Chapter 7 SmartBook

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

false

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

straight-line declining-balance

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

the book value at the beginning of the year.

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.

Internally developed intangible asset

product or process created internally for which patent may be obtained.

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.

The original cost of an asset minus accumulated depreciation is

book value.

Long-term tangible assets include

buildings. land. equipment.

The accumulated depreciation account is classified as a(n)

contra asset.

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.

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

intangible asset.

The initial valuation of purchased intangible assets requires that the intangible asset is recorded at

original cost.

The exclusive legal right to manufacture a product or to use a process is called a(n) .

patent

_______ is the exclusive right to manufacture a product or use a process granted for a period of ______ years

patent 20

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

recognize a loss of $2,400

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

capitalized

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

means to record an expenditure as an asset.

capitalized

_________ 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

____________ 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

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

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

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 formula for calculating the double-declining-balance method is

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

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

improvements. repairs and maintenance. additions.

MACRS

Commonly used for tax reporting

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

Debit Depreciation Expense Credit Accumulated Depreciation

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

Expense the costs as incurred.

Units of production or units of output are alternative terms for the________ - _________ depreciation method.

activity based

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

debit to loss debit to accumulated depreciation credit to equipment

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

limited, short

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

reduces

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

Advertising costs Research and development costs

depletion

Allocation of the cost of natural resources

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

Amortization

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

As a contra account to equipment on the balance sheet

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

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

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

Total depreciation recognized over the asset's service life.

For accounting purposes, depreciation is

an allocation of a cost of an asset

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

lower

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

net income

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

Residual

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?

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

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

(cost - residual value)/estimated total production.

The formula for straight-line depreciation is

(cost - residual value)/service life.

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

Accumulated Depreciation

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.

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

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

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

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

Krasel 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 $70,000. The new asset received had a fair value of $50,000 and a book value of $45,000. The journal entry to record this exchange will include which of the following entries?

Credit equipment $90,000 Debit equipment $50,000 Debit accumulated depreciation $70,000 Credit gain on exchange of asset $30,000

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

False

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.

purchased intangible assets

Patents, copyrights, trademarks, or franchise rights acquired from other companies.

Which of the following are long-term tangible assets?

Property Equipment

capitalized

Purchase price plus costs necessary to get asset ready for use

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.

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

allocation

depreciation

allocation of the cost of a tangible fixed asset

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

amount received less the book value of asset sold

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

benefits

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.

depreciation

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

_________ 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

expensed

research and development costs

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.

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

retirement

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.

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

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 Reason: Depreciation expense is ($50,000 - 10,000)/5 = $8,000 per year. $50,000 less accumulated depreciation of $24,000 = $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 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?

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

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

Additions Improvements Repairs and maintenance

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

Cost of driveways Cost of sidewalks Cost of lawn sprinkler system

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

Cost of sidewalks Cost of parking lots Cost of fences

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?

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

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

Straight-line

commonly used for financial statement purposes

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

depreciation

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

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

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

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

Intangible assets that are acquired from other entities are referred to as purchased intangibles, whereas intangibles that are created by a company are referred to as

internally developed intangibles.

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.

The distinction between land and land improvements is that:

land has an indefinite life

A purchased intangible is valued at its original cost. Original cost for acquiring a patent would include.

purchase price. required filing fees. legal costs to acquire.

Goodwill is recognized only when one company ________ another company.

purchases

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

realtor commissions Remodeling building purchase price legal fees to obtain title

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

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

the same regardless of the depreciation method used

_______ 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.

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

capitalized

________ is an exclusive right of protection given to a creator of a published work, such as a song, film, painting, photograph, or book.

copyright

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

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

units of production method units of output method

Amortization

The allocation of the cost of an intangible asset