ch 7

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.

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.

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

recognize a loss of $2,400

An estimated residual value ___ the total amount of depreciation recorded over an asset's service life.

reduces

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.

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.

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

the same regardless of the depreciation method used

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

units of output method units of production method

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

straight-line declining-balance

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.

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

As a contra account to equipment on the balance sheet

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 ___

Blank 1: depreciation Blank 2: amortization

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? Multiple choice question.

$26,000

The formula for straight-line depreciation is

(cost-residual value)/useful life

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. Which of the following statements is true?

Clem will depreciate the machine for $150,000 over its service life.

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. Which of the following statements is true? Multiple choice question.

Clem will depreciate the machine for $150,000 over its service life.

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

Credit Accumulated Depreciation Debit Depreciation Expense

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

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 is the formula for the profit margin ratio?

Net income divided by net sales.

Which of the following are commonly used depreciation methods?

Straight-line Declining-balance Activity-based

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?

Total assets are lower. Net income is lower.

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

Total depreciation recognized over the asset's service life.

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

accumulated depreciation

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

allocation

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

benefits

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

The original cost of the asset less the accumulated depreciation is the ___ ___ of the asset

book value

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

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

depreciate

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

false

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

false

Using the declining balance method, depreciation will be

higher in earlier years, but lower in later years.

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

impairment

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

in the current and future years

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

intangible

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

amount received less the book value of asset sold

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.

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

net income

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

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.

When an asset is no longer useful, but cannot be sold, it is called an asset

retirement

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

salvage

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 ___

Blank 1: time Blank 2: use, usage, or activity

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

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 Reason: $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.

At the beginning of year 1, Looby Corp. purchases equipment for $100,000. The equipment has a residual value of $20,000 and an expected service life of 10 years. What is straight-line depreciation for year 1?

8000 Reason: ($100,000 - 20,000)/10 years = $8,000 per year

Units of production or units of output are alternative terms for the ___ - ___ depreciation method.

Blank 1: activity Blank 2: based

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?

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

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

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

Expense the costs as incurred.

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

debit to accumulated depreciation debit to loss credit to equipment

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.

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

legal fees to obtain title remodeling building realtor commissions

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

Blank 1: amortization

The original cost of the asset less the accumulated depreciation is the ___ ___ of the asset

Blank 1: book Blank 2: value

When an asset is no longer useful, but cannot be sold, it is called an asset ____

Blank 1: retirement or retire

The accumulated depreciation account is classified as a(n)

contra asset

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

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

At the beginning of year 1, Valerie Corp. purchases equipment for $10,000. The equipment has a residual value of $4,000 and an expected service life of 4 years. What is straight-line depreciation for year 1?

1500 Reason: ($10,000 - 4,000)/4 years = $1,500 per year