Chapter 8

A company may make an exception to the accounting rules and not capitalize a long-lived asset if its cost is _____.

immaterial, insignificant, small, low, minimal, or negligible

The total cost of the purchase of undeveloped land ______.

includes the cost plus all other incidental costs such as title fees

Vango, Inc. sold its van for $6,000 cash. The van's original cost was $40,000, and its Accumulated depreciation was $32,000. When recording the sale, Vango should record a ______.

loss of $2,000

If a company were to purchase inexpensive wastebaskets that are expected to be used for 3 years, the company ______.

may choose to expense the wastebaskets in the period purchased

The costs of a new building that is currently under construction, not for sale but for a company's own use, are ______.

reported on the balance sheet as a noncurrent asset

Which of these are major types of long-lived assets?

Intangible assets tangible assets

Shenandoah Skies built a new lodge for its ski resort. Which of the following costs should be capitalized?

$4,200 paid in sales tax on the lumber to build the lodge $70,000 cost of lumber to build the lodge $7,000 in architect fees

Which of the following result in an increase to intangible assets?

A company purchased a franchise for $100,000. $10,000 was spent to purchase a patent. A company purchased another company for $10,000 more than its net assets.

Which of the following is true?

Capitalized costs increase long-lived assets.

Which of the following statements is correct?

Depreciation is not intended to report an asset at its current value.

The write-down of goodwill for impairment will affect which of the following financial statements?

Income Statement Balance Sheet

What is the effect of an impairment loss on the accounting equation?

It decreases total stockholders' equity. It decreases total assets.

Which of these are long-lived productive assets?

Machinery Delivery Equipment

In accordance with US Generally Accepted Accounting Principles, which of the following costs associated with long-lived assets are expensed, not capitalized?

Ordinary repairs and maintenance Immaterial repairs and maintenance Interest on loans to purchase the assets

Executives at WorldCom committed an $11 billion fraud by capitalizing costs that should have been expensed. What was the effect of this fraud on WorldCom's financial statements?

Retained earnings were too high. Total assets were too high. Net income was too high.

Squid Roe, Inc.'s $48,000 sushi bar was originally expected to be used for 8 years with no residual value. Depreciation on the bar was $6,000 per year for the past 2 years. In the 3rd year, management changed the estimated life of the bar to be a total of only 6 years instead of 8. What should Squid Roe do?

Revise the depreciation expense to be $9,000 for years 3 through 6.

Miss Hap, the company bookkeeper, recorded the annual repair costs on the company's machinery as an increase to the machinery account. As a result, which of the following is true?

Stockholders' equity will be overstated Assets will be overstated

Busy Beaver, Inc. signed a $315,000, 5-year note payable to buy a new $315,000 industrial veneer cutter. Busy Beaver paid $5,000 cash for transportation of the machine and $750 cash for installation costs. What is the overall effect of this transaction on the accounting equation?

Total assets increase $315,000. Total liabilities increase $315,000. Machinery, an asset, increases $320,750.

An asset's cost minus accumulated depreciation is its ______ value.

book

On-a-Roll, Inc. amortizes its patent of $20,000 over 20 years. The adjusting entry to record amortization results in a(n) ______.

decrease to assets on the balance sheet decrease to net income on the income statement

To determine the approximate age of a noncurrent depreciable assets remaining life, ______.

divide the book value by the original cost

Capitalized costs differ from expenses in that only capitalized costs result in a(n) ______.

increase to long-lived assets

The write-down due to impairment will cause ______.

intangible assets to decrease net income to decrease

Amortization ______.

is in accordance with the matching principle is calculated using the straight-line method spreads the cost of intangible assets to expense over their useful lives

Which of the following costs incurred due to the construction of a building would be capitalized as part of the cost of the building?

labor materials interest on construction loan

Acme, Inc.'s balance sheet shows Equipment at a cost of Depreciation expense is an estimate because it is based on the asset's estimated ______.

residual value useful life to the company

Which of the costs associated with the purchase of undeveloped land would be debited?

sales commissions survey fees title fees

A gain on the disposal of an asset occurs when the ______.

selling price is greater than the asset's book value

If a depreciable asset is expected to be used evenly over its useful life, then management should choose which method?

straight-line

On January 1, 2015, X-it Company bought a new delivery truck for $30,000. X-it plans to use the truck for 4 years, after which it will be sold for $6,000. Depreciation expense for 2018, the fourth year of use, using double-declining-balance equals ______.

$0

On January 1, 2017, X-it Company bought a new delivery truck for $30,000. X-it plans to use the truck for 4 years, after which it will be sold for $6,000. Depreciation expense for 2019, the third year of use, using double-declining-balance equals ______.

$1,500

Busy Beaver, Inc. signed a $315,000, 5-year note payable to buy a new industrial veneer cutter. Busy Beaver paid $5,000 cash for transportation of the machine and $750 cash for installation costs. The journal entry to record this transaction will include a ______.

$5,750 credit to Cash $320,750 debit to Machinery $315,000 credit to Note Payable

Four years ago, on January 1, California Creamery bought a new delivery truck for $30,000. The company planned to use the truck for 7 years, and then sell it for $2,000. The company used the truck for 4 years and properly recorded straight-line depreciation each year. At the beginning of the 5th year, a change in emissions standards made the truck illegal in California. The company expects to sell the truck outside of California later this year for $6,000. The company should record a journal entry that includes a(n) ______.

$8,000 credit to Truck $8,000 debit to Impairment Loss

Acme, Inc.'s balance sheet shows Equipment at a cost of $5,000,000. Accumulated Depreciation is $2,000,000. Acme's income statement shows Depreciation Expense of $200,000 for the year. The equipment has $0 salvage value. Which of the following statements is true?

40% of the equipment's economic benefits have been used up so far.

Straight-line, units-of-production, and declining-balance are commonly used ____ methods.

Blank 1: depreciation or amortization

Depreciation expense is an estimate because it is based on the asset's estimated _____ ______ and _____ value.

Blank 1: useful or economic Blank 2: life Blank 3: residual or salvage

An impairment loss is a(n) ______.

is a reduction to net income on the income statement

Which of the following may lead to a revision of an estimate of a company's depreciation expense?

Extraordinary repairs that significantly extend the asset's usefulness A change in the estimated useful life A change in the estimated residual value

True or false: GAAP require management to select an accelerated depreciation method if the long-lived asset produces more revenue in its early years than in its later years.

False

True or false: In accordance with US Generally Accepted Accounting Principles, a company will always capitalize the cost of a long-lived asset.

False

Which of these depreciation methods are allowed by GAAP?

Straight-line Declining-balance Units-of-production

Acme Enterprises just bought a new manufacturing machine. Which of these costs should be capitalized?

The $15,000 freight bill to deliver the machine to Acme's factory The $8,000 cost of tearing down Acme's factory wall to get the machine inside The $500,000 invoice price of the machine

Ace, Inc. just bought a new delivery truck. Which of these costs should be capitalized?

The $25,000 cost of the truck The $2,000 paid to install shelves inside the truck

X-it Company signed a $500,000, 5-year note payable to buy a new machine. The company paid $2,000 cash for transporting and $1,000 cash for installing the machine. What is the effect of this transaction on the accounting equation?

Total assets increase $500,000. Total liabilities increase $500,000. Machinery, an asset, increases $503,000.

Which of the following financial statement totals are reduced by the adjusting entry to record amortization?

Total assets on the balance sheet Total stockholders' equity on the balance sheet Net income on the income statement

Busy Beaver, Inc. signed a $315,000, 5-year note payable to buy a new $315,000 industrial veneer cutter. Busy Beaver paid $5,000 cash for transportation of the machine and $750 cash for installation costs. What is the overall effect of this transaction on the accounting equation?

Total liabilities increase $315,000. Machinery, an asset, increases $320,750. Total assets increase $315,000.

True or false: Depreciation is not intended to report an asset at its current value.

True

True or false: US GAAP allows companies to use different methods of depreciation for different specific assets or asset groups as long as the method is consistently applied.

True

When equipment is purchased using noncash assets, the equipment is recorded as ______.

an asset at its cash equivalent price

If a cost is capitalized, it is recorded as a(n) ___, not an expense.

asset

Long-lived assets are ______.

assets acquired for use over 1 or more years used by the business

On-a-Roll, Inc. amortizes its copyright of $20,000 over 20 years. Miss Hap, the bookkeeper, forgot to record the amortization in the current year. The effect of this mistake causes ______.

assets to be overstated net income to be overstated

____ interest is the amount of interest costs that is debited to the asset that is being constructed and credited to Cash when the interest is paid.

capitalized

The amount recorded for the purchase of long-lived tangible assets is the ______.

cash equivalent price net cash equivalent amount paid or to be paid acquisition cost

Quiche & Tell, Inc. has discovered that its goodwill has been impaired because the secret recipe it received when it purchased its competitor is no longer a secret. This impairment will ______.

cause a decrease in stockholders' equity

An asset's book value or carrying value is its ______.

cost minus accumulated depreciation

An intangible asset may be recorded only if ______.

purchased

An intangible asset may be recorded when a company ______.

purchases a trademark pays more than the net assets of the company purchased