Financial Accounting - Module 9 - PP&E and Intangible Assets
True or False: PP&E is used in the company's operations to earn revenue; therefore, like other deferred assets, its cost should be allocated over time to the income statement as an expense
True
When compared to the straight-line method, the double-declining-balance method (DDB) will tend to yield a higher depreciation expense in the asset's earlier years but lower depreciation expense in the later years. (T/F)
True
The "Accumulated Depreciation" account is an example of which type of account? A. An asset B. A liability C. An expense D. A contra-asset E. A contra-revenue
contra-asset
How do you calculate Depreciation Expense for each year of the asset's life?
(Cost - Estimated Residual Value / Estimated useful life) * (number of months used during the year / 12)
What are common example of capitalized costs related to Real Property? (4)
1) Base purchase price 2) Transfer-related taxes 3) Commissions 4) Closing costs
What are common examples of capitalized costs related to Tangible Personal Property (5)
1) Base purchase price 2) Sales taxes 3) Shipping 4) Installation 5) Insurance during transit
What are the 3 stages of the Life-Cycle of PP&E?
1) Beginning 2) During 3) End
What is the difference between accounting depreciation and other meanings of depreciation?
1) Accounting depreciation = Cost portion of the PP&E used up or expensed in the current accounting period and NOT referring to a decline in fair value
What are Basket Purchases?
1) Companies can also require MORE than 1 asset in a single transaction for a lump-sum amount 2) Basket purchases, lump-sum purchases and bargain purchases are other names for Basket purchases
What is the End stage of the Life-Cycle of PP&E?
1) Disposal of the asset for cash (monetary exchange) 2) Trading in the asset for another long-term (non-monetary exchange)
Once depreciation has been recorded up to the date of the disposal. What are the 3 steps to record the actual disposal?
1) Eliminate the balance in the asset as well as its related Accumulated Depreciation account 2) If applicable, record the cash received 3) Balance the journal entry by recording either a gain or loss
The following are a list of Deferred Asset names. What are their respective Expense names? 1) Prepaid insurance 2) Supplies 3) Inventory 4) Equipment 5) Oil Reserves (natural resources) 6) Patent (intangible asset)
1) Insurance expense 2) Supplies expense 3) COGS 4) Depreciation expense 5) Depletion Expense 6) Amortization Expense
What are 6 examples of Natural Resources?
1) Land 2) Oil reserves 3) Timberlands 4) Natural gas 5) Coal mines 6) Mineral Deposits
What are 6 examples of Tangible Operating Assets?
1) Machinery and Equipment 2) Furniture and Fixtures 3) Vehicles 4) Buildings 5) Computers and Peripherals 6) Land improvement (e.g fencing, parking lot, outdoor lighting)
Why does the company credit the "Accumulated Depreciation" account instead of crediting the asset account directly?
1) Most companies find it helpful to preserve the knowledge of the PP&E's original cost. e.g they may need this original cost information for property tax purposes 2) Users can sense how "used up" the asset is by having two different accounts. Having this information could be important because as assets near
PP&E may also be referred to as 1) 2) 3)
1) Operating Assets 2) Plant Assets 3) Fixed Assets
What is the During stage of the Life-Cycle of PP&E?
1) Ordinary repairs and maintenance 2) Extraordinary repairs 3) Betterments and additions 4) Depreciation
What are common examples of Intangible Assets? ( list at least 4)
1) Patents 2) Trademarks 3) Tradenames 4) Franchise agreements 5) Construction permits 6) Broadcasting rights 7) Goodwill
What is the Beginning stage of the Life-Cycle of PP&E?
1) Purchase of the asset (acquisition costs) 2) Construction of the asset (covered in Intermediate)
What are the 3 common reasons PP&E can become impaired?
1) Significant decrease in the market value of the company as a whole 2) Changes in the way the asset is used or a physical change in the asset 3) Legal factors or changes in the business climate that might affect the asset's fair value or adverse action or assessment by regulators
What are the 3 most common depreciation methods?
1) Straight line 2) Activity Level 3) Double-Declining Balance
What are the 2 Impairment Test for PP&E?
1) The Recoverability Test 2) The Fair Value Test
What are 3 disposal reasons for an operating asset?
1) The asset can be sold outright for cash or a receivable (often referred to as a monetary exchange) 2) The asset can be "junked" or otherwise donated or thrown away without a receipt of cash 3) The asset can be traded for a different asset (often referred to as a non-monetary exchange)
What are 4 common reasons a company will dispose of an operating asset?
1) The asset has served its purpose and is no longer being used 2) A better asset has come along, and it makes financial sense to replace the old asset 3) The repair costs exceed the benefit received from the asset 4) The company has cash flow problems and needs to sell the asset for cash
What does GAAP say about Basket Purchases?
1) When a company receives more than one asset for a single amount, the costs assigned to each asset should be based on their relative fair market values
What is Capitalized when accounting for PP&E Acquisition costs?
1) a cost is CAPITILIZED when it becomes part of an asset's cost in the accounting records 2) The company will debit the specific asset account (e.g machinery) for the capitalized cost amount 3) The capitalized cost will remain on the company's balance sheet until it is used up
The "depreciable cost" of an asset used in a company's business is equal to the asset's: a. cost minus residual value b. cost c. cost plus accumulated depreciation d. cost plus residual value
Cost - residual value
ABC. Inc purchases a machine on January 1, 20x1. On that date, they pay $50,000 for the machine plus shipping charges of $800. They also purchase an insurance policy costing $200 in cash that provides coverage while the machine is in transit to them. What is the journal entry to record these machine-related costs is as follows:
1/1/X1 Dr. Machine (50,000 + 800 + 200) = 51,000 Cr. Cash 51,000
Peters Inc. purchased a machine to use in its business. The machine is estimated to have an economic life of ten (10) years before it becomes obsolete. The company expects to use the machine for five (5) years before it replaces it with a newer machine. Peters uses the straight-line depreciation method. Question: Over how many years should Peters depreciate this asset?
5 years Depreciable assets should be depreciated over their estimated useful (or service) life to the company.
Holden Mills purchased a new machine for its factory in 20X1. Expenditures related to the machine during 20X1 were as follows: Base purchase price, $50,000 Sales tax incurred at the time of purchase, $3,000 Installation charges for the machine, $1,000 Insurance costs incurred while the machine was being shipped, $200 Insurance costs for the first year of the machine's service life, $500 Repairs and maintenance costs during the first year of the machine's service life, $1,200 Question: What should be the capitalized cost of the machine at 12/31/X1? Do not use symbols, decimals, or cents in the numerical response.
50,000 + 3,000 + 1,000 + 200 = $54,200
The process of allocating the cost of an intangible asset over its useful life is called
Amortization
In accounting, assets represent what?
An economic resource a company has at a point in time because they are expected to provide future economic benefits.
What is the formula for computing annual depreciation using the DDB method?
Annual Depreciation Expense = DDB % * Book Value at the beginning of the period
Jamison Inc., a calendar year-end company, acquired a machine on 1/1/X1 with the following attributes: Cost = $80,000 Residual value = $5,000 Total expected number of hours of use = 20,000 hours Actual number of hours used in 20X1 =2,000 hours Assuming that Jamison Inc. uses the units-of-activity (or activity-level) depreciation method, answer the following question: Question: How much depreciation expense should be recorded in 20X1? Round the depreciation rate to two decimal places.
Annual depreciation expense = (Depreciable Cost/Total Estimated # of units) x Actual number of units for that period Depreciable cost = $80,000 - $5,000 = $75,000 Depreciate rate per unit = $75,000 ÷ 20,000 hours = $3.75 per hour Depreciation expense in 20X1 = $3.75 per hour x 2,000 hours = $7,500 The correct answer is: $7,500
What type of account should be debited when a cost is capitalized? A. Revenue B. Expense C. Contra-asset D. Asset E. Liability
Asset
What is the definition of PP&E?
Assets on the balance sheet that have a USEFUL life longer than 1 year and used in the company's key operating activities
What are Identifiable Assets?
Assets that can be independently sold, transferred, licensed, rented, or exchanged, while "net assets" refer to the difference between a company's assets and liabilities
What is the accounting treatment when the total number of units produced does NOT equal the total estimated units?
Assuming the original estimate was made in good faith, the company would treat this as a CHANGE IN ESTIMATE - meaning they will adjust their estimate in the last year in this case and FORCE the accumulated depreciation to equal depreciable cost
Assuming an operating asset has a residual value, the balance in its "Accumulated Depreciation" account at the end of its useful life should be equal to its: A. Cost B. Depreciable cost C. Residual value D. Fair market value
B. Depreciable cost
In accounting, which of the following is the best definition of what depreciation represents? A. Depreciation represents the decline in an operating asset's fair market value. B. Depreciation represents the portion of an operating asset's cost used up over time. C. Depreciation represents the amount of cash a company spends on an operating asset's repairs and maintenance each year.
B. Depreciation represents the portion of an operating asset's cost used up over time.
What is the formula for Book value?
BV = Cost - Accumulated Depreciation
On 1/1/X2, Marshall Inc. sold one of its machines for $11,000 cash. The following data are available for the machine on the disposal date: Cost = $100,000 Accumulated depreciation = $85,000 Original residual value = $1,000 Required: In the journal below, prepare the journal entry to record the machine's disposal.
Cash (dr) 11,000 Accumulated depreciation (dr) 85,000 Loss on sale (dr) 4,000 Machinery (cr) 100,000 When PP&E is disposed of, the journal entry should: (1) Remove the cost and accumulated depreciation for the disposed asset, (2) Record the cash received, and (3) Record any gain or loss This machinery had a book value of $15,000 on the date of disposal. Since the cash received of $11,000 was less than the book value, a $4,000 loss should be recorded. The original residual value has no impact on this journal entry.
Which of the following PP&E assets should not be depreciated or depleted? A. Equipment B. Timberlands C. Building D. Land E. Furniture and Fixtures
D. Land (Due to its nature, land is not generally used up)
How is DDB percentage rate calculated?
DDB percentage rate = (200% / useful life in years)
Rhodes Corp., a calendar year-end company, purchased machinery on 1/1/X1 with the following attributes: Cost = $15,000 Estimated salvage value = $1,500 Estimated useful life = 4 years Assuming Rhodes uses thedouble-declining balance (DDB) depreciation method, answer the following question: Question: How much depreciation expense should be recorded in 20X4(year four of the asset's life)?Do not use symbols, decimals, or cents in the numerical response.
DDB rate = 200% divided by the SL life. 200% ÷ 4 = 50% rate Annual Deprec Expense = DDB rate x Book Value at beginning of year **Remember that with the DDB method, you will likely need to "force" the Accumulated Depreciation account balance to equal the asset's depreciable cost at the end of its life. Since the depreciable cost of this asset is $13,500, the "Accumulated Depreciation" balance must equal $13,500 at the end of year 4. BV = Cost - Accumulated Depreciation Depreciable Cost = Cost - Residual Correct answer = 375
For a given asset, as the accumulated depreciation account balance increases, the asset's book value will: A. Decrease B. Increase C. Stay the same
Decrease
If an impairment loss is recorded for PP&E, the company's net income will: A. Decrease B. Increase C. Stay the same
Decrease
The purchase of PP&E and Intangible Assets are example of __________ expenses
Deferred expenses 1) On the purchase date, the company debits an asset account for its cost and later allocates that cost to the income statement in the form of an expense
At the end of a depreciable asset's useful life, the "Accumulated Depreciation" account balance should equal the asset's
Depreciable cost
What is the second way to calculate the Depreciation expense?
Depreciation expense = (Actual number of units used / Estimated total usage units) * (Cost - Estimated Residual value)
How do you calculate annual depreciation expense? (depreciation rate per unit and multiplies the rate per unit by the actual number of units each year to calculate depreciation expense
Depreciation expense = (Cost - Estimated Residual Value / Estimated Total Usage Units) * ( Actual Number of Units)
What is the formula for Depreciation Rate?
Depreciation rate = (Cost - Estimated Residual value / Estimated total usage units)
Allocating the cost of an operating asset, such as machinery, to the time periods in which it helps the company earn revenues is an application of the ______ principle
Expense recognition (matching) principle
What is the Fair Market Value Received > Book Value given up =
Gain (a credit in the entry)
When a depreciable asset is disposed of and the fair market value received is more than the book value of the asset given up, the company should record a:
Gain on the disposal
What is Goodwill?
Goodwill is an intangible asset that captures what is paid for an acquisition over fair market value.
Which of the following is not an example of an intangible asset? a. Trademarks b. Land Improvements c. Copyrights d. Patents
Land improvements
For PP&E, an impairment exists when the undiscounted future net cash flows the asset is expected to generate are: A. Less than the asset's book value. B. More than the asset's book value. C. Equal to the asset's book value
Less than the asset's book value
What is the Fair Market Value Received < Book Value given up =
Loss (a debit in the entry)
When a depreciable asset is sold and the fair market value received is less than the book value of the asset given up, the company should record a: A. Gain on disposal B. Loss on disposal
Loss on disposal
Only Goodwill that is __________ will be shown on a company's balance sheet
Purchased
An accelerated depreciation method is one that generally: A. Records an even amount of depreciation expense over each year of an operating asset's useful life. B. Records a higher amount of depreciation expense in the earlier years of an operating asset's useful life. C. Records a lower amount of depreciation expense in the earlier years of an operating asset's useful life.
Records a higher amount of depreciation expense in the earlier years of an operating asset's useful life.
A company can only purchase goodwill as part of the purchase of an entire _________ __________
Reporting unit
What does Book Value or Carrying Value mean relating to depreciable assets?
Represents the difference in the asset's cost and accumulated depreciation balance to date
Assuming an operating asset has a residual value, the asset's book value at the end of its useful life should be equal to its: A. Cost B. Depreciable cost C. Residual value D. Fair market value
Residual value
What are the 2 general rules for calculating depreciation?
Rule #1 - At the end of the asset's useful life, the "Accumulated Depreciation" account balance should be equal to the asset's depreciable cost Rule #2 - At the end of the asset's useful life, its book value should be equal to its estimated residual value
What is the Double Declining Balance?
The DDB method assumes the asset is used more in its earlier years - with the first year being the highest. This pattern is called an ACCELERATED pattern
What is the Activity Level (or units of production)?
The activity level method allocates depreciation over the useful life based on the asset's ACTUAL use
What is Depreciation?
The cost allocation for a human-made asset, tangible, and has a useful life of more than 1 year
What is Depletion?
The cost allocation for a natural resource asset with a limited life
What is Amortization?
The cost allocation for an intangible asset (e.g patent) with a limited life
What is the Book Value (carrying value)?
The difference or "net" amount between the PP&E account balance and its related accumulated depreciation account balance represents the UNALLOCATED COST of the asset remaining at year-end
What is the Single Line Deprecation?
The straight line method assumes the asset is used up EVENLY over its useful life
Assuming an asset is used for its full estimated useful life, when comparing the total amount of depreciation taken using the DDB method versus the straight-line method, we should observe which of the following? a. The total amount of depreciation taken is the same under both methods. b. The total amount of depreciation taken using the DDB method is higher. c. The total amount of depreciation taken using the DDB method is lower.
The total amount of depreciation taken is the same under both methods.
On March 15, Heston Inc. purchased a vehicle and equipment for a combined cost of $40,000 in cash. The estimated fair values of the vehicle and equipment are $35,000 and $8,750, respectively. Required: In the journal below, complete the journal entry for this purchase.
When a group of assets is purchased for a single dollar amount, the amount should be allocated to each individual asset based on their relative fair market values as follows: First: For each asset, determine its percentage of the total fair value by dividing its fair value by the total fair value. Second: Multiply each asset's percentage by the original cost amount to determine what portion of the cost should be allocated to the individual asset. Vehicle cost allocation: $35000/$43,750 X $40,000 = $32,000 Equipment cost allocation: 48,750/$43,750 x $40,000 = $8,000 Vehicle (dr) 32,000 Equipment (dr) 8,000 Cash (cr) 40,000
Assume a company has chosen the double-declining balance (DDB) depreciation method. Required: For each useful life, indicate the correct DDB rate. A. If the useful life is 4 years, the DDB rate is B. If the useful life is 5 years, the DDB rate is C. If the useful life is 10 years, the DDB rate is
a) 200% / 4 = 50% b) 200% / 5 = 40% c) 200% / 10 = 20%
What are Intangible assets?
a) Also used in the company's operations to earn operating revenue, but they DO NOT have a physicals substance like PP&E b) Cannot be easily observed being used or used up
When assets are impaired, the company should write the asset down by decreasing its reported ____ ______
a) Book Value * When assets are written down due to impairment, a loss on the income statement will result
How should companies select a depreciation method?
a) Companies should select depreciation method that best agrees to how the asset is used up over time to produce operating revenues. b) A company can select an alternative method as long as there is no material effect on the financial statements.
What does Depreciable Cost mean relating to depreciable assets?
a) Depreciable cost is equal to the asset's COST LESS RESIDUAL VALUE. b) Depreciable cost represents the portion of the asset's cost that is subject to depreciation. Theoretically, only the depreciable cost portion is used up over time
If an asset is disposed of during the year, the company records ___________ __________ for a partial period
a) Depreciation expense ** Once the accumulated depreciation account has its most up-to-date account balance, it is time to record the actual disposal
What is the Fair Value Test?
a) Fair value test determines the AMOUNT of the impairment b) The amount of the impairment is determined by taking the difference between the fair value of the asset and its book value. c) If the asset's fair value is NOT known/determinable, the present value of the future cash flows should be calculated and compared to the asset's book value d) Asset's fair value - Asset's book value = Impairment loss amount * For purposes of this test, fair value is the amount at which the asset could be bought or sold in an arm's length transaction
What is is the Double-Declining Balance (DDB method) or "200 DB" method mean?
a) If the asset is expected to be used more in its earlier years than later years, a company will likely choose a declining balance method b) The DDB method can also be expressed as "200 DB" which is interpreted to mean 200% of the straight line rate
Which financial statement shows where gains or losses occur?
a) Income statement b) On a multi-step income statement, gains or losses are reported in a category often called "Other Revenues and Expenses"
Which intangible asset will only have their cost amortized over time?
a) Knowing the nature of an intangible asset is important because only PURCHASED intangibles with a FINITE life will have their cost amortized over time.
Companies who choose to present their long-term asset balance at only the _______ amount should disclose the split between the cost balance and the accumulated depreciation balance in the notes to their ________ _________
a) NET b) Financial statements
What are common examples of intangible assets?
a) Patents b) Trademarks c) Tradenames d) Franchise Agreements e) Construction Permits g) Broadcasting Rights h) Goodwill
If the long-term assets are used in the company's operations, they will likely be presented on the balance sheet in the following 2 subcategories : ___________ and _________
a) Property, Plant and Equipment b) Intangible Assets
What is the first step that a company should take before recording the disposal of an operating asset?
a) Record the depreciation expense up through the date of the disposal b) Depreciation expense is usually computed at year-end
What does Residual Value or Salvage Value mean relating to depreciable assets?
a) Residual value estimates the cash amount the company expects to realize from the sale of the asset at the end of its useful life. b) Residual value portion of the asset's cost is NOT subject to depreciation
Gains are similar to ____ and losses are similar to:
a) Revenues b) Losses * Gains increases net income and Losses decrease net income
Intangible assets convey ______ and _________ to the company that owns them
a) Rights b) Privileges 1) These rights and privileges often arise out of legal rights granted by the government or through a contractual arrangement with a 3rd party
What rule MUST hold regardless of the depreciation method choosen?
a) Since the "Accumulated Depreciation" account is the sum of depreciation expense taken over time, then at the end of the asset's useful life, the "Accumulated Depreciation" account should be equal to the asset's depreciable cost
What is the computation for GoodWill?
a) The difference in the amount paid for a reporting unit in EXCESS of the fair value of the reporting unit's identifiable net assets b) Goodwill amount = Amount paid - Fair Value of Reporting Units Identifiable Net Assets
What is the Recoverability Test?
a) This step establishes whether an impairment actually EXISTS OR NOT b) The step is performed when the company compares the undiscounted future net* cash flows the asset is expected to generate to its book value c) if the undiscounted future cash flows are LESS THAN the asset's book value, an impairment exists d) Future economic benefits < book value = impairment exists
What is an Impairment in accounting?
a) When the asset's future economic benefit is NOT expected to be as great as its book value b) Future economic benefits < Book Value = Impairment
The gain or loss is the difference between the fair market value received (e.g the cash received), if any, and the ___________ of the asset given up
a) book value
Whereas most tangible fixed assets have a limited useful life, intangible assets can have either a _______ or an _______ useful life depending on the asset's nature.
a) finite (limited) b) indefinite ) undeterminable * For example: - In the U.S, a patent usually has a legal life of 20 years, whereas trademarks and tradenames can be renewed for an indefinite number of years
The DDB method multiplies a ______ percentage by the asset's book value to determine depreciation expense per ______
a) fixed b) year
PP&E items can be ___________ or exist in ___________ such as land and other natural resources
a) human-made b) nature
What does Cost mean relating to depreciable assets?
a) refers to the total capitalized cost of the asset. b) The asset's cost is the amount recorded in the general ledger
Which of the following assets would NOT be subject to depreciation? (check all that apply) a. Land b. Machinery c. Supplies d. Building e. Furniture and Fixtures f. Inventory
land, supplies, inventory
At the end of a depreciable asset's useful life, the book value (or carrying value) of the asset should equal the asset's
residual value
With respect to PP&E, an impairment occurs when: a. the undiscounted future cash flows expected to be generated by the asset are less than its book value. b. the undiscounted future cash flows expected to be generated by the asset are more than its book value. c. the undiscounted future cash flows expected to be generated by the asset are equal to its book value.
the undiscounted future cash flows expected to be generated by the asset are LESS than its book value.