,000. The company uses the straight-line method of depreciation. On December 31 of its sixth year, before year-end adjusting entries have been recorded, Jim's decides to revise the estimated salvage value to $48,000 but the estimated useful life is unchanged. How much depreciation expense should be recorded for the sixth year?

Original depreciation per year: ($300,000 - 60,000)/10 years = $24,000 per year.Revised depreciation per year: ($300,000 - 5 x 24,000 - 48,000)/(10-5) = $26,400 per year

Karen's Craft shop bought equipment for $40,000 on January 1 of its first year. The equipment's original estimated useful life is 8 years and its estimated salvage value is $8,000. The company uses the straight-line method of depreciation. On December 31 of its third year, before year-end adjusting entries have been recorded, Karen's decides to shorten the estimated useful life by 3 years giving it a total life of 5 years. The company did not change the salvage value and continues to use the straight-line method. How much depreciation expense should be recorded for the third year?

Original depreciation per year: ($40,000 - 8,000)/8 years = $4,000 per year.Revised depreciation per year: ($40,000 - 2 x 4,000 - 8,000)/(5-2) = $8,000 per year

Lorek Company acquires land for $140,000 cash. Additional costs are as follows: Removal of shed, $1,000; Filling and grading, $2,500; Salvage value of lumber of shed, $200; Broker commission, $4,000; Paving of parking lot, $13,000; Closing costs, $1,700. Lorek Company should record the acquisition cost of the land as

Purchase price, 140,000Add: Removal of shed less salvages (i.e., 1,000 - 200), 800Add: Filling and grading, 2,500Add: Broker's commission, 4,000Add: Closing costs, 1,700Acquisition costs of land, 149,000

Oahu Industries' average total assets for the year are $4,000,000, its average total stockholders' equity for the year are $3,000,000, its net income is $900,000, its gross margin is $5,000,000, and its net sales are $12,000,000. What is Oahu's return on assets?

Return on assets is calculated by dividing net income by the average total assets. Oahu's return on assets is $900,000 divided by $4,000,000 = 22.5%.

Welch Company's average total assets is $200,000, average total equity is $120,000, and net sales is $100,000. Its return on assets is 15%. What was the company's net income?

Return on assets is net income divided by average total assets. Alternatively, net income equals average total assets times the return on assets.Net income = $200,000 x 15% = $30,000.

A company uses straight-line depreciation. It purchased a truck for $40,000. The truck's salvage value is $4,000. The truck's annual depreciation expense is $3,000. What is the truck's useful life?

Solution:The depreciable cost equals the cost minus the salvage value; it is the $40,000 purchase price less $4,000 salvage value, which is $36,000. The annual depreciation cost is $3,000 Since $36,000 will be depreciated by $3,000 per year, the useful life is 12 years (i.e., $36,000/$3,000 per year = 12 years).

An asset purchased on January 1 for $50,000 has an estimated salvage value of $5,000. The current useful life is 9 years. How much is total accumulated depreciation using the straight-line method at the end of the third year of life?

The annual depreciation is calculated as the sum of the purchase price less the salvage value divided by the useful life: ($50,000 - $5,000)/9 years = $5,000 At the end of the third year, there will be two years of accumulated depreciation for a total of $15,000.

A company's average total assets are $250,000, depreciation expense is $10,000, and accumulated depreciation is $60,000. Net income is $1,200,000. Net sales total $300,000. What is the asset turnover?

The asset turnover is net sales divided by the average total assets: $300,000/$250,000 = 1.2 times.

A purchase of equipment includes a purchase price of $18,000, freight charges of $500 and installation costs of $2,500. The estimated salvage value and useful life are $3,000 and five years, respectively. Under the straight-line method, how much is annual depreciation expense?

The cost of the equipment is $18,000 plus the freight costs of $500 and the installation costs of $2,500 for a total of $21,000. Depreciation expense = ($21,000 - $3,000)/5 = $3,600 per year.

Given the following account balances at year end, how much are total intangible assets on the balance sheet of Alisha Enterprises? Sales revenue, $45,000,000; Copyrights, $200,000; Cash, $1,500,000; Accounts receivable, $3,000,000; Patents, $1,000,000; Land, $15,000,000; Equipment, $25,000,000; Trademarks, $1,200,000; and Goodwill, $3,500,000. The company also paid $1,500,000 for research & development during the current year.

The intangibles are copyrights of $200,000, trademarks of $1,200,000, patents of $1,000,000, and goodwill of $3,500,000 totaling $5,900,000.

Given the following account balances at year end, how much are total intangible assets on the balance sheet of Alisha Enterprises? Sales revenue, $45,000,000; Cash, $1,500,000; Accounts receivable, $3,000,000; Land, $15,000,000; Equipment, $25,000,000; Franchises, $500,000; Trademarks, $1,700,000; and Goodwill, $2,800,000. The company also paid $1,500,000 for research & development during the current year.

The intangibles are trademarks of $1,700,000, franchises of $500,000, and goodwill of $2,800,000 totaling $5,000,000.

Which of the following two ratios multiplied together yields the return on assets ratio?

The profit margin ratio and the asset turnover ratio

Paul Company purchased a dump truck for $25,000. In addition, Paul Company paid freight charges of $500, and $800 to paint the company's logo on the truck. The estimated salvage value and useful life are $3,800 and 5 years, respectively. How much is the accumulated depreciation under the straight-line method after three years?

The purchase price includes all costs necessary to get the truck ready to use: $25,000 + $500 + $800 = $26,300. The annual depreciation is calculated as the sum of the purchase price less the salvage value divided by the useful life: ($26,300 - $3,800)/5 years = $4,500.Accumulated depreciation after three years = $4,500 x 3 = $13,500.

Rawlings Company purchased a machine for $70,000 on January 1 of the current year and depreciated it on a straight-line basis over a 10-year life assuming no salvage value. If the company sells the machine for $29,000 on June 30 of the fourth year, what would be the company's gain or loss from the sale?

The selling price less the book value of the machine equals the gain or loss on the sale. The Book value of the machine when sold: $70,000 - [($70,000/10 years) x 3.5 years] = $45,500. The gain (loss) on the sale = sales price minus book vale = $29,000 - $45,500 = ($16,500).

Which statement is true about additions to plant assets?

They are capitalized.

The cost of a plant asset, such as equipment, machinery, and buildings used in the operation of a company, is expensed

over its useful life

All the following are needed for the computation of depreciation except

wage expense of personnel operaring the depreciable asset