Financial Accounting Chapter 7 8 9

Schager Company purchased a computer system on January 1, 2012, at a cost of $40,000. The estimated useful life is 10 years, and the estimated residual value is $5,000. Assuming the company will use the double-declining-balance method, what is the depreciation expense for the second year? $8,000. $7,000. $5,600. $6,400.

$6,400 $40,000 x 20% = $8,000 depreciation in the first year. ($40,000 - 8,000) x 20% = $6,400 depreciation in the second year. Depreciation rate = 2/10 = 20%.

Light Company acquires Photon Company by paying $25 million in cash. The fair value of all identifiable assets acquired is $30 million. The fair value of all identifiable liabilities assumed is $8 million. What will be the amount of goodwill that Light Company would record as part of this acquisition? $0$ 5 million $3 million $2 million

3 million Goodwill = $3 million ($25 million purchase price - $22 million fair value of net assets)

On January 1, 2010, Jacob Inc. purchased a commercial truck for $48,000 and uses the straight-line depreciation method. The truck has a useful life of eight years and an estimated residual value of $8,000. On December 31, 2012, Jacob Inc. sold the truck for $30,000. What amount of gain or loss should Jacob Inc. record on December 31, 2012? Gain, $22,000. Loss, $18,000. Gain, $5,000. Loss, $3,000.

3000 ($48,000 - $8,000)/8 = depreciation of $5,000 per year. After three years, the book value would be [$48,000 - ($5,000 x 3 years)] = $33,000. The truck was sold for $30,000 or a $3,000 loss below book value.

Industrial Metals purchases land, building, and equipment together for $1.2 million. The estimated fair values of the land, buildings, and equipment are $500,000, $800,000, and $200,000. What amount should be recorded in the separate account for the land?

400,000 This is calculated as [$500,000 / ($500,000 + $800,000 + $200,000)] x $1.2 million.

Windsor Hospital purchases $90,000 in surgical equipment on October 1, 2012. The useful life is estimated to be 5 years, and the residual value is estimated to be $10,000. What will be the depreciation expense reported for this equipment in 2012 if the hospital uses the straight-line method? $16,000 $8,000 $4,000 $2,667

4000 Think of the number of months for which depreciation expense has to be calculated in 2012.

Why do we use capitalized interest?

Because of the matching principle. expenses are to be matched with the revenues they help to create.

The cost of ordinary repairs to equipment during the first year of service is added to the equipment account. True False

False , Rather than including recurring costs as part of the asset, we expense them as we incur them, in order to properly match them with revenues generated during the same period.

When a firm develops a trademark internally through advertising, it records the advertising costs as part of the cost of the intangible asset. True False

False, When a firm develops a trademark internally through advertising, it doesn't record the advertising costs as part of the cost of the intangible asset.

Kosher Pickle Company acquires all the outstanding stock of Midwest Produce for $14 million. The fair value of Midwest's assets is $11.3 million. The fair value of Midwest's liabilities is $1.5 million.

Purchase price $14.0 Less: Fair value of assets acquired 11.3 Less: fair value of liabilities assumed (1.5) (11.3-1.5)=9.8 Fair value of identifiable net assets 9.8 (14-9.8)=4.2 Amount paid for goodwill $ 4.2

out of working capital, current ratio and acid- test which has better measurement for liquidity

acid test

The annual interest rate specified on a bond (which is based on the maturity amount of the bond) appropriately can be called the A) stated rate. B) nominal rate. C) coupon rate. D) contract rate. E) A through D are all acceptable terms.

e

Rather than including recurring costs as part of the cost of the equipment, we..

expense them as we incur them, in order to properly match them with revenues generated during the same period. (matching Principle)

when a firm develops a patent internally, it..

expenses the research and development costs as it incurs them

T/f interest expense incurred while borrowing money and dividends paid to stockholders are tax deductible

false

What is the exception to recording patents developed internally?

legal fees. The firm will record in the Patent asset account the legal and filing fees to secure the patent, even if it developed the patented item or process internally.

bonds sell at face amount

market rate= stated rate

Several years ago, Health Services acquired a helicopter for use in emergency situations. Required: Indicate whether Health Services should capitalize or expense each of the following expenditures related to the helicopter delivery operations in 2012: 1. Overhauled the engine at a cost of $7,500. Health Services estimated the work would increase the service life for an additional five years. 2. Painted the Health Services company logo on the helicopter at a cost of $6,000. 3. Added new emergency health equipment to the helicopter for $25,000. 4. Modified the helicopter to reduce cabin noise by installing new sound barrier technology at a cost of $15,000. 5. Paid insurance on the helicopter for 2012, which increased 15% over the prior year to $9,000. 6. Performed annual maintenance and repairs at a cost of $39,000.

1. capitalize 2. capitalize 3. capitalize 4. capitalize 5. expense 6. expense We capitalize an expenditure as an asset if it benefits future periods. We expense an expenditure if it benefits only the current period

Answers for next problems

1. debit accumulated depreciation for 5000 debit loss 5000 credit equipment 10000 2. credit equipment 10000 debit cash 6000 debit accumulated depreciation 5000 credit gain 1000 3. Debit cash 20,000 credit equipment 100000 debit loss 10000 debit accumulated depreciation 70,000 4.Assets increase by 10,000 Total Stockholders equity increases by 10,000

Prime, Inc., purchases $100,000 in construction machinery on January 1, 2012. The useful life is estimated to be 8 years, and the residual value is estimated to be $20,000. What will be the depreciation rate if the company uses the double-declining method? 25% 40% 20% 12.5%

25% Note that the double-declining-balance depreciation rate is double the straight-line rate.

Raider Company acquires Target Company by paying $60 million in cash. The fair values of all identifiable assets acquired are $90 million. In the purchase, Raider also assumes all of Target's long-term debt, which has a fair value of $35 million at the date of acquisition. Raider would report how much as goodwill? Why?

5 million, which is the difference between the purchase price of $60 million and the $55 million fair value of net assets.

Bahama Catering purchased a commercial dishwasher by paying cash of $5,000. The dishwasher's fair value on the date of the purchase was $5,600. The company incurred $400 in transportation costs, $300 installation fees, and paid a $200 fine for illegal parking while the dishwasher was being delivered. For what amount will Bahama record the dishwasher? $5,600. $5,700. $5,900. $6,300.

5700 Add all the costs except the ticket as it is not a cost necessarty to get the asset ready for use. $5,000 + $400 + $300 = $5,700.

Accelerated depreciation method

Allocates a higher depreciation in the earlier years of the asset's life and lower depreciation in later years

Straight-line method

Allocates an equal amount of depreciation to each year of the asset's service life

Depletion

Allocation of the cost of a natural asset over its service life

Depreciation

Allocation of the cost of a tangible asset over its service life

Amortization

Allocation of the cost of an intangible asset over its service life

Declining-balance method

An accelerated depreciation method that records more depreciation in earlier years and less depreciation in later years

Liquidity Analysis (Current ratio and working capital)

CR= CA/CL WC= CA- CL

We __________ the costs of adding a new major component to an existing asset. Expense Capitalize

Capitalize We should capitalize because they increase rather than maintain the futire benefits from the expedenture.

What are recurring costs?

Cost that re-occur such as annual property insurance and annual property taxes

Residual value

The amount the company expects to receive from selling the asset at the end of its service life. Also referred to as salvage value.

Capitalized interest refers to interest costs that _____. are recorded as interest expense for a period are unlikely to be paid are added to the asset account help finance working capital requirements

are added to the asset account

A firm can only record what as an intangible asset in the Trademark asset account?

attorney fees, registration fees, design costs, successful legal defense, and other costs directly related to securing the trademark

we record goodwill as an intangible asset in the what only when we purchase it as part of the acquisition of another company?

balance sheet as an asset

Bondspayableshouldbereportedasalong-termliabilityinthebalancesheetat: A. Face Value. B. Current bond market price. C. Carrying value. D. Face value less accrued interest since the last interest payment date.

c

El Tapitio purchased restaurant furniture on September 1, 2012, for $35,000. Residual value at the end of an estimated 10-year service life is expected to be $5,000. Calculate depreciation expense for 2012 and 2013, using the straight-line method, and assuming a December 31 year-end

Depreciation expense 2012 $1000 2013 $3000 Explanation: Year 2012 ($35,000 - $5,000)/10 = 3,000 × 4/12 = $1,000 2013 ($35,000 - $5,000)/10 = $3,000

Which balance method do you not substract the residual value from?

Double-Declining

Book value

Equal to the original cost of the asset minus the current balance in Accumulated Depreciation

If the defense of an intangible right is unsuccessful, then the firm should __________ the litigation costs. Expense Capitalize

Expense There are no furture benefits because the defense in unsuccessful

Double-declining method produces a higher net income than straight-line method in the earlier years of an asset's life. True False

False Straight-line produces a higher net income than accelerated methods in the earlier years of an asset's life.

When a change in depreciation estimate is required, the company adjusts depreciation in prior periods. True False

False When a change in estimate is required, the company changes depreciation in current and future years, but not in prior periods.

Capitalized interest

Interest costs recorded as assets rather than interest expense

Salad Express exchanged land it had been holding for future plant expansion for a more suitable parcel of land along distribution routes. Salad Express reported the old land on the previously issued balance sheet at its original cost of $60,000. According to an independent appraisal, the old land currently is worth $112,000. Salad Express paid $14,000 in cash to complete the transaction. Record the exchange

Journal entry to record exchange Debit Credit Land, new 126000 Land, old 60000 Cash 14000 Gain 52000 Your Gain is the new land minus the price you paid for it previously(old land) and the cash you spent on the transfer.

Which of the following assets is not depreciated? Building Equipment Land Land Improvements

Land

We do not depreciate land because its life is indefinite. However, we do depreciate

Land Improvements

Intangible assets

Long-term assets that lack physical substance, and whose existence is often based on a legal contract

Return on assets

Net income divided by average total assets. Measures the amount of net income generated for each dollar invested in assets

Asset turnover

Net sales divided by average total assets. Measures the sales per dollar of assets invested

Prime, Inc., purchases $100,000 in construction machinery on January 1, 2012. The useful life is estimated to be 8 years, and the residual value is estimated to be $20,000. If the company uses the double-declining method, the asset will reach its residual value in the ____ year. seventh eighth sixth fifth

Sixth Note that if the estimated residual value is high enough, the asset will reach its residual value in fewer years than its expected service life.

We record purchased intangible assets at their original cost plus all other costs, such as legal and filing fees, necessary to get the asset ready for use. True False

True

bonds sell at premium

stated rate greater than market rate

bonds sell at discount

stated rate less than market rate

We record goodwill as an intangible asset in the balance sheet only when _____. we purchase it as part of an acquisition it is internally generated it is more than 50 percent of assets we make an acquisition at a price below the fair value of net assets

we purchase it as part of an acquisition (Imagine how difficult it would be to estimate the amount and future benefits of internally generated goodwill.)

what is the acid test

(cash+current investments+a/r) / CL

Activity-based method

Allocates an asset's cost based on its use

Debt to Equity Ratio

Total Liabilities /Total SE

Accumulated depreciation

A contra asset account representing the total depreciation taken to date

Hawaiian Specialty Foods purchased equipment for $20,000. Residual value at the end of an estimated four-year service life is expected to be $2,000. The machine operated for 2,200 hours in the first year, and the company expects the machine to operate for a total of 10,000 hours. Calculate depreciation expense for the first year using each of the following depreciation methods: (1) straight-line, (2) double-declining-balance, and (3) activity-based.

(1) Straight-line Depreciation expense = ($20,000 - $2,000)/4 = $4,500 (2) Double-declining-balance Depreciation expense = $20,000 × 2/4 = $10,000 (3) Activity-based Depreciation expense = ($20,000 - $2,000)/10,000 hours = $1.80 per hour × 2,200 hours = $3,960 in activity based you divide total depreciation expense by total hours used to find the depreciation rate. then multiply that rate by the total number of hours for the year you are looking for. In this case it is year one.

Sonic Corporation purchases a delivery truck for $24,000. The company expects the truck to be in service for 100,000 miles, and the residual value is estimated to be $4,000. What is the depreciation rate using activity-based depreciation? $0.20 $0.24 $0.40 $0.10

.20 Use depreciable cost in your calculation.

Fruitasia purchased land, a building, and equipment for $800,000. The estimated fair values of the land, building, and equipment are $100,000, $700,000, and $200,000, respectively. At what amount would the company record the land? $80,000. $90,000. $100,000. $800,000.

80000 $800,000 x ($100,000/$100,000 + $700,000 + $200,000) = $80,000.

Natural resources

Assets like oil, natural gas, and timber that we can physically use up or deplete

Abbott Landscaping purchased a tractor at a cost of $32,000 and sold it three years later for $16,000. Abbott recorded depreciation using the straight-line method, a five-year service life, and a $2,000 residual value. Tractors are included in the Equipment account. Assume the tractor was sold for $10,000 instead of $16,000. Record the sale.

Debit Credit Cash 10000 Accumulated depreciation 18000 Equipment 32000 loss 4000 It was worth 14000, if you sold it for 10000 this is a loss of 4000. losses are always debit

Abbott Landscaping purchased a tractor at a cost of $32,000 and sold it three years later for $16,000. Abbott recorded depreciation using the straight-line method, a five-year service life, and a $2,000 residual value. Tractors are included in the Equipment account. Record the sale..

Debit Credit Cash 16000 Accumulated depreciation 18000 Equipment 32000 Gain 2000 Explanation: Accumulated depreciation: ($32,000 - $2,000) / 5 = $6,000 year × 3 years = $18,000 since you first purchased it for 32000 and when you sell it, accumulated depreciation was 18000.... 32000-18000=14000. so its now worth 14000. you sold it for 16000 this is a 2000 dollar gain. Gains are always Credit.

Orion Flour Mills purchased a new machine and made the following expenditures: Purchase price $65,000 Sales tax 5,500 Shipment of machine 900 Insurance on the machine for the first year 600 Installation of machine 1,800 The machine, including sales tax, was purchased on account, with payment due in 30 days. The other expenditures listed above were paid in cash. Required: Record the above expenditures for the new machine.

General Journal Debit Credit Equipment 73200 Prepaid insurance 600 Cash 3300 Accounts payable 70500 Explanation: Purchase price $ 65,000 Sales tax 5,500 Shipping 900 Installation 1,800 Total cost $ 73,200 With the exception of the $600 annual insurance, each of the expenditures described is necessary to bring the machine to its condition and location for use. Orion will initially report the $600 insurance amount as prepaid insurance and expense over the first year of coverage.

Service life

How long the company expects to receive benefits from the asset before disposing of it. Also referred to as useful life.

Land improvements

Improvements to land such as paving, lighting, and landscaping that, unlike land itself, are subject to depreciation

A company expenses the costs associated with purchasing a $100 bookcase in the current period, even though the bookcase has a useful life of 15 years. The company is using the __________ principle. Materiality Matching

Materiality It relates to the size of an item that is likely to influence a decision.

Whole Grain Bakery purchases an industrial bread machine for $25,000. In addition to the purchase price, the company makes the following expenditures: freight, $1,500; installation, $3,000; testing, $1,000; and property tax on the machine for the first year, $500.

Purchase price $25,000 Freight 1,500 Installation 3,000 Testing 1,000 Total cost of the bread machine $30,500 The $500 property tax is a recurring cost that benefits the company in the current year. The Whole Grain Bakery will report the $500 as property tax expense over the first year.

Fresh Veggies, Inc. (FVI), purchases land and a warehouse for $500,000. In addition to the purchase price, FVI makes the following expenditures related to the acquisition: broker's commission, $30,000; title insurance, $2,000; and miscellaneous closing costs, $5,000. The warehouse is immediately demolished at a cost of $30,000 in anticipation of building a new warehouse. Determine the amount FVI should record as the cost of the land

Purchase price of land(+ warehouse to be removed) 500000 Broker's commission 30,000 Title insurance 2,000 Closing costs 5,000 Cost of removing the warehouse 30,000 -------------------------------------------------------------------------------- Total cost of the land $567,000

How do we record intangible assets that are developed internally ?

Rather than recording these on the balance sheet as intangible assets, we expense to the income statement most of the costs for internally developed intangible assets as we incur these costs.

Capitalize

Record an expenditure as an asset

Goodwill

The value of a company as a whole, over and above the value of its identifiable net assets. Goodwill equals the purchase price less the fair value of the net assets acquired.

The research and development (R&D) team at a pharmaceutical company is developing a drug for prostate cancer. Which of the following is true of the R&D costs incurred in developing this drug during the current year? They are recorded as an intangible asset in the balance sheet. They are treated in the same manner as intangible assets that are purchased. They are expensed directly in the income statement. They are expensed in the period in which benefits from R&D accrue.

They are expensed directly in the income statement. (Think about the reporting rules for intangible assets that are developed internally.)

when a firm develops a trademark internally through advertising..

it doesn't record the advertising costs as part of the cost of the intangible asset. Instead, it expenses the advertising costs in the income statement.

a company must expense the costs generated internally. So, we record goodwill only when..

it is acquired as part of the purchase of another business.

We record a long-term asset at what to get the asset ready for use?

its cost plus all expenditures necessary to get the asset ready for use

Tangible Assets Include what?

land, land improvements, buildings, equipment, and natural resources

semi annual interest payments equation

principal x 1/2stated

annual interest payments equation

principal x stated

After acquiring a long-term asset, the owners often incur additional expenditures for

repairs and maintenance,

the cost of equipment is

the actual purchase price plus all other costs necessary to prepare the asset for use.

To record the cost of a franchise, the franchisee records..

the initial fee paid as an intangible asset and then expenses that cost over the life of the franchise agreement.

We record purchased intangible assets at..

their original cost plus all other costs, such as legal and filing fees, necessary to get the asset ready for use.

T/F The mixture of liabilities and stock holders equity a business uses is called capital structure

true