Intermediate Ch 11
Which of the following costs should be capitalized in the cost of a acquiring a building?
remodeling building, realtor commissions, legal fees to obtain title
Whcih statement is true about the straight-line method of depreciation?
It allocates an equal amount of depreciation to each year the asset is used
Allocation Base
The cost of the asset that is expected to be consumed
The difference between an asset retirement liability and the probability weighted expected cash flows is recognized as ... expense each period.
accretion
When selling a fixed asset, the seller recognizes a gain or loss for the difference between the consideration 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 x 1/service life
The gain or loss on disposal of an asset is calculated as
consideration received less the book value of asset sold.
The accumulated depreciation account is classified as a
contra account
Which of the following are not accelerated methods of depreciation?
straight-line method and units-of-output depreciation.
Measure each type of impairment: asset to be held and used?
the excess of book value over the fair value.
goodwill
the excess when a company acquires a business in a business acquisition and the consideration paid is greater than the fair value of the net assets acquired
property to be held and used
when events or circumstances indicate book value may not recoverable
The residual value of an intagible asset is usually _____________.
zero
accretion
The difference between an asset retirement liability and the probability weighted expected cash flows is recognized as _____________ expense each period.
Noncurrent tangible assets include
plant, equipment, propety
The amount of use that the company expects to obtain from an asset before disposing of it is referred to as the __________________ life of the asset.
service
The amount of use that the company expects to obtain from an asset before disposing of it is referred to as the ... life of the asset.
service/useful
Most companies use _-_ amortization for intangible assets.
straight, line
The residual value of an intangible asset is usually _____.
Zero
A new major component that is added to an existing asset is considered an _______ and should be capitalized.
addition
Depreciation is a process of cost (blank), and not a process of valuation
allocation
Depreciation is a process of cost _____ and not a process of valuation.
allocation
depletion
allocation of the cost of natural resources
Allocating the cost of intangible assets to expense is referred to as
amortization
Allocation of the cost of an intangible asset is called
amortization
The allocation of the cost of an intangible asset over its useful life is called
amortization
The allocation of the cost of an intangible asset over its useful life is called_____.
amortization
The purchase price and all costs to bring an asset to its desired condition and location should be
capitalized
U.S. GAAP
capitalized and amortized over remaining useful life of related intangible right
The useful life of an intangible asset may be limited by what type of provisions?
contractual, regulatory, legal
The acronym "MACRS" refers to a(n) _____ method that may be used for ______ purposes.
depreciation; tax
An asset that is traded for another asset is treated as an exchange, whereas an asset that is sold or retired is treated as a(n) _______________.
disposition
Which of the following statements describe the accouting rules for a franchise agreement?
expense periodic payment as incurred amortize the cost of the franchise over its life capitalize the cost of the franchise
Match the accounting treatment of costs associated with intangible assets with the description.
expensed - research and development costs Capitalized - Purchase price plus costs necessary to get asset ready for use
The key factor in classifying items as repairs and maintenance is that
future benefits are not provided beyond those originally anticipated tfrom the asset.
Consideration recevied less the book value of asset sold
gain or loss on disposal of an asset is calculated as?
An asset representing the value of a company over and above its identifiable tangible and intangible assets is referred to as ...
goodwill
The initial valuation of purchased intangible assets requires that the intangible asset is recorded
original cost
The exclusive legal right to manufactore a product or to use a process is called is called a _____________.
patent
The exclusive legal right to manufacture a product or to use a process is called a _.
patent
The exclusive legal right to manufacture a product or to use a process is called a ___________.
patent
The exclusive legal right to manufacture a product or to use a process is called a(n) ______
patent
A _ is the exclusive right to manufacture a product or use a process for a period of _ years.
patent, 20
A(n) ... is the exclusive right to manufacture a product or use a process granted for a period of ... years.
patent, 20
Which of the following iterms are intagible assets?
patent, trademark, copyright
Match each intangible asset with its definition.
patent- exclusive right to produce a product or use a process Copyright-Exclusive right of protection given to a creator of a published work Trademark-Exclusive right to display a word, slogan, symbol, or emblem that distinctively identifies a company Franchise- Contractual agreement in which an entity may use a company's name, products, and formulas
Which of the following intangible assets are usually considered to have indefinite lives?
trademarks
Computer software purchased for internal use should be -expensed immediately -capitalized as part of the computer hardware -capitalized and amortized over its useful life
capitalized and amortized over its useful life
If equipment is purchased for R&D, but has an alternative future use, the cost of the equipment is capitalized and depreciated as R&D expense in the current and future periods expensed in the year the equipment is retired capitalized and not expensed to R&D expensed immediately
capitalized and depreciated as R&D expense in the current and future periods
A(n) _ 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
A(n) ______ is an exclusive right of protection given to a creator of a published work, such as a song, film, painting, photograph, or book
copyright
Western Company purchased a franchise on January 1, 2018 for $100,000 cash. The franchise agreement is for a period of 10 years. Western uses the straight-line method for intangible assets. The journal entry at the end of 2018 includes
credit franchise $10,000 debit amortization expense $10,000
Western Company purchased a franchise on January , 2018 for $100000 cash. The franchise agreement is for a period of 10 years. Western uses the straight line method for intangible assets. The journal entry at the end of 2018 includes (Select all that apply.) credit franchise $10000 debit depreciation expense $10000 credit amortization expense $10000 debit franchise $10000 debit amortization expense $10000
credit franchise $10000, debit amortization expense $10000
A company acquires equipment by signing an interest-bearing note payable for $20000. The interest rate is realistic so the company will record (Select all that apply.) credit note payable $20000 debit discount on note payable debit machine for an amount less than $20000 debit machine $20000
credit note payable $20000, debit machine $20000
The term _________ means to record the expenditure as an asset.
capitalize
When an expenditure is recorded as an asset, we say that we (blank) the expenditure
capitalize
An expenditure that qualifies as an addition should be
capitalized
If an intangible right is successfully defended, the legal costs should be
capitalized
Which assets are required to be tested for impairment annually? intangible assets with indefinite lives PPE intangible assets with finite lives
intangible assets with indefinite lives
A purchased intangible is valued at its original cost. Original cost for acquiring a patent would inclued.
legal costs to acquire required filing fees purchase price
Which of the following costs are capitablized as an internally developed patent?
legal fees filing fees
Which of the following costs are capitalized as an asset for an internally developed patent? (Select all that apply.) legal fees filing fees research and development accretion expense
legal fees, filing fees
Accounting for land improvements requires that the land improvements are recorded separately from land because the improvements have a (blank) life
limited
The cost of land improvement are capitalized separately from land because land improvements tent to have a __________ life.
limited
The cost of land improvements are capitalized separately from land because land improvements tend to have a (blank) useful life
limited
Intangible assets are written down when events or changes in circumstances indicate that the asset's (blank) amount is less than its (blank) amount
recoverable; recorded
A gain or loss is recognized for the difference between the value of the asset given up and its book value
What is true regarding a non-monetary exchange of assets?
book
When selling a fixed asset, the seller recognizes a gain or loss for the difference between the consideration received and the _______ value of the asset sold
When assets are purchased in a group for a single sum, it is referred to as a
basket purchase
When assets are purchased in a group for a single sum, it is referred to as a ...
basket purchase
franchise
contractual agreement in which an entity may use a company's name, products, and formulas.
The service life of an intangible asset may be limited by what types of provisions?
contractual, legal, regulatory
A(n) ___________ is protected by law and gives the creator of a published work the exclusive right to reproduce and sell the work for the life of the creator plus 70 years.
copyright
Declining balance depreciation methods multiply _________ by an annual rate that is a multiple of the straight line method.
cost less accumulated depreciation
For natural resources the depletion base is
cost less any anticipated residual value.
In the sum-of-the-years-digits method of depreciation, the depreciation rate is multiplied by the depreciable base. the depreciable base is the
cost less residual value
Which of the following costs should be cost should be capitalized in the costs of acquiting a building?
delinquent property taxes, purchase price, legal fees to obtain title
Allocation of the cost of a natural resource is called _____.
depletion
Allocation of the cost of a natural resource is called _________.
depletion
The allocation of the cost of natural resources to the periods extracted is referred to as ... expense.
depletion
natural resources
depletion
The cost of a natural resource less its anticipated residual value is called the
depletion base
The cost of a natural resource less its anticipated residual value is called the ...
depletion base
The cost of a natural resource less its anticipated residual value is called the _____ _____.
depletion base
The cost of natural resources less its anticipated residual value is called the __________ __________.
depletion base
sum-of the years depreciation
depreciable base(cost-salvage/rate per year 2016 56000x4/10=22400 2017 56000x3/10=16800
Straight-line, declining-balance, and activity-based refer to accouting methods commonly used to ___________ property, palnt, and equipment.
depreciate
An expenditure that qualifies as an addition should be depreciated over the remaining useful life of original asset or its own useful life, whichever is shorter depreciated over the remaining useful life of original asset or its own useful life, whichever is longer capitalized expensed
depreciated over the remaining useful life of original asset or its own useful life, whichever is shorter, capitalized
For an asset with an estimated salvage value treated than 0, depreciation during the last service year may be less than the amount calculated based on the carrying value times the depreciating rate in order to avoid:
depreciating part of the salvage value
Plant and equipment
depreciation
The allocation of the cost of a tangible asset over its life is referred to as ________
depreciation
The allocation of the cost of a tangible asset over its service life is referred to as _.
depreciation
The allocation of the cost of tangible asset over its service life is referred to as:
depreciation
Match the cost allocation terms with the type of assets to which they relate.
depreciation - property,plant, and equipment amortization - intangible assets
units-of production
depreciation base/units during life= 2016 depreciation per hour(5.60) x machine hours in 2016(3800)=21280 2017 5.60x 4800= 25760
Manchines used in manufacturing, computers, printers, vehicles, furniture, and fixutres generally are classified as
equipment
When an asset has a significant decline in value and is written down, this is called _____.
impairment
When an asset has a significant decline in value and is written down, this is called ___________.
impairment
Which of the following is NOT a part of the amortization figure reported in EBIT on the I/S? impairment loss on a building depreciation of delivery van amortization of a patent depletion of a gold mine
impairment loss on a building
If goodwill impairment is indicated, it is measured as the excess of the book value over its
implied fair value
The two approaches for a systematic and rational allocation of the cost of an asset over its useful life are:
time-based methods and activity-based methods.
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
What is the purpose of group or composite depreciation? to classify assets by type as required by GAAP to reduce the record-keeping costs of determining depreciation to eliminate the need for impairment testing to eliminate the accounting entries when disposing of assets
to reduce the record-keeping costs of determining depreciation
If goodwill impairment is indicated, it is measured as the excess of the book value over its residual value total assets of the reporting unit implied fair value fair value less costs to sell
implied fair value
If goodwill impairment is indicated, it is measured as the excess of the book value over its -total assets of the reporting unit -residual value -fair value less costs to sell -implied fair value
implied fair value
Expenditures classified as _____ involve the replacement of a major component of an asset.
improvements
Expenditures classified as _______________ involve the replacement of a major component of an asset.
improvements
The types of expenditures that can occur subsequent to an asset's acquisition are
improvements, repairs and maintenance, additions
A subsequent expenditure for an asset increases the future benefits of the asset if it
increases the quality of the goods or services produced by the asset. increases the operating efficiency of the asset. extends the asset's useful life.
The ... approach for self-constructed assets advocates including only the additional overhead costs incurred in the construction of the asset, whereas the full-cost approach requires the allocation of overhead to self-constructed assets.
incremental
The amount of time an asset will last is its _____ life, whereas the amount of time the company expects to use the asset to generate revenues is referred to as its _____ life.
physical, useful/service
The amount of time an asset will last is its ______ life, whereas the amount of time the company expects to use the asset to generate revenues is referred to as its ______ life.
physical; useful
Long-term tangible assets
plant, property, equipment
Intangible assets are written down when events or changes in circumstances indicate that the asset's __________ amount is less than its __________ amount
recoverable; recorded
Intangible assets are written down when events or changes in circumstances indicate that the asset's _ amount is less than its _ amount.
recoverable;recorded
Group and composite depreciation commonly is used to
reduce costs of record-keeping
Group and composite depreciation commonly is used to
reduce costs of record-keeping.
An estimated residual value (blank) the total amount of depreciated recorded over an asset's service life
reduces
An estimated residual value __________ the total amount of depreciation recorded over an asset's service life
reduces
The useful life of an intangible asset may be limited by what type of provisions? (Select all that apply.) regulatory US GAAP contractual legal
regulatory, contractual, legal
A basket purchase or lump-sum acquisition of assets required that an allocation is made to each individual asset based on the assent's _________.
relative fair value
A basket purchase or lump-sum acquisition of assets requires that an allocation is made to each individual asset based on the asset's _.
relative fair value
A basket purchase or lump-sum acquisition of assets requires that an allocation is made to each individual asset based on the asset's:
relative fair value
A(n) _____ is an operating segment of a company or a component of an operating segment for which discrete financial information is available and management regularly reviews the operating results of that component
reporting unit
The lower of cost or market approach is______ for companies that use_____ -required under GAAP; any method of inventory valuation -optional under GAAP; any method of inventory valuation -optional under GAAP; LIFO or the retail inventory -required under GAAP; LIFO or the retail inventory
required under GAAP; LIFO or the retail inventory
Ther service life of useful life of an asset is
the amount of use that the company expects to obtain from the asset before disposing of it
The service life or useful life of an asset is
the amount of use that the company expects to obtain from the asset before disposing of it.
The service life or useful life of an asset is
the amount of use the company expects to obtain before disposing of the asset.
Residual Value
the amount the company expects to receive for the asset at the end of its service life less any anticipated disposal costs
In a lump-sum purchase of assets, the cost must be allocated to the individual assets because the assets have different useful lives intangible assets must be identified and expensed goodwill must be expensed immediately
the assets have different useful lives
In a basket purchse of assets, the cost must be allocated to the individual assets because
the assets have different useful lives.
For assets using the group or composite method of depreciation, the assets will be depreciated over
the average service life of assets in the group
The formula for calculating declining balance depreciation is the depreciation rate per year times
the book value at the beginning of the year
The formula for calculating declining balance depreciation is the depreciation rate per year times the cost less the residual value less accumulated depreciation the book value at the beginning of the year the cost less the residual value
the book value at the beginning of the year
1. Time- based methods 2. Activity based methods
the two approaches for a systematic and rational allocation of the cost of an asset over its useful life are?
In determining wether an impairment loss should be recognized, the first step in the two-step process compares the asset's book value with
the undiscounted sum of estimated future cash flows from the asset.
A nonmonetary exchange lacks commercial substances when there is a significant difference in the estimated future cash flows of the exchanged assets there is little or no difference in the estimated future cash flows of the exchanged assets the exchanged assets have essentially the same remaining estimated useful lives the exchanged assets have materially different estimated salvage values
there is little or no difference in the estimated future cash flows of the exchanged asets
Larry purchases land to be used for a new corporate headquarters. Which of the following items are capitalized in the cost of land? (Select all that apply.) title insurance legal fees to secure title current year's property taxes grading the land costs to remove an old building
title insurance, legal fees to secure title, grading the land, costs to remove an old building
If both an asset group in a company and goodwill in one of its reporting units have to be tested for impairment, which of the following statements is correct regarding impairment testing and impairment losses? 1 The other asset group should be tested for an impairment loss before goodwill is tested. 2 Impairment testing may be conducted concurrently for the other asset group and goodwill. 3 If the other asset group is impaired, the loss should not be recognized prior to goodwill being tested for impairment. 4 If goodwill is impaired, the loss should be recognized prior to testing the other assets for impairment.
1 The other asset group should be tested for an impairment loss before goodwill is tested.
An impairment loss for assets to be held and used is reported as: 1 discontinued operations. 2 other comprehensive income. 3 element of income from operations. 4 cumulative effect of change in accounting principle.
3 element of income from operations.
Which assets are not required to be tested for impairment annually, but only if events and circumstances indicate the book value may not be recoverable?
intangible assets with finite lives and property, plant, and equipment.
No amortization is recorded for
intangible assets with indefinite lives
Which assets are required to be tested for impairment annually?
intangible assets with indefinite lives
The types of expenditures that can occur subsequent to an asset's acquisition are
repairs and maintenance additions improvements
The types of expenditures that can occur subsequent to an asset's acquisition are
repairs and maintenance improvements rearrangements additions
A __________ __________ is an operating segment of a company or a component of an operating segment for which discrete financial information is available and management regularly reviews the operating results of that component.
reporting unit
A(n) ... is an operating segment of a company or a component of an operating segment for which discrete financial information is available and management regularly reviews the operating results of that component.
reporting unit
The depreciable cost of an asset in the asset's cost minus its ___________ value.
residual
The depreciable cost of an asset is the asset's cost minus its ________ value.
residual
_ value is the amount the company expects to receive for the asset at the end of its service life.
residual
_________ value is the amount the company expects to receive for the asset at the end of its service life
residual
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
True or false: Assets held for sale are not depreciated or amortized while classified as held for sale.
true
What events would require the investigation of a possible impairment?
-a significant adverse change in how the asset is being used -a significant decrease in market price
What should be considered when choosing an allocation method for a long-term asset?
-a systematic and rational allocation method -a pattern in which the services are obtained from its use
The two approaches for a systematic and rational allocation of the cost of an asset over its useful life are
-activity based methods -time based methods
The types of expenditures that can occur subsequent to an asset's acquisition are -additions -improvements -goodwill -intangibles -rearrangements -repairs and maintenance
-additions -improvements -rearrangements -repairs and maintenance
The two important accounting issues related to self-constructed assets are -date placed in service -allocation of overhead -treatment of interest charges -residual value
-allocation of overhead -treatment of interest charges
In accounting, the term impairment refers to
-an asset's significant decline in value
allocation of indirect cost related to research, materials used in the lab, and salaries of researchers.
What is included in research and development costs?
legal fees to establish title, installation and testing of equipment, freight to deliver the equipment, and sales tax
What items should be capitalized in the cost of equipment?
real estate commissions relating to purchase of building
What should be included in the
Impairment losses cannot be reversed
What statement correctly describes the treatment of the recovery of previously recognized goodwill impairment losses under IFRS and GAAP?
self-constructed
When a company decides to build its own asset rater than purchase it outright, this is referred to as a __________ asset.
appraisal
When a company receives an asset from an unrelated party by s donation, the assets are valued at ______________ value.
Because it is difficult to estimate the future values of research and development, FASB requires that research and development costs be treated as
an expense on the income statement
For natural resources the depletion base is
cost less ant anticipated residual value
The method of the amortization used for intangible assets:
is most commonly straight-line
Consistent with IFRS rules for R&D, the costs of research-related activities are recorded as _,while the costs of development-related activities are recorded as _ _.
expenses, intangible, assets
Which of the following costs should be capitalized in the costs of acquiring a building?
legal feast obtain tittle, purchase price, delinquent property taxes, remodeling building
Which of the following items should be capitalized in the cost of equipment?
freight deliver the equipment, installation and testing of equipment, legal fees to establish tittle, and sales tax
Indicate which costs would be capitalize as part of the cost of manufacturing equipment. (Select all that apply.) freight-in training of equipment operator insurance during transit set-up cost depreciation for the first month
freight-in, insurance during transit, set-up cost
PPE typically include furniture goodwill cars and trucks machinery patents
furniture, cars and trucks, machinery
An intangible asset that is measured as the consideration paid less the fair value of the net identifiable assets is called
goodwill
An intangible asset that is measured as the consideration paid less the fair value of the net identifiable assets is called development a bargain purchase accretion goodwill
goodwill
An intangible asset that is measured as the consideration paid less the fair value of the net identifiable assets is called -accretion -development -goodwill -a bargain purchase
goodwill
The measurement of an impairment loss for intangible assets with indefinite useful lives if a(n) ... process. three step two step one step
one step
The measurement of an impairment loss for intangible assets with indefinite useful lives is a(n) __________ process.
one step
When a company acquires a business in a business acquisition and the consideration paid is greater than the fair value of the net assets acquired, the excess is reported as _.
goodwill
When a company acquires a business in a business acquisition and the consideration paid is greater than the fair value of the net assets acquired, the excess is reported as:
goodwill
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
When an asset has a significant decline in value and is written down, this is called ______.
impairment
When an asset has a significant decline in value and is written down, this is called ________.
impairment
Goodwill may only be recognized ...
in a business acquisition
Goodwill may only be recognized
in a business acquistition
Under what circumstance is depreciation included in inventory?
in a manufacturing environment
A change in accounting estimate requires a company to account for the change
in the current and future years
Cost of acquiring assets
included as part of assets' acquisition costs
Goodwill
indefinite
One-Step Impairment Test
The fair-value test determines the impairment loss for an indefinite-life intangible asset as the amount by which the carrying value of the asset exceeds the fair value of the asset. There is no recoverability test based on future undiscounted cash flows for indefinite-life intangible assets. Many indefinite-life intangible assets easily meet the recoverability test because their cash flows extend many years into the future.
Depletion
Allocation of the cost of natural resources
Allocation of the cost of an intangible asset
Amortization
Intangible asset
Amortization.
Addition
a new major component that is added to an existing asset
The formula for the sum of the years digits method is the depreciable base times the depreciation rate, which is calculated as book value x depreciation rate per year # years remaining in asset's life / # years of depreciation recognized to date sum of years digits x previous year's dep. expense # years remaining in asset's life / sum of years digits
# years remaining in asset's life / sum of years digits
Polly Corporation purchases land for $200,000. Polly incurs the following costs associated with the land acquisition:
$224,000
Which of the following are characteristics of goodwill?
-indefinite life -subject to impairment testing
What are the issues when accounting for impairments
1. When to recognize the impairment 2. How to measure the impairment loss
The journal entry to record the amortization of an intangible asset would include
Credit to the intangible asset, debit to amortization expense
commercial substance
For nonmonetary exchanges, the assets are measured at fair value except when the transaction lacks ________________________.
contract term
Franchise useful life
Indefinite
Goodwill useful life
20 years
Patents useful life
Match each intangible with its estimated service life.
Patient; 20 years Copyright; Life of creator plus 70 years Trademark; 10 years renewable, possibly indefinite Frenchise; contract term Goodwill; indefinite
Gerhard Inc. recognizes goodwill related to the acquisition of another company. Gerhard should:
Periodically test goodwill for impairment, capitalize the goodwill when company is acquired
U.S. GAAP
Recorded as expense during period incurred
IFRS
Recorded as intangible asset
Goodwill
The excess of book value over implied fair value
Which of the following are classified as natural resources?
Timber tracts, mineral deposits
10 years, renewable indefinitely
Trademark useful life
Under IFRS, when a company chooses the revaluation model as its accounting policy for measuring property, plant, and equipment, which of the following statements is correct?
When an asset is revalued, the entire class of property, plant, and equipment to which the asset belongs must be revalued.
the related asset
When an asset retirement obligation is recorded as a liability, the offsetting journal entry is a debit to
Intangible assets with indefinite lives
Which assets are required to be tested for impairment annually?
Which item qualifies as an additional and should be capitalized? -adding a new computer-aided cutting device to an existing machine -replacing the cutting blades on a machine -performing tasks such as oiling and calibrating to an existing machine
adding a new computer-aided cutting device to an existing machine
MARCS
commonly used for tax reporting
Machines used in manufacturing, computers, printers, vehicles, furniture, and fixtures generally are classified as:
equipment
Which of the following is an intangible asset?
patent copyright trademark
A change in depreciation method is treated as a change in estimate that i achieved by a change in accounting principle, and is accounted for
prospectively in the current and future periods
_____ value is the amount the company expects to receive for the asset at the end of its services life less an anticipated disposal costs.
salvage
The depreciable cost is
the cost of the asset minus the residual value.
A product purchased for $20 is marked up to a $25 sales price. Later, the selling price is decreased to $22. Eventually, the sales price is increased to $24. What is the net markdown amount? -$2 -$3 -$1 -$4
$1, the sales price is $25 and the initial markdown is $3. When the price is increased form $22 to $24, the markdown is reduced to $1
the allocation of the cost of a tangible asset over its service life is referred to as _________________.
depreciation
A product purchased for $10 is listed with a $15 sales price. Later, the selling price is increased to $17. When the product does not sell, the sales price is decreased to $16. What is the net markup amount? -$5 -$6 -$1 -$2
$1, the sales price is $15 and the initial markup is $2. When the price is decreased from $17 to $16, the markup is reduced to $1
The formula for straight line depreciation is
(cost-residual value)/useful life
Huffman Corporation constructed a building at a cost of $30,000,000. Weighted-average accumulated expenditures (WAAE) were $12,000,000, actual interest was $1,200,000, and avoidable interest was $1,600,000. If the salvage value is $2,400,000, and the useful life is 40 years, depreciation expense for the first full year using the straight-line method is $690,000 $705,000 $720,000 $735,000
$720,000
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 the straight-line depreciation for year 1?
$8,000
Crane Corp. purchased equipment on January 1, year 1, for $100000. The equipment had a 10 year life and was depreciated using the double declining balance method. In year 2, Crane changed its depreciation method to the straight line method. The depreciation expense recognized in year 3 is $16000 $0 $10000 $8000
$8000
Spartan Corp. purchases inventory, land, building, and equipment for $540000 from Klein Corp. The values of the assets are as follows... Asset Klein Corp's Book Value Fair Value Inventory $80000 $100000 Land $140000 $180000 Equipment $80000 $120000 Building $200000 $200000 At what amount should Spartan record the inventory? $100000 $80000 $86400 $90000
$90000
The formula to calculate the units-or-production depreciation rate is
(cost-resicual value)/estimate total production
The formula to calculate the units-of-production depreciation rate is:
(cost-residual value)/estimated total production
The formula to calculate the units-of-production depreciation rate is:
(cost-residual value)/estimated total production.
Depreciation method definition: Declining balance method Sum-of-the-years-digits method Straight-line method
-Accelerated method that multiplies a constant percentage rate by the decreasing book value. -Accelerated method that multiplies the depreciable base by a fraction that declines each year. -Method that allocates an equal portion of the depreciable base to each year of the assets service life.
Expenditure Definitions: Improvements Repairs and maintenance Additions Rearrangements
-Expenditures to replace a major component of an asset. -Expenditures to maintain a given level of benefit. -Expenditures to acquire a new major component to an existing asset. -Expenditures to restructure an asset without making any improvements to the asset.
What is required when a material error is discovered in a subsequent accounting period that impacts retained earnings?
-a disclosure note describing the nature of the error and the impact of the correct on net income and earnings per share -previous financial statements are retrospectively restated -a prior period adjustment is made to the beginning balance of retained earnings
Long-term assets are typically classified in one of these two categories: -leasehold improvements -intangible assets -investments -property, plant, and equipment -construction in progress
-intangible assets -property, plant, and equipment
The method of amortization used for intangible assets
-is most commonly straight line -should reflect the pattern of use of the asset
The useful life of an intangible asset may be limited by what provisions?
-regulatory -legal -contractual
copyright
A ____________ 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.
Which of the following items should be considered when choosing an allocation method for a long-term asset? A pattern in which the services are obtained from its use. The probability for an impairment loss The cost of the asset compared to its residual value. A systematic and rational allocation method.
A pattern in which the services are obtained from its use. A systematic and rational allocation method.
purchase price, legal costs to acquire, and required filing fees
A purchased intangible is valued at its original cost. Original cost for acquiring a patent would include
Declining-balance method
Accelerated method that multiples a constant percentage rate times the decreasing book value
Written down
Assets held for use that have significant impairment of value should be?
Match the measurement to each type of impairment.
Assets to be held and used - The excess of book value over the fair value Goodwill - The excess of book value over implied fair value Assets to be sold - The excess of book value over fair value less costs to sell
Indefinite life intangible assets other than goodwill matches
At least annually, or more frequently if indicated
Timing of when to test for impairment with the type of asset: Indefinite life intnagible assets other than goodwill. Assets to be sold. Property to be held and used.
At least annually, or more frequently if indicated. When considered held for sale. When events or circumstances indicate book value may not be recoverable.
Fair value less estimated costs to sell
Consistent with IFRS, biological assets are valued at?
fair
Consistent with US GAAP and IFRS, donated assets generally are valued at ________ value.
Cost less accumulated depreciation or depletion
Consistent with US GAAP, biological assets are valued at?
Margot Company constructs a new building that will replace its current office building. In addition to construction materials and labor, which of the following costs incurred during the construction period should be included in the cost of the new building?
Construction related overhead costs, Interest Costs, Architect fees
Which of the following statements related to PPE is FALSE? Depreciation involves the systematic and rational allocation of the cost of a PPE asset to expense as it is used to help generate revenue for the company. Assets classified as PPE must be both long-term in nature and possess physical substance. Costs incurred after the acquisition of a PPE asset that increase its useful life are capitalized and depreciated over its remaining useful life. Costs of training employees to use a new piece of PPE before it is placed into service are expensed in the period they are incurred.
Costs of training employees to use a new piece of PPE before it is placed into service are expensed in the period they are incurred.
On December 30, 20X1, Rocket Corp. disposed of equipment with a historical cost of $100,000 and accumulated depreciation of $70,000. The equipment was sold for $80,000 cash. The journal entry to record the sale will include which of the following entries?
Debit accumulated depreciation $70,000, Credit to equipment $100,000
On December 30, 20X1, Brighton Corp. disposed of equipment with a historical cost of $150,000 and accumulated depreciation of $60,000. The equipment was sold for $70,000 cash. The journal entry to record the sale will include which of the following entries?
Debit cash $70,000, Credit equipment $150,000, Debit loss on sale of equipment $20,000
Which of the following statements regarding the concept of "amortization" is FALSE? The service life of an asset and its physical life are not always the same. Depreciation is based on the decline in the fair value of the asset. Depreciation, depletion, and amortization all involve the allocation of the cost of a long-lived asset to expense over its useful life. The cost of an asset less its estimated salvage value equals its depreciation base.
Depreciation is based on the decline in the fair value of the asset.
Which of the following statements regarding accounting for goodwill in the U.S. is FALSE? Conceptually, goodwill represents the future economic benefits arising from the other assets acquired in a business combination that are not individually identified and separately recognized. Goodwill is recorded only when an entire business is purchased as goodwill cannot be separated from the business as a whole. Goodwill equals the purchase price less the FMV of the net identifiable assets (as determined by a "purchase audit" or other independent appraisal) acquired in a business combination. Goodwill is a limited life intangible asset that is amortized to expense over a period not to exceed 40 years.
Goodwill is a limited life intangible asset that is amortized to expense over a period not to exceed 40 years.
When there is a net increase in the physical quantity of inventory during a period, the use of _____ results in an additional layer of inventory -FIFO -LIFO -average cost
LIFO
Which of the following long-lived assets would not be depreciated?
Land
Costs that are capitalized with regard to a patent include:
Legal fees of obtaining the patent, incidental costs of obtaining the patent, and costs of successful patent infringement suits.
Which of the following are required when a material error is discovered in a subsequent accounting period that impacts retained earnings?
Previous financial statements are retrospectively restated. A prior period adjustment is made to the beginning balance of retained earnings. A disclosure note describing the nature of the error and the impact of the correction on net income and earnings per share.
What is the accounting treatment for the discovery of a material error in a previous year
Previous years' financial statements are restated.
Depreciation
Property Plant Equipment
Assets to be sold
The excess of book value over fair value less costs to sell
What are the issues when accounting for impairments?
When to recognize the impairment. How to measure the impairment loss.
What are the issues when accounting for impairments?
When to recognize the impairment. How to measure the impairment loss.
Loss on impairment of goodwill is typically reported as
a separate component of operating expense
The total amount of cost to be allocated over an asset's service life is called its allocation
base
The two categories for intangible assets are (Select all that apply.) intangibles with undefined lives intangibles with finite lives intangibles with infinite lives intangibles with indefinite lives
intangibles with finite lives, intangibles with indefinite lives
Of the following costs related to the development of a gold mine asset, which will NOT be a part of its depletion cost. acquisition cost of the gold mine exploration costs to find gold veins within the mine tangible equipment costs associated with machinery used to extract gold present value of the expected future restoration costs necessary to safely shutdown the gold mine after all gold has been extracted
tangible equipment costs associated with machinery used to extract gold
Intangible assets with indefinite useful lives should be....
tested for impairment
Intangible assets with indefinite useful lived should be
tested for impaitment
Amortization
the allocation of the cost of an intangible asset over its useful life
The measurement of an impairment loss in step 2 is the difference between
the assets book value and its fair value
What is an allocation method?
the patters in which the usefulness of an asset is expected to be consumed
Plant assets purchased on long term credit contracts should be accounted at the replacement cost of the plant assets the sum of the expected future payments the future value of the expected future payments the present value of the expected future payments
the present value of the expected future payments
Golden Company has a binding commitment from another company to purchase its copyright the end of the asset's useful life. The agreed upon amount is 150,000. When calculating copyright amortization, Golden Company should utilize a residual value of
150,000
self-constructed asset
A company decided to build a new store rather than purchase an existing building. This type of asset is referred to as a
The cost of a natural resource less its anticipated residual value is called the _____ _____.
Depletion base
A purchased intangible is valued at its original cost. Original cost for acquiring a patent would include (Select all that apply) NPV of future cash flows purchase price legal costs to acquire required filing fees accretion expense
purchase price, legal costs to acquire, required filing fees
Which of the following statements is correct regarding the accuracy of the estimates derived under the gross profit method? -a physical count is necessary to enhance reliability -the company's cost flow assumption is irrelevant -the gross profit ratio must be reliable
the gross profit ratio must be reliable
The lower of cost and net realizable value rule causes income to be reduced in the period when -the inventory is sold -the inventory is purchased -the inventory value declines below cost
the inventory value declines below cost
If a company bases depreciation expense on the life of a machine in hours, and depreciates the machine for the number of hours used during the year, it is using the _____ method of depreciation
units-of-production
Which of the following is an activity based depreciation method?
units-of-production method.
A new major component that is added to an existing asset is considered a ________ and should be capitalized
addition
A new major component that is added to an existing asset is considered a(n) _____ and should be capitalized.
addition
A new major component that is added to an existing asset is considered a(n) ____________ and should be capitalized.
addition
Depletion
alloation of the cost of natural resources
The three factors that should be established to measure cost allocation are:
allocation method, service life, and allocation base.
depreciation
allocation of the cost of a tangible fixed asset
Amortization
allocation of the cost of an intagible asset
amortization
allocation of the cost of an intangible asset
indefinite life intangible assets other than goodwill
at least annually, or more frequently in indicated
The lower of average cost and net realizable value retail inventory method is also referred to as the ______ retail method
conventional
Accounting for land improvements requires that the land improvements are capitalized and then _____ over periods benefited by their use
depreciated
An asset that has no physical substance is calledn a(n) _______________ asset
intangible
what are the 2 steps in the two-step process of measuring impairments?
recoverability test, measurement of the impairment loss
IFRS
recoverable amount
In a basket purchase of assets, the cost must be allocated to the individual assets because
the assets have different useful lives
A(n) _____ is an exclusive right to display a word, slogan, symbol, or emblem that distinctively identifies a company, product, or service
trademark
Probability weighted cash flow and the risk free interest rate
What item(s) are used to determine the present value of cash flows when the expected cash flow approach is used?
assets built for a company's own use and assets built as discrete projects for sale or lease
What items qualify for interest capitalization?
credit-adjusted risk-free rate
When calculating the fair value of an asset retirement obligation, what rate is used to calculate the expected cash flows?
Property to be held and used matches
When events or circumstances indicate book value may not be recoverable
Patent
20 years
Natural Resources
Depletion.
An expenditure that qualifies as an addition should be:
capitalized.
Allocation of the cost of a natural resource is called ...
depletion
Accounting for Impairments: Indefinite-Life Intangible Assets
Asset Grouping: US GAAP stipulates that firms combine indefinite-life intangibles into an asset grouping if they are operated as a single asset and thus are not separable from each other. When to Test for Impairment: (2 options) 1. Assess qualitative factors annually to determine whether it is necessary to perform the quantitative impairment test. Indefinite-life intangibles are tested annually, as opposed to when indicators exists, because they are not amortized and thus are more likely to be overstated. If it is "more likely than not" that the asset is impaired, the firm then proceeds to calculate the fair value. Qualitative factors could include changes in technology and the marketplace such as consumers preferring touch-screen phones, changes in economic factors such as interest rate changes the affect present-value calculations, or an adverse legal ruling restricting a company's activities. 2. Perform an annual impairment test with the same indicators in Exhibit 12.1
Frenchise
contract term
Norbert Inc. purchases a machine for $21,000 with an estimated service life of three years and estimated salvage value of $1,000. The company utilizes the double-declining balance method. Depreciation expense for the last service year is:
$1,333
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
In January of 2017, Yeager Corporation purchased a mine for $5,100,000 with removable ore estimated to be 2,000,000 tons. The property has an estimated salvage value of $300,000. The company incurred $1,500,000 of development costs preparing the mine for production. During 2017, 600,000 tons of ore was extracted and 480,000 tons was sold. What amount of depletion expense(or cost of goods sold) should Yeager report for 2017? $1,512,000 $1,584,000 $1,890,000 $1,980,000
$1,512,000
Smith Company's inventory cost is $100. The expected sales price is $110, estimated selling costs are $6. The normal gross profit ratio is 20% of selling price. The replacement cost of the inventory is $102. Smith Company uses the LIFO inventory method so must use the lower of cost or market approach and this inventory item should be valued at -$100 -$110 -$102 -$104
$100, ceiling is NRV=$110-6=$104. Floor is NRV less normal profit of 20% so $104-22=$82. Replacement cost is $102. Market is the middle of these three value so =$102 compared to cost of $100. Cost is lower so record at cost
Smith Company's inventory cost is $100. The expected sales price is $110, estimated selling costs are $6. The normal gross profit ratio is 20% of selling price. The replacement cost of the inventory is $106. Smith Company uses the LIFO inventory method so must use the lower of cost or market approach and this inventory item should be valued at -$102 -$106 -$104 -$110
$100, ceiling is NRV=$110-6=$104. Floor is NRV less normal profit of 20% so $104-22=$82. Replacement cost is $106. Market is the middle of these three value so =$104 compared to cost of $100. Cost is lower so record at cost
Smith Company's inventory cost is $100. The expected sales price is $110, estimated selling costs are $6. Consistent with the lower of cost and net realizable value approach, this inventory item should be valued at -$104 -$96 -$100 -$110
$100, lower of cost and net realizable value is required. The NRV is $104, but the cost of $100 is lower
Western Company incurred the following costs during the year related to the creation of a new product: salaries of researchers:$100,000 depreciation on R&D equipment:$30,000 utilities at R&D facility:$5,000 patent filing and legal costs:$8,000 payment for services in connection with R&D activities:$10,000 adaptation costs for specific needs of a customer:$2,000 What amount should Western report as research and development expense in its income statement? -$145,000 -$155,000 -$153,000 -$147,000 -$115,000
$145,000, the patent filing and legal costs and the adaption costs are excluded.
Golden Company has a binding commitment from another company to purchase its copyright at the end of the asset's useful life. The agreed upon amount is $150,000. When calculating copyright amortization, Golden Company should utilize the residual value of
$150,000
Berner Inc. Internally developed a patent, which has an estimated vale of $25 million. Related legal, design and registration fees were $155,000. The amount reported on Berner's balance sheet should be:
$155,000
At the beginning of year 1, Looby Corp. purchased equipment for $100,000. The equipment has a residual value of $20,000 and an expected useful life of 10 years. What is accumulated depreciation at the end of year 2 using straight-line depreciation?
$16,000
Angst Company purchased equipment in January of 2008 for $400,000. The equipment was depreciated using the straight-line method over an estimated useful life of 20 years, with no salvage value. At the beginning of 2018 (after 10 years of use), the company paid $50,000 to overhaul the equipment. As a result of the improvement, the company estimated the useful life would be extended by 5 years (or 15 years of use from the date of the overhaul). What should be the depreciation expense be for 2018? $10,000 $13,333 $16,667 $20,000
$16,667
On Jan 1, year 1, Paisley corp. purchases equipment for $200,000. Paisley uses the double-declining-balance method of depreciation. The asset has a 10-year useful life and a $10,000 residual value. What is the book value at the end of year 1?
$160,000 200,000/10 = 20,000 20,000 * 2 = 40,000 $200,000- 40,000 = $160,000
The following information is available for Pokey Company's machinery at December 31, 2014 (following the adjusting journal entry for the 2014 depreciation expense): Historical cost $420,000 Accumulated amortization 126,000 Undisc. expected future cash flows 273,000 Fair value 259,000 What amount would Pokey depreciate in 2015 if the machinery is depreciated using the straight-line method, had a salvage value of zero, and had a remaining useful life of 14 years at the end of 2014? $0 $18,500 $19,500 $21,000
$18,500
South Company acquires North Corporation for $20 million. The book value of North Corporation's net assets is $15 million, while the fair value of the net assets is $18 million. The fair value of the liabilities assumed is $2 million. Goodwill associated with the acquisition is $2 million $4 million $5 million $3 million $0
$2 million ($20 million - $18 million... net assets has already been reduced by the liabilities)
A product purchased for $20 is listed with a $25 sales price. Later, the selling price is marked up to $30. When the product does not sell, the sales price is decreased to $27. What is the net markup amount? -$7 -$2 -$10 -$5
$2, net markup is the difference between the original sales price and any mark up or down, but not below the original selling price. $5 markup - $3 markup cancellation = $2 net markup
Linden Company has three inventory items. Utilizing the lower of cost and net realizable value rule, Linden determines the following: Item A:cost exceeds net realizable value by $20 Item B: cost is $10 lower than net realizable value Item C: cost is $5 lower than net realizable value If Linden applies the rule to individual items, it should recognize a loss of -$5 -$20 -$15
$20, when applying the rule to individual items, only item A has a market value below cost so a $20 loss is recorded
Equipment owned by Company A with a net book value of $30,000 ($70,000 cost and $40,000 in A/D) and a fair value of $40,000 is exchanged for equipment owned by Company B with a fair value of $48,000. Company B also pays Company A $12,000 in cash. Assuming the exchange lacks commercial substance, what amount should the new equipment be recorded by Company A? $40,000 $20,000 $48,000 $28,000
$20,000
On January 1, 2017, Sonic Corp. begins construction on a new warehouse. The construction project qualifies as a self-constructed asset. Sonic had the following expenditures on the project during 2017: January 1, 2017-$100,000 April 1, 2017-$100,000 November 1, 2017-$150,000 What are the average accumulated expenditures used to calculate capitalized interest on the project in 2017? -$350,000 -$175,000 -$200,000 -$116,667
$200,000 Jan. 1, 2017-$100,000 x 12/12=$100,000 April 1, 2017-$100,000 x 9/12=$75,000 Nov 1, 2017-$150,000 x 2/12=$25,000 wtd avd exp=$200,000
On January 1, 2017, Sonic Corp. begins construction on a new warehouse. The construction project qualifies as a self-constructed asset. Sonic had the following expenditures on the project during 2017: January 1, 2017 $100000 April 1, 2017 $100000 November 1, 2017 $150000 What are the average accumulated expenditures used to calculate capitalized interest on the project in 2017? $175000 $116667 $200000 $350000
$200000 January 1, 2017: $100000 x 12/12 = $100000 April 1, 2017: $100000 x 9/12 = $75000 November 1, 2017: $150000 x 2/12 = $25000 Weighted average expense: $200000
Western Company recently lost its entire inventory in an earthquake. The following information is available from its accounting records: Beginning inventory: $5,000; purchases: $18,000; net sales: $40,000. The company's average gross profit percentage is 40%. Using the gross profit method, a reasonable estimate of cost of goods for this past period would be -$23,000 -$24,000 -$18,000 -$16,000
$24,000 $40,000 x(1-40%)=$24,000
On January 1, year 1, London Corp. purchases equipment for $400000. The equipment has a 5 year life and a $50000 residual value. London uses the double declining balance method of depreciation. What is the book value at the end of year 1? $190000 $240000 $350000 $200000
$240000
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
Northern Company incurred the following costs during the year related to the creation of a new product: salaries:$200,000 depreciation on R&D equipment:$50,000 quality control during commercial production:$10,000 patent filing and legal costs:$8,000 payment for services in connection with R&D activities:$20,000 testing of preproduction prototypes and models:$5,000 What amount should Northern report as research and development expense in its income statement? -$273,000 -$293,000 -$275,000 -$260,000 -$285,000
$275,000, the patent filing legal costs and the quality control during commercial production are excluded
Northern Company incurred the following costs during the year related to the creation of a new product: Salaries $200000 Depreciation on R&D equipment $50000 Quality control during commercial production $10000 Patent filing and legal costs $8000 Payment for services in connection with R&D $20000 Testing of preproduction prototypes & models $5000 What amount should Northern report as R&D expense in its income statement? $293000 $275000 $273000 $260000 $285000
$275000 (the patent filing and legal costs and the quality control during commercial production are excluded)
Monet Company purchased a patent with an estimated service life of ten years for $200,000 After three years of amortizing the patent using the straight-line method, Monet estimates that the remaining useful life is only 5 years. Depreciation expense for the fourth year is:
$28,000
On February 1, 2014, Nelson Corporation purchased a parcel of land as a factory site for $275,000 (which included $5,000 of legal fees for the title investigation and purchase contract). An old building on the property was demolished, and construction began on a new building which was completed on November 1, 2014. Costs incurred during this period are listed below: Demolition of old building $ 20,000 Architect's fees for new building 35,000 Construction costs for new building 1,330,000 Nelson should record the cost of the land and new building, respectively, as $295,000 and $1,365,000 $300,000 and $1,370,000 $305,000 and $1,365,000 $310,000 and $1,350,000
$295,000 and $1,365,000
A product purchased for $40 is marked up to a $50 sales price. Later, the selling price is decreased to $45. Eventually, the sales price is increased to $47. What is the net markdown amount? -$7 -$5 -$3 -$10
$3
On January 1, year 1, Green Tractor Corp. purchased equipment for $100,000. The equipment has a useful life of 4 years, and the residual value of $20,000. Using the sum-of-the-years-digits method, what is the depreciation expense for year 1?
$32,000
On Jan 1, year 1, Green Tractor corp. purchased equipment for $100,000. The equipment has a useful life of 4 years, and a residual value of $20,000. Using the sum-of-the-years-digits method, what is the depreciation expense for year 1?
$32,000 ($100,000-20,000)/(4/10) = $32,000 The denominator in SYD is 1 + 2 + 3 + 4 = 10
On February 1, 2017, Walker Company purchased a parcel of land as a factory site for $300,000. An old building on the property was demolished, and construction began on a new building which was completed on November 1, 2017. Additional costs incurred during this period are listed below: Demolition of old building$ 25,000 Proceeds received from salvaged materials 5,000 Closing fees (legal and other) for land purchase contract 5,000 Architect's fees for design of new building 20,000 Building construction costs 1,100,000 Parking lot, fences, and street lights 50,000 Trees, shrubs, and pond 70,000 Walker should record the cost of the land, building, and land improvements as follows: $320,000 $1,110,000 $135,000 $395,000 $1,120,000 $50,000 $325,000 $1,190,000 $50,000 $395,000 $1,170,000 $0
$395,000 $1,120,000 $50,000
JM Mining has a coal mine with a depletion base of $1,000,000. It is estimated that 500,000 tons will be extracted over the mine's useful life. During year 1, JM extracted 20,000 tons of coal. The depletion expense for year 1 is
$40,000
On January 1, year 1, LaRose Corp. purchases equipment for $100,000. LaRose uses the double-declining-balance method of depreciation. The asset has a 5-year useful life and a $10,000 residual value. What is depreciation expense for year 1? -$36,000 -$40,000 -$50,000 -$45,000
$40,000
Archer Company owned an indefinite life franchise license with the following information at December 31, 2017: Historical cost $260,000 Undisc. expected future cash flows 270,000 Fair value (disc. expected future cash flows) 220,000 What amount would Archer report as an impairment gain/loss at December 31, 2017? $0 $10,000 gain $40,000 loss $50,000 loss
$40,000 loss
Duffs Corporation constructed a building at a cost of $20,000,000. Weighted-average accumulated expenditures were $6,500,000, actual interest was $400,000, and avoidable interest was $700,000. If the salvage value is $1,600,000, and the useful life is 40 years, depreciation expense for the first full year using the straight-line method is $460,000 $470,000 $477,500 $632,500
$470,000
Gould Corporation purchased Klein Company for $5,200,000 cash on January 1, 2017. The book value of Klein's net assets, as reflected on its December 31, 2016 balance sheet was $4,350,000. However, an analysis by an independent actuarial service on December 31, 2016 indicated that the fair value of Klein's PP&E exceeded book value by $225,000, and the fair value of an unrecorded internally generated trademark was $145,000. How much goodwill should be recognized by Gould when recording the purchase of Klein? $0 $370,000 $480,000 $850,000
$480,000
On January 1, year 1, Roark Corp. purchased equipment for $120,000. The equipment has a residual value of $20,000, and has a life of 1,000,000 hours. Roark uses the units-of-production method of depreciation. In year 1, Roark used the machine 30,000 hours and 50,000 hours in year 2. What is the depreciation expense for year 2?
$5,000
On October 1, year 1, Kirby Corp. purchased equipment for $100,000. The equipment has an expected service life of 5 years with no residual value. Kirby uses the straight-line method of depreciation. The partial year depreciation for year 1 is:
$5,000
On Jan 1, Year 1, Roark Corp. purchased equipment for $120,000. The equipment has a residual value of $20,000, and has a life of 1,000,000 hours. Roark uses the units-of-production method of depreciation. In year 1, Roark used the machine 30,000 hours, and in year 2, Roark used the machine 50,000 hours. What is the depreciation expense for year 2?
$5,000 $120,000-20,000 50000/1,000,000 = .05 $100,000 * .05 = $5,000
On October 1, year 1, Kirby Corp. purchased equipment for $100,000. The equipment has a useful life of 5 years with no residual value. Kirby uses the straight-line method of depreciation. The partial year depreciation for year 1 is
$5,000 Rationale: $100,000/5 years = $20,000 per year x 1/4 year = $5,000 depreciation expense in year 1.
On January 1, year 1, Glasser Corp. purchased equipment for $120,000. the equipment has a useful life of 3 years, and a residual value of $20,000. Using the sum-of-the-years'-digits method, what is the depreciation expense for year 1? -$40,000 -$20,000 -$60,000 -$50,000
$50,000
On December 30, 20X1, Rocket Corp. disposed of equipment with a historical cost of $100,000 and accumulated depreciation of $70,000. The equipment was sold for $80,000 cash. What is the gain or loss on disposal of the equipment?
$50,000 gain
On January 1, 2015, Twilight Corporation acquired World Products for $6,400,000, and recorded goodwill of $1,200,000 as a result of the purchase. At December 31, 2018, the World Products Division had a fair value of $5,440,000. The net identifiable assets of the Division (excluding goodwill) had a fair value of $4,740,000 at that time. What amount of loss on impairment of goodwill should Twilight record in 2018? $0 $460,000 $500,000 $960,000
$500,000
On January 1, 2017, Plaid Corporation begins construction on a new warehouse. The construction project qualifies as a self-constructed asset. Plaid had the following expenditures on the project during 2017: January 1, 2017-$200,000 July 1, 2017-$600,000 December 1, 2017-$120,000 What are the average accumulated expenditures used to calculate capitalized interest on the project in 2017? -$460,000 -$310,000 -$420,000 -$510,000
$510,000 Jan. 1, 2017-$200,000 x 12/12=$200,000 July 1, 2017-$600,000 x 6/12=$300,000 Dec 1, 2017-$120,000 x 1/12=$510,000 wtd avd exp=$510,000
On January 1, 2017, Plaid Corporation begins construction on a new warehouse. The construction project qualifies as a self-constructed asset. Plaid had the following expenditures on the project during 2017: January 1, 2017 $200000 July 1, 2017 $600000 December 1, 2017 $120000 What are the average accumulated expenditures used to calculate capitalized interest on the project in 2017? $310000 $510000 $420000 $460000
$510000
At the beginning of 2017, Western Inc. acquired a building for $10.6 million. Depreciation for 2017 and 2018 was calculated using the straight line method, a 25-year useful life, and a $2.6 million residual value. In 2019, the estimates of useful life and residual value were changed to 20 years (total) and $660,000, respectively. What is the depreciation on the building for 2019?
$516,667
At the beginning of 2017, Western Inc. acquired a building for $10.6 million. Depreciation for 2017 and 2018 was calculated using the straight-line method, a 25 year useful life, and a $2.6 million residual value. In 2019, the estimates of useful life and residual value were changed to 20 years (total) and $660000. What is depreciation on the building for 2019? $465000 $497000 $516667 $372222 $552222
$516667 ($10.6 million - $2.6 million)/25 years = $320000 initial depreciation per year x 2 years = $640000. ($10.6 million - $640000 - $660000) / 18 remaining years
On January 1, year 1, Mark Corp. purchases equipment for $300,000. The equipment has a 10-year service life and a $50,000 residual value. Mark uses the double-declining-balance method of depreciation. What is the depreciation expense for year 1?
$60,000
Warren Company's records reveal the following information regarding its inventory: Beginning inventory was $100,000 at cost and 160,000 at retail. Purchases during the year were $300,000 at cost and $500,000 at retail. Net markups were $10,000 and net markdowns, $20,000. Assuming the retail inventory method is used to approximate average costs, what is the amount of goods available for sale at retail? -$400,000 -$670,000 -$650,000 -$660,000
$650,000 $160,000+$500,000+$10,000-$20,000=$650,000
Rock Company purchased manufacturing equipment for $500,000 on April 1, 2012. The estimated salvage value is $50,000, and the estimated total useful life is 5 years. The straight-line method is used for depreciation. What is the gain or loss on sale if the asset was sold for $215,000 on May 1, 2015? $75,000 gain $15,000 gain $7,500 gain $7,500 loss
$7,500 loss
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
On January 1, year 1, Glasser Crop. purchased equipment for $120,000. The equipment has a useful life of 3 years, and a residual value of $20,000. Using the sum-of-the-years'-digits method, what is the book value at the end of year 1? -$50,000 -$100,000 -$70,000 -$110,000
$70,000 (120,000-20,000)x(3/6)=50,000. The denominator in SYD is 1+2+3=6. Book value is cost-accumulated depreciation so 120,000-50,000
Smith Company's inventory cost is $100. The expected sales price is $110, estimated selling costs are $6. The normal gross profit ratio is 20% of selling price. The replacement cost of the inventory is $95. Smith Company uses the LIFO inventory method so must use the lower of cost or market approach and this inventory item should be valued at -$104 -$95 -$100 -$110
$95, ceiling is NRV=$110-6=$104. Floor is NRV less normal profit of 20% so $104-22=$82. Replacement cost is $95. Market is the middle of these three value so =$95 compared to cost of $100. Cost is lower so record at cost
Day Company purchased a patent on January 1, 2017 for $640,000. On that date, the patent had a remaining legal life of 19 years and a remaining useful life of 10 years. On January 1, 2018, Day successfully defended the patent at a cost of $288,000. What amount of amortization expense would Day record for the year ended December 31, 2018? $48,000 $72,000 $77,000 $96,000
$96,000
Feather Company's inventory is recorded at its historical cost of $100,000. The replacement cost currently is $95,000; estimated selling price $102,000; estimated selling cost is $5,000; normal profit is $10,000. The estimated net realizable value of the inventory is -$100,000 -$97,000 -$87,000 -$102,000
$97,000
Jones Company's inventory cost is $100. The expected sales price is $110, estimated selling costs are $12. Consistent with the lower of cost and net realizable value approach, this inventory item should be valued at -$100 -$98 -$88 -$110
$98
Jones Company's inventory cost is $100. The expected sales price is $110. The company estimates sales cost as 10% of the sales price. Consistent with the lower of cost and net realizable value approach, this inventory item should be valued at -$121 -$99 -$110 -$90 -$100
$99, lower of cost and net realizable value is required. The NRV is $110-11=99 and is lower than cost
The formula for straight-line depreciation is
(cost-residual value)/service life
What is true regarding property, plant, and equipment or intangibles held for sale?
- if the fair value less costs to sell is below book value, an impairment loss is recognized -the assets held for sale are not depreciated or amortized
An impairment loss related to indefinite-life intangible assets is measured as the difference between book value and another measure. Match the correct measure with the appropiate accounting standard.
-------------------
Identify the corresponding account treatment of the costs of successfully defending intangible rights under IFRS and U.S. GAAP
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Match each depreciation method to its definition
-------------------
Match each term with its definition.
----------------------
match the timing of when to test for impairment with the type of asset
----------------------
Smith Company has several current product lines. In the past, the company applied the lower of cost and net realizable value method to individual inventory items. The company wants to make the process less time consuming and is exploring alternatives. What alternatives does the company have? -Smith could choose not to apply the lower of cost and net realizable value rule and report inventory at historical cost -Smith could apply the lower of cost and net realizable value rule to each product line -Smith could apply the lower of cost and net realizable rule to its entire inventory
-Smith could apply the lower of cost and net realizable value rule to each product line -Smith could apply the lower of cost and net realizable rule to its entire inventory
A retirement or abandonment of an asset is different from a sale of an asset because
-a loss must be recognized for the remaining book value -no consideration is received
Which of the following items should be considered when choosing an allocation method for a long-term asset? -a pattern in which the services are obtained from its use -a systematic and rational allocation method -the probability for an impairment loss -the cost of the asset compared to its residual value
-a pattern in which the services are obtained from its use -a systematic and rational allocation method
Which of the following are included in research and development costs? -allocation of overhead for lab facilities -equipment in the lab -sales commissions -labor costs of research personnel -administrative expenses
-allocation of overhead for lab facilities -equipment in the lab -labor costs of research personnel
Raphael Corp. incorrectly expensed a major addition to equipment when the company should have capitalized the expenditure. What are the financial statement effects in the year the error was made?
-assets are understated -net income in understated
Advantages of the retail inventory method include that it can -be adjusted to approximate the different cost flow assumptions -eliminate the need for an annual physical inventory at the end of the year -be used to estimate inventory lost, stolen, or destroyed
-be adjusted to approximate the different cost flow assumption -be used to estimate inventory lost, stolen, or destroyed
What is considered a change in estimate that would be treated on a prospective basis in the current and future periods?
-change in the useful life of an asset -increasing the residual value of an asset
Mining Ventures purchases land and the rights to explore for $100,000. Exploration costs are $20,000, and development costs are $30,000. The estimated cost of restoration, calculated as the present value of expected cash outflows, is $50,000. The journal entry to record the acquisition of the mine will include which of the following entries? -credit to cash $200,000 -credit to asset retirement liability of $50,000 -debit to mining assets of $200,000 -credit to cash $150,000 -debit to asset retirement obligation of $150,000
-credit to cash $200,000 -credit to asset retirement liability of $50,000 -debit to mining assets of $200,000 -credit to cash $150,000
The retail inventory method tends to be more accurate than the gross profit method because it relies on the -current gross profit ratio -historic gross profit ratio -current relationship between cost and selling prices -historic relationship between cost and selling prices
-current relationship between cost and selling prices
Western Company determines the cost of its inventory is $410,000 and net realizable value is $400,000. Western Company should -credit cost of goods sold $10,000 -debit cost of goods sold $10,000 -not record a journal entry -credit inventory $10,000 -debit inventory $10,000
-debit cost of goods sold $10,000 -credit inventory $10,000
Which of the following would be included in a journal entry to record the allocation of the cost of a natural resource for the period?
-debit depletion expense -credit the natural resource
When the two-step process is used for impairment losses, the _____ estimates of cash flows are used in step 1 to determine whether an impairment loss is indicated, but the _____ estimates of cash flows are used to determine the amount of loss.
-undiscounted -discounted
A company acquires equipment by signing an interest-bearing not payable for $20,000. The interest rate is realistic so the company will record -debit machine for an amount less than $20,000 -debit machine $20,000 -debit discount on note payable -credit note payable $20,000
-debit machine $20,000 -credit note payable $20,000
On December 30, 2017, Glaze Corp. disposed of equipment with a historical cost of $50,000 and accumulated depreciation of $30,000. The equipment was sold for $45,000. The journal entry to record the sale would include
-debit to accumulated depreciation of 30,000 -debit to cash of 45,000 -credit to gain on sale of asset of 25,000 -credit to equipment of 50,000
The journal entry to record the amortization of an intangible asset would include a
-debit to amortization expense -credit to the intangible asset
Marston acquired assets for $100,000. At the end of year 3, the assets had accumulated depreciation of $40,000. An impairment loss was indicated, and the fair value of the assets was $48,000. The journal entry to record the impairment loss will include
-debit to loss on impairment of 12,000 -debit to accumulated depreciation of 40,000 -credit to assets of 52,000
What are the accelerated methods of depreciation?
-declining balance method -sum of the years digits method -double declining balance method
What are the cost components for self-constructed assets? -direct material -operating expenses -direct labor -manufacturing overhead
-direct material -direct labor -manufacturing overhead
Emil Company expects that its asset will be more useful during early years of its life than during later years. In addition, the company estimates that repair costs will increase over time. Which method(s) may help equalize total expenses recognized over the service life of this asset?
-double-declining balance -sum-of-the-years digits
The retail inventory method can be modified to estimate which of the following using FIFO, LIFO, or average cost? -net income -operating income -ending inventory -cost of goods cold
-ending inventory -cost of goods cold
Which of the following are estimated when using the gross profit method? -purchases -beginning inventory -ending inventory -cost of goods sold
-ending inventory -cost of goods sold
Under what circumstances are accelerated depreciation methods most appropriate?
-for an asset that has high repair and maintenance costs later in life -for an asset that will be used extensively in the earlier years of its life
Under what circumstances are accelerated depreciation methods most appropriate? -for an asset that has high repair and maintenance costs early in life -for an asset that will be used extensively in earlier years of its life -for an asset used evenly throughout its life and the life is measured in years -for an asset that has high repair and maintenance costs later in life
-for an asset that will be used extensively in earlier years of its life -for an asset that has high repair and maintenance costs later in life
For financial reporting, the lower of cost or net realizable value approach can be applied to -groups of inventory items -only to inventory purchased during the current year -individual inventory items -the entire inventory
-groups of inventory items -individual inventory items -the entire inventory
For financial reporting of companies using LIFO, the lower of cost or market approach can be applied to -groups of inventory items -only to inventory purchased during the current year -the entire inventory -individual inventory items
-groups of inventory items -the entire inventory -individual inventory items
A subsequent expenditure for an asset increases the future benefits of the asset if it -increases the operating efficiency of the asset -increases the quality of the goods or services produced by the asset -repairs and maintains the asset in working order -extends the asset's useful life
-increases the operating efficiency of the asset -increases the quality of the goods or services produced by the asset -extends the asset's useful life
The retail inventory method -is used to test the overall reasonableness of physical counts -is used in budgeting and forecasting -is used to avoid an annual physical count of inventory -is used to generate information for interim financial statement
-is used to test the overall reasonableness of physical counts -is used in budgeting and forecasting -is used to generate information for interim financial statement
If an impairment loss is recognized for an intangible asset with a finite life, which of the following occurs? -later recovery of the impairment is prohibited -a recovery can be recognized up to the initial amount of the impairment -the written-down book value is the new cost basis for future amoritzation -future impairment losses are prohibited
-later recovery of the impairment is prohibited -the written-down book value is the new cost basis for future amortization
Which method can be applied to individual inventory items, categories of inventory, or the entire inventory? -lower of cost or market only -lower of cost and net realizable value only -lower of cost or market and lower of cost and net realizable value
-lower of cost or market and lower of cost and net realizable value
Property, plant, and equipment typically include -machinery -patents -goodwill -cars and trucks -furniture
-machinery -cars and trucks -furniture
Which of the following are included in research and development costs? -materials used in the lab -general administrative expenses for the company -allocation of indirect costs related to research -salaries of researchers
-materials used in the lab -allocation of indirect costs related to research -salaries of researchers
Which of the following information is needed to utilize the gross profit method? -net sales -beginning inventory -estimated gross profit ratio -purchases -cost of goods sold
-net sales -beginning inventory -estimated gross profit ratio -purchases
When group depreciation is used, and an asset is old, what occurs?
-no gain or loss is recorded -the assets cost is removed from the books
Under what circumstances is depreciation included in inventory?
-when manufactured goods are not sold at the end of the period -in a manufacturing environment
What are the issues when accounting for impairments?
-when to recognize the impairment -how to measure the impairment loss
Omar Company uses a periodic inventory system and erroneously overstates ending inventory by $10,000 for the year ended December 31, 2017. Ignoring the tax effect, the effect on the 2017 financial statement includes an -understatement of net income by $10,000 -overstatement of net income by $10,000 -understatement of cost of goods sold by $10,000 -overstatement of cost of goods sold by $10,000
-overstatement of net income by $10,000 -understatement of cost of goods sold by $10,000
Which assets are not required to be tested for impairment annually, but only if events and circumstances indicate the book value may not be recoverable?
-property, plant and equipment -intangible assets with finite lives
Which of the following items should be capitalized in the cost of equipment? -purchase price -repair costs for first year of operations -installation and testing of equipment -insurance on equipment during shipping -freight to deliver the equipment to its location
-purchase price -installation and testing of equipment -insurance on equipment during shipping -freight to deliver the equipment to its location
Which of the following are expenditures for assets subsequent to acquisition?
-repairs and maintenance -additions -improvements
The three factors that should be established to measure cost allocation are
-service life -allocation method -allocation base
In applying the lower of cost or market rule, market value -should not be less than net realizable value less normal profit margin -must be greater than the inventory's current replacement cost -must be less than the inventory's current replacement cost -should not be greater than net realizable value
-should not be less than net realizable value less normal profit margin -should not be greater than net realizable value
Which of the following are characteristics of goodwill? -amortized periodically -subject to impairment testing -indefinite life -finite life
-subject to impairment testing -indefinite life
Emil Company expects that its asset will be more useful during early years of its life than during later years. In addition, the company estimates that repair costs will increase over time. Which method(s) may help equalize total expenses recognized over the service life of this asset? -straight-line -sum-of-the-years digits -retirement -declining balance
-sum-of-the-years digits -declining balance
Emil Company expects that its assets will be more useful during early years of its life than during late years. In addition, the company estimates that repair costs will increase over time. Which method(s) may help equalize total expenses recognized over the service life of this asset? -straight-line -sum-of-the-years digits -retirement -declining balance
-sum-of-the-years digits -declining balance
The measurement of an impairment loss in step 2 is the difference between
-the asset's book value and its fair value
The two approaches for a systematic and rational allocation of the cost of an asset over its useful life are -cost recovery methods -time-based methods -percentage-of-completion methods -activity-based methods
-time-based methods -activity-based methods
Larry purchases land to be used for a new corporate headquarters. Which of the following are capitalized in the cost of land? -title insurance -grading the land -current year's property taxes -legal fees to secure title -costs to remove an old building
-title insurance -grading the land -legal fees to secure title -costs to remove an old building
Which of the following items are intangible assets? -trademark -land -equipment -patent -copyright
-trademark -patent -copyright
GOODWILL
What asset cannot be directly associated with any specific identifiable right and is not separable from the company as a whole?
On September 3, 2021, the Robers Company exchanged equipment with Phifer Corporation. The facts of the exchange are as follows: Robers' Asset Phifer's Asset Original cost $ 205,000 $ 225,000 Accumulated depreciation 123,000 131,000 Fair value 100,500 78,500 To equalize the exchange, Phifer paid Robers $22,000 in cash. Required: Record the exchange for both Robers and Phifer. The exchange has commercial substance for both companies.
1 1 Cash D22,000 Equipment-new D78,500 Accumulated depreciation D123,000 Equipment-old C205,000 Gain on exchange of assets C18,500 2 2 Equipment-new D100,500 Accumulated depreciation D131,000 Loss on exchange of assets D15,500 Cash C22,000 Equipment-old C225,000 Explanation Robers Company: Equipment―new ($100,500 FV given − $22,000 cash received) = $78,500 Gain on exchange of assets ($100,500 FV − $82,000 BV) = $18,500 Phifer Company: Equipment―new ($78,500 FV given + $22,000 cash paid) = $100,500 Loss on exchange of assets ($78,500 FV − $94,000 BV) = $15,500
Oaktree Company purchased new equipment and made the following expenditures: Purchase price $ 55,000 Sales tax 3,200 Freight charges for shipment of equipment 800 Insurance on the equipment for the first year 1,000 Installation of equipment 2,000 The equipment, including sales tax, was purchased on open account, with payment due in 30 days. The other expenditures listed above were paid in cash. Required: Prepare the necessary journal entries to record the above expenditures
1 1 Equipment D61,000 Accounts payable C58,200 Cash 2,800 2 2 Prepaid insuranceD 1,000 Cash C1,000 Explanation Equipment ($55,000 + $3,200 + $800 + $2,000) = $61,000
Profit margin multiple by asset turnover equals return on:
assets
Consider each of the transactions below. All of the expenditures were made in cash. The Edison Company spent $26,000 during the year for experimental purposes in connection with the development of a new product. In April, the Marshall Company lost a patent infringement suit and paid the plaintiff $9,000. In March, the Cleanway Laundromat bought equipment. Cleanway paid $20,000 down and signed a noninterest-bearing note requiring the payment of $25,000 in nine months. The cash price for this equipment was $39,000. On June 1, the Jamsen Corporation installed a sprinkler system throughout the building at a cost of $42,000. The Mayer Company, plaintiff, paid $26,000 in legal fees in November, in connection with a successful infringement suit on its patent. The Johnson Company traded its old equipment for new equipment. The new equipment has a fair value of $14,200. The old equipment had an original cost of $14,400 and a book value of $7,200 at the time of the trade. Johnson also paid cash of $10,800 as part of the trade. The exchange has commercial substance. Required: Prepare journal entries to record each of the above transactions.
1 1 Research and development expense D26,000 Cash 2C6,000 2 2 Legal fees expenseD 9,000 Cash C9,000 3 3 Equipment D39,000 Discount on notes payable D6,000 Cash C20,000 Notes payable C25,000 4 4 Building (sprinkler system) D42,000 Cash C42,000 5 5 Patent D26,000 Cash C26,000 Equipment-new 14,200 Accumulated depreciation 7,200 Loss on exchange of assets 3,800 Equipment-old 14,400 Cash 10,800 Explanation 6. Equipment-new ($3,400 FV given* + $10,800 cash paid) = $14,200 Accumulated depreciation-machine ($14,400 cost - $7,200 BV) = $7,200 Loss on exchange of assets ($3,400 FV* - $7,200 BV) = $3,800 Equipment—old (remove account balance) = $14,400 *Fair value of old equipment (Fair value of new equipment - Cash given): $14,200 - $10,800 = $3,400
Tristar Production Company began operations on September 1, 2021. Listed below are a number of transactions that occurred during its first four months of operations. (FV of $1, PV of $1, FVA of $1, PVA of $1, FVAD of $1 and PVAD of $1) (Use appropriate factor(s) from the tables provided.) On September 1, the company acquired five acres of land with a building that will be used as a warehouse. Tristar paid $270,000 in cash for the property. According to appraisals, the land had a fair value of $185,600 and the building had a fair value of $104,400. On September 1, Tristar signed a $57,000 noninterest-bearing note to purchase equipment. The $57,000 payment is due on September 1, 2022. Assume that 9% is a reasonable interest rate. On September 15, a truck was donated to the corporation. Similar trucks were selling for $4,200. On September 18, the company paid its lawyer $6,000 for organizing the corporation. On October 10, Tristar purchased maintenance equipment for cash. The purchase price was $32,000 and $1,350 in freight charges also were paid. On December 2, Tristar acquired various items of office equipment. The company was short of cash and could not pay the $7,200 normal cash price. The supplier agreed to accept 200 shares of the company's no-par common stock in exchange for the equipment. The fair value of the stock is not readily determinable. On December 10, the company acquired a tract of land at a cost of $37,000. It paid $6,000 down and signed a 11% note with both principal and interest due in one year. Eleven percent is an appropriate rate of interest for this note.
1 September 01 Land D172,800 Building D97,200 Cash 2C70,000 2 September 01 Equipment +/-D 52,294 Discount on notes payable +/-D 24,706 Notes payable C57,000 3 September 15 Truck D4,200 Revenue-donation of asset C4,200 4 September 18 Organization cost expense D6,000 Cash C6,000 5 October 10 Maintenance equipment D33,350 Cash C33,350 6 December 02 Office equipment D7,200 Common stock C7,200 7 December 10 Land D37,000 Cash D6,000 Notes payable C31,000 Explanation 1. Asset Fair Value Percent of Total Fair Value Initial Valuation (Percent × $270,000) Land $ 185,600 64.00 % $ 172,800 Building 104,400 36.00 97,200 Totals $ 290,000 100.00 % $ 270,000 2. Present value of note payments: PV = $57,000 (0.91743*) = $52,294 *Present value of $1: n = 1, i = 9% (from PV of $1) 5. Equipment = $32,000 + $1,350 = $33,350
The two categories for intagible assets are
1) Intagibles with finite lives 2) Intagibles with indefinite lives
Larry purchases land to be used for a new corporate headquarters. Which of the following items are capitalized in the cost of land?
Cost to remove an old building, Title insurance, Legal fees to secure title, grading the land
The three factors that should be established to measure cost allocation are
1. allocation base 2. service life 3. allocation method
Place the two steps of measuring impairments in the correct order.
1. recoverability test 2. measurement of the impairment loss
Trademark regusters with the U.S. Patent and Trademark Office protects the trademark from use by others for a period of
10 years
Trademark
10 years renewable, possibly indefinite
On October 1, year 1, Johnson Corp. purchased equipment for $100,000. The equipment has a useful life of 5 years with no residual value. Johnson uses the double-declining-balance method of depreciation. The partial year depreciation for year 1 is
10,000 Rationale: The depreciation rate is 1/5 x 2 = 40%. $100,000 x 40% x 1/4 = $10,000 depreciation expense in year 1.
On January 1, year 1, green tractor Corp. purchased equipment for 100,000. The equipment has a useful life of 4 years, and a residual value of 20,000. Using the sum-of-the-years'-digits method, what is the depreciation expense for year 1?
100,000-20,000/4/10=32,000 the denominator is SYD is 1+2+3+4=10
Gordon Company has the following information for year 2: What is Gordon's return on assets for year 2?
11.4%
Sherman Corporation purchases land for $100,000. Sherman incurs the following costs associated with the land acquisition:
114,000
double declining balance begin of year book value x 200%/10 one hundred fifty percent declining balance 150/10
123,000 * 20% * 3/12 = 6150 123,000-6150= 116,850 * 20% * 12/12=23,370 123,000 * 15% * 3/12=4613 118,387 * 15%* 12/12= 17,758
Jan purchases a piece of land and immediately tears down an old building. The proceeds from selling the salvaged materials should be recognized as:
A reduction in the cost of the purchased land
On January 1, 2021, the Mason Manufacturing Company began construction of a building to be used as its office headquarters. The building was completed on September 30, 2022. Expenditures on the project were as follows: January 1, 2021 $ 1,200,000 March 1, 2021 900,000 June 30, 2021 1,100,000 October 1, 2021 900,000 January 31, 2022 315,000 April 30, 2022 648,000 August 31, 2022 945,000 On January 1, 2021, the company obtained a $3,500,000 construction loan with a 12% interest rate. The loan was outstanding all of 2021 and 2022. The company's other interest-bearing debt included two long-term notes of $3,000,000 and $7,000,000 with interest rates of 8% and 10%, respectively. Both notes were outstanding during all of 2021 and 2022. Interest is paid annually on all debt. The company's fiscal year-end is December 31. Required: 1. Calculate the amount of interest that Mason should capitalize in 2021 and 2022 using the specific interest method. 2. What is the total cost of the building? 3. Calculate the amount of interest expense that will appear in the 2021 and 2022 income statements.
2021 2022 Interest capitalized $327,000 $432,876 Interest expense $1,033,000 $927,124 Total cost of building $6,767,876 Explanation 1. 2021: Expenditures for 2021: January 1, 2021 $ 1,200,000 × 12/12 = $ 1,200,000 March 1, 2021 900,000 × 10/12 = 750,000 June 30, 2021 1,100,000 × 6/12 = 550,000 October 1, 2021 900,000 × 3/12 = 225,000 Accumulated expenditures (before interest) $ 4,100,000 Average accumulated expenditures − $ 2,725,000 Interest capitalized: $2,725,000 × 12% = $327,000 = Interest capitalized in 2021 2022: January 1, 2022 ($4,100,000 + $327,000) $ 4,427,000 × 9/9 = $ 4,427,000 January 31, 2022 315,000 × 8/9 = 280,000 April 30, 2022 648,000 × 5/9 = 360,000 August 31, 2022 945,000 × 1/9 = 105,000 Accumulated expenditures (before interest) $ 6,335,000 Average accumulated expenditures − $ 5,172,000 Interest capitalized: $ 5,172,000 - 3,500,000 (construction loan) × 12.00 % × 9/12 = $ 315,000 1,672,000 × 9.40 %* × 9/12 = 117,876 Interest capitalized in 2022 $ 432,876 *Weighted-average rate of all other debt: $ 3,000,000 × 8 % = $ 240,000 7,000,000 × 10 % = 700,000 $ 10,000,000 $ 940,000 $940,000 = 9.40% $10,000,000 2. Accumulated expenditures 9/30/2022 before interest capitalization (above) $ 6,335,000 2022 interest capitalized (above) 432,876 Total cost of building $ 6,767,876 3. 2021 $ 3,500,000 × 12 % = $ 420,000 3,000,000 × 8 % = 240,000 7,000,000 × 10 % = 700,000 Total interest incurred 1,360,000 Less: Interest capitalized (327,000 ) 2021 interest expense $ 1,033,000 2022 Total interest incurred $ 1,360,000 Less: Interest capitalized (432,876 ) 2022 interest expense $ 927,124
At the beginning of year 1, Kuhn Corp. purchases equipment for 22,000. The equipment has a residual value of 2,000 and an expected useful life of 5 years. What is the straight-line depreciation for year 3?
22000-2000/5=4,000 per year
Linden has the following information. Assuming that the company has no interest or tax expense, what is Linden's profit margin?
30%
A subsequent expenditure for an asset increases the future benefits of the asset if it
A subsequent expenditure for an asset increases the future benefits of the asset if it
TR Mining has a mineral mine with a depletion base of 5,000,000. It is estimated that 20,000,000 tons will be extracted over the mine's useful life. During year 1, TR extracted 400,000 tons of minerals. The depletion expense for year 1 is?,
5,000,000/20,000,000=$.25 per ton. 400,000 tons extracted x $.25= 100,000
Which of the following statements related to long term assets is TRUE? If a company scraps a long term asset (no cash recovery), it recognizes a gain equal to the book value of the asset at the time it is scraped. When land with an old building is purchased as a future building sit, the cost of removing the old building is capitalized as a part of the cost of the new building. A change in the estimated total units for a depletion expense calculation for a natural resource asset is handled in a prospective manner. An impairment loss on PPE is the amount by which the net book value exceeds the sum of the undiscounted expected future net cash flows from the use of the asset.
A change in the estimated total units for a depletion expense calculation for a natural resource asset is handled in a prospective manner.
present value of the note payable, which is the face amount of the note
A company acquires equipment by signing an interest-bearing note payable. If the interest rate is realistic, the company will record the equipment at the
- Future income is unrealistically high - Current year income is low - future depreciation, depletion or amortization is unrealistically low
A company can manipulate income by overstating impairment loss. The financial statement effects of this are?
appraised value of the land
A company issues its equity securities to purchase land. The common stock is not publicly traded. The best indicator of fair value is the
Recording Long-term operating assets held for sale or disposal
A company selling or disposing of an asset measures the asset the lower of cost (carrying value) or net realizable value (fair value less selling costs). If a write-down is necessary, then the loss is equal to the difference between the carrying value of the asset and its fair value net of selling costs. If a company writes down the asset in one period and still holds the asset in the next period, then the company can report an increase in value in the subsequent period if the fair value net of selling costs has increased. However, because the asset is held at the lower of cost or fair value less selling costs, the write-up could never result in a carrying value greater than the carrying value of the asset before the write-down or impairment. Companies do not depreciate or amortize long-term operating assets while holding them for sale or disposal because they are reporting them at the lower of cost or fair value less selling costs. Companies report the asset as a separate line item on the balance sheet, if material in amount
goodwill
A company's reputation and clientele, its trained employees, and favorable business location may give rive to ___________.
Under IFRS, the initial revaluation of equipment when book value exceeds fair value results in
A decrease in net income.
development stage
A new business that has either not commenced its principal operations or has not yet generated significant revenue is referred to as ____________________ enterprise.
commercial substance
A nonmonetary exchange is considered to have _______________ if the future cash flows will change as a result of the exchange.
Which of the following statements related to nonmonetary exchanges is TRUE? A nonmonetary exchange of assets has commercial substance if the future cash flows of the two parties change as a result of the transaction. Companies treat gains and losses from nonmonetary exchanges as OCI items on the comprehensive income statement. In a nonmonetary exchange, cash is never a part of the transaction. Nonmonetary exchanges are rare and usually do not receive much attention on the CPA exam.
A nonmonetary exchange of assets has commercial substance if the future cash flows of the two parties change as a result of the transaction.
Which of the following items are expensed?
Costs related to maintaining equipment
declining balance method
Accelerated method that multiplies a constant percentage rate by the decreasing book value
Sum-of-the-years'-digits method
Accelerated method that multiplies the depreciable base by a faction that declines each year
DIFFERS
Accounting for impairment of value of assets with finite lives and those with indefinite lives?
capitalized / depreciated
Accounting for land improvements requires that the land improvements are ______________ and then ______________ over periods benefited by their use.
Added to the cost column Deducted in both the cost and retail columns Deducted in the cost column
Added to the cost column: Freight-In Deducted in both the cost and retail columns: purchase returns, abnormal shrinkage Deducted in the cost column: purchase discounts taken(gross method)
Which item qualifies as an addition and should be capitalized?
Adding a new computer-aided cutting device to an existing machine.
Which of the following are expenditures for assets subsequent to acquisition?
Additions Imprrovements Repairs and maintenance
Two-Step Impairment Test
After identifying the reporting unit, there are two steps to determine the amount of any goodwill impairment: 1. Assess recoverability 2. Compare goodwill's carrying value to its implied fair value To assess recoverability, the firm compares the fair value of a reporting unit (which includes any goodwill) to the carrying value of the reporting unit, including goodwill. The fair value of the reporting unit is the valuation of the entity as if the company were to be sold in a business combination. If the carrying value is higher than the fair value of the reporting unit, goodwill may be impaired requiring that the firm compare the goodwill;s carrying value to its implied fair value. Otherwise, no impairment is indicated. The impairment loss is the difference between the implied fair value of goodwill and its carrying value. Specifically, the firm compares the fair value of the reporting unit (including goodwill) to the appraisal (fair) value of its net assets (excluding goodwill). The difference, or residual, is the implied fair value of goodwill. If the carrying value of the goodwill is greater than the implied fair value, the impairment loss is the difference between the carrying value and the implied fair value. Impairment loss is limited to the carrying value of goodwill
Straight-line method
Allocates an equal portion of the depreciable base to each year of the asset's service life
The value of the usefulness that is expected to be consumed?
Allocation base.
The three factors that should be established to measure cost allocation are
Allocation method Allocation base. Service life.
The pattern in which usefulness is expected to be consumed?
Allocation method.
depletion
Allocation of the cost of a natural resource is called ____________ ?
Depreciation
Allocation of the cost of a tangible fixed asset
Amortization
Allocation of the cost of an intangible asset
Under IFRS, a company that acquires an intangible asset may use the revaluation model for subsequent measurement only if
An active market exists for the intangible asset.
present value of the note payable discounted at the market rate
An asset is acquired by signing a note payable. The note does not indicate an interest rate, and the fair value of the asset cannot be reliably determined. At what amount should the asset be recorded?
goodwill
An asset representing the future economic benefits arising from other assets acquired in a business combination that are not individually identified and separately recognized is _____________.
fair
An asset requirement obligation is measured at ________ value.
intangible
An asset that has no physical substance is called an ______________ asset.
disposition
An asset that is traded for another asset is treated as an exchange, whereas as asset that is sold or retired is treated as a ______________.
finite / indefinite
An intangible asset with a ___________ life is amortized, whereas an intangible asset with an _____________ life is tested for impairment.
tested for impairment and recorded at cost
An intangible asset with an indefinite life is
Linx Corporation internally develops an intangible asset with research and development costs of $10,000. How should Linx report this transaction?
As an expense in the period
Asset Grouping IFRS
Asset grouping is similar under US GAAP and IFRS, although there may be some differences in practice. If a firm cannot estimate the recoverable amount of the individual asset, then it groups assets. Under IFRS, the asset group is called a cash-generating unit (CGU), which is the smallest identifiable group of assets that generates cash inflows that are largely independent of the cash inflows from other assets or groups of assets.
The two categories for intangible assets are:
Intangibles with indefinite lives; intangibles with finite lives
Samtech Manufacturing purchased land and building for $3 million. In addition to the purchase price, Samtech made the following expenditures in connection with the purchase of the land and building: Title insurance $ 30,000 Legal fees for drawing the contract 7,000 Pro-rated property taxes for the period after acquisition 50,000 State transfer fees 5,400 An independent appraisal estimated the fair values of the land and building, if purchased separately, at $3 and $1 million, respectively. Shortly after acquisition, Samtech spent $96,000 to construct a parking lot and $54,000 for landscaping. Required: 1. Determine the initial valuation of each asset Samtech acquired in these transactions. 2. Determine the initial valuation of each asset, assuming that immediately after acquisition, Samtech demolished the building. Demolition costs were $390,000 and the salvaged materials were sold for $8,000. In addition, Samtech spent $93,000 clearing and grading the land in preparation for the construction of a new building.
Assets Initial Valuation Land $2,281,800 Building $760,600 Land improvements $150,000 Assets Initial Valuation Land $3,517,400 Building Land improvements $150,000 Explanation 1. Cost of land and building: Purchase price $ 3,000,000 Title insurance 30,000 Legal fees 7,000 State transfer fees 5,400 Total cost $ 3,042,400 Note: The pro-rated property taxes for the period after acquisition are not included in the initial valuation of the land and building. They are recorded instead as prepaid taxes and expensed over the related period. The total is allocated to the land and building based on their relative fair values: Asset Fair Value Percent of Total Fair Value Initial Valuation (% × $3,042,400) Land $ 3,000,000 75 % $ 2,281,800 Building 1,000,000 25 % 760,600 $ 4,000,000 100 % $ 3,042,400 Assets: Land $ 2,281,800 Building $ 760,600 Land improvements: Parking lot $ 96,000 Landscaping 54,000 $ 150,000 2. Cost of land: Purchase price $ 3,000,000 Title insurance 30,000 Legal fees 7,000 State transfer fees 5,400 Demolition of old building $ 390,000 Less: Sale of materials (8,000 ) 382,000 Clearing and grading costs 93,000 Total cost of land $ 3,517,400 Land improvements: Parking lot 96,000 Landscaping $ 54,000 $ 150,000
When to test for impairment GW
Because goodwill is not subject to amortization and has an uncertain value, US GAAP allows companies either to: 1. Make a qualitative evaluation annually to determine whether it is more likely than not that a reporting unit's goodwill is impaired. If it is more likely than not that the goodwill is impaired, then a firm must conduct a quantitative assessment of impairment. 2. Conduct a quantitative test for the impairment of goodwill at least annually
Asset Grouping
Before testing assets for impairment, a firm must determine whether to assess them as individual assets or in asset groups. An asset grouping is the lowest level of identifiable and independent cash flows. If cash flows are identifiable and independent for an individual asset such as a delivery truck, the firm can test the delivery truck for impairment. Alternatively, if the delivery truck is part of a fleet of the store's delivery trucks, the delivery fleet could be considered an asset group. The rationale is that the cash flows from an individual truck are dependent on the cash flows from the other trucks in the fleet.
Match each inventory at retail component with the correct cost-to-retail percentage assuming that the LIFO retail method is used Begging inventory Current period layer
Beginning inventory-beginning inventory cost-to-retail percentage Current period layer- current-period purchases cost-to-retail percentage
What is the formula ro compute the return on assets?
Net income divided by average total assets
Fullerton Waste Management purchased land and a warehouse for $800,000. In addition to the purchase price, Fullerton made the following expenditures related to the acquisition: broker's commission, $50,000; title insurance, $13,000; miscellaneous closing costs, $16,000. The warehouse was immediately demolished at a cost of $38,000 in anticipation of the building of a new warehouse. Determine the amounts Fullerton should capitalize as the cost of the land and the building.
Capitalized cost of land $917,000 Capitalized cost of building (blank) Explanation Capitalized cost of land: Purchase price $ 800,000 Broker's commission 50,000 Title insurance 13,000 Miscellaneous closing costs 16,000 Demolition of old building 38,000 Total capitalized cost $ 917,000 All of the expenditures, including the costs to demolish the old building, are included in the initial cost of the land.
On March 1, 2021, Beldon Corporation purchased land as a factory site for $77,000. An old building on the property was demolished, and construction began on a new building that was completed on December 15, 2021. Costs incurred during this period are listed below: Demolition of old building $ 7,500 Architect's fees (for new building) 16,000 Legal fees for title investigation of land 4,000 Property taxes on land (for period beginning March 1, 2021) 4,700 Construction costs 670,000 Interest on construction loan 8,500 Salvaged materials resulting from the demolition of the old building were sold for $3,700. Required: Determine the amounts that Beldon should capitalize as the cost of the land and the new building.
Capitalized cost of land: Purchase price $77,000 Demolition of old building $7,500 Sale of materials (3,700) Legal fees for title investigation 4,000 Total cost of land $84,800 Capitalized cost of building: Construction costs $670,000 Architect's fees 16,000 Interest on construction loan 8,500 Total cost of building $694,50 Explanation Note: Property taxes on the land for the period after acquisition are not part of acquisition cost. They are expensed in the period incurred.
Which of the following accounting changes must be justified in the notes to the financial statements?
Changes in depreciation methods
Sarah purchases land to be used for a new storage facility. Which of the following items are capitalized in the cost of land?
Commissions, Legal feed to secure title, Costs to remove an old building
Required Disclosures of Long-term operating Assets Held for Disposal
Companies must disclose the following items when classifying assets as held for sale: 1. The description of the facts and circumstances that led to the expected disposal as well as the expected manner and timing of the disposal. 2. The carrying values of the major classes of assets and liabilities included as part of the disposal group (reported either on the face of the financial statements or in the note disclosures) 3. The gain or loss included in net income due to a write-down or write-up (reported either on the face of the income statement or in the note disclosures) 4. The segment, if applicable, that includes the disposal group.
Which of the following items should be capitalized as land improvements?
Cost of fences, cost of parking lots, cost of sidealks
Clarion purchases land and prepares it for use. Which of the following items should be capitalized as land improvements?
Cost of lawn sprinkler system, cost of driveways, cost of sidewalks
Which of the following costs should be capitalized in the year they are incurred? Research and development costs. Costs to internally generate brand recognition. Operating losses incurred during the start-up years of a new business. Costs to register an internally generated patent.
Costs to register an internally generated patent.
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
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?
Credit equipment $90,000, Debit equipment $40,000, Debit loss on exchange $10,000
A company constructs a building for its own use. Construction began on January 1 and ended on December 30. The expenditures for construction were as follows: January 1, $580,000; March 31, $680,000; June 30, $480,000; October 30, $840,000. To help finance construction, the company arranged a 7% construction loan on January 1 for $860,000. The company's other borrowings, outstanding for the whole year, consisted of a $4 million loan and a $6 million note with interest rates of 8% and 6%, respectively. Assuming the company uses the specific interest method, calculate the amount of interest capitalized for the year.
Date Expenditure Weight Average January 1 $580,000 × 12/12 = $580,000 March 31 680,000 × 9/12 = 510,000 June 30 480,000 × 6/12 = 240,000 October 30 840,000 × 2/12 = 140,000 Accumulated expenditures $2,580,000 $1,470,000 Average Interest Rate Capitalized Interest Average accumulated expenditures $1,470,000 Construction loan 860,000 7.00 % = $60,200 Other loans (not construction) 610,000 6.80 % = 41,480=MULTIPLY(B11,D11/100) $101,680 Explanation Weighted-average rate of all other debt: $ 4,000,000 × 8 % = $ 320,000 6,000,000 × 6 % = 360,000 $ 10,000,000 $ 680,000 $680,000 = 6.80 % weighted average $10,000,000
On January 1, 2021, the Highlands Company began construction on a new manufacturing facility for its own use. The building was completed in 2022. The company borrowed $1,700,000 at 9% on January 1 to help finance the construction. In addition to the construction loan, Highlands had the following debt outstanding throughout 2021: $6,000,000, 14% bonds $4,000,000, 9% long-term note Construction expenditures incurred during 2021 were as follows: January 1 $ 620,000 March 31 1,220,000 June 30 824,000 September 30 620,000 December 31 420,000 Required: Calculate the amount of interest capitalized for 2021 using the specific interest method
Date Expenditure Weight Average January 1 $620,000 x 12/12 = $620,000 March 31 1,220,000 x 9/12 = 915,000 June 30 824,000 x 6/12 = 412,000 September 30 620,000 x 3/12 = 155,000 December 31 420,000 x 0/12 = Accumulated expenditure $3,704,000 $2,102,000 Average Interest Rate Capitalized Interest Average accumulated expenditures $2,102,000 Construction loan 1,700,000 x 9.0 % = $153,000 Other loans (not construction) $402,000 x 12.0 % = 48,240 $201,240=SUM(G11,G12) Explanation Weighted-average rate of all other debt: $ 6,000,000 × 14 % = $ 840,000 4,000,000 × 9 % = 360,000 $ 10,000,000 $ 1,200,000 $1,200,000 = 12.00% $10,000,000
What is the formula for the profit margin ratio?
Net income divided by net sales
filing fees and legal fees
What costs are capitalized as an internally developed patent?
Allocation of the cost of natural resources
Depletion
Allocation of the cost of a tangible fixed asset
Depreciation
Cost allocation method: Plant and equipment Natural Resources Intangible asset
Depreciation Depletion Amortization
depletion
Depreciation expense is recorded for tangible fixed assets, where as _________ expense is recorded for natural resources.
Define Depreciation, Depletion, and Amortization
Depreciation-allocation of the cost of a tangible fixed asset Depletion-allocation of the cost of natural resources Amortization-allocation of the cost of an intangible asset
Plant and Equipment
Depreciation.
Which of the following costs may be capitalized into the cost of a trademark?
Design costs Fees for a successful legal defense Registration fees
What is the first issue that needs to be addressed in order to properly report tangible and intangible assets?
Determining the amounts to be included in the assets' initial cost
copyright
Elusive right of protection given to a creator of a published work
trademark
Elusive right to display a word, slogan, symbol, or emblem that distinctively identifies a company
patent
Elusive right to produce a product or use a process
1. Declining base 2. Sum-of-the-year digits
Emil company expects that its assets will be more useful during early years of its life than later years. In addition, the company estimates that repair costs will increase over time. Which method(s) may help equalize total expenses recognized over the service of this asset?
Cedric Company recently traded in an older model of equipment for a new model. The old model's book value was $333,000 (original cost of $723,000 less $390,000 in accumulated depreciation) and its fair value was $370,000. Cedric paid $77,000 to complete the exchange which has commercial substance. Required: Prepare the journal entry to record the exchange
Equipment - new D447,000 Accumulated depreciation D390,000 Equipment - old C723,000 Cash C77,000 Gain on exchange of assets C37,000 Explanation Equipment - new ($370,000 + $77,000) = $447,000 Gain on exchange of assets ($370,000 − $333,000) = $37,000
Dodson Company traded in a manual pressing machine for an automated pressing machine and gave $24,000 cash. The old machine cost $279,000, a net book value of $213,000, and a fair value of $180,000. Which of the following is the correct journal entry on Dodson's books to record the exchange? a. Equipment 204,000 Equipment 120,000 Cash 24,000 b. Cash 24,000 Equipment 180,000 Loss on Disposal 33,000 Accumulated Depreciation 66,000 Equipment 303,000 c. Equipment 204,000 Loss on Disposal 33,000 Accumulated Depreciation 66,000 Equipment 279,000 Cash 24,000 d. Equipment 369,000 Accumulated Depreciation 66,000 Equipment 279,000 Cash 24,000
Equipment 204,000 Loss on Disposal 33,000 Accumulated Depreciation 66,000 Equipment 279,000 Cash 24,000
Materiality
Expenditure subsequent to acquisition may be properly capitalized when they increase the assets useful life or increase its productive capacity. However, most companies set thresholds for capitalizing these expenditures based on?
capitalized as part of the cost of land
Expenditures needed to get land ready for its intended use should be:
exploration
Expenditures relating to a search for natural resources are referred to as ______________ costs.
Recurring costs
Expensed during the period they are incurred
Match the recognition of related cots incurrent during the year with the description of the intangible asset.
Expensed when incurred - mueller's industrial engineers develop a new process for which the compny was granted a patent. Capitalized as an intangible asset - mueller's purchases the right to manufacture a new product for which patton inc. holds the patent.
IFRS
Expensed, except when expenditure increases future benefits of intangible right
On March 31, 2021, Wolfson Corporation acquired all of the outstanding common stock of Barney Corporation for $17,200,000 in cash. The book values and fair values of Barney's assets and liabilities were as follows: Book Value Fair Value Current assets $ 6,200,000 $ 7,700,000 Property, plant, and equipment 11,200,000 14,200,000 Other assets 1,020,000 1,520,000 Current liabilities 4,200,000 4,200,000 Long-term liabilities 6,200,000 5,700,000 Required: Calculate the amount paid for goodwill.
Explanation Calculation of goodwill: Fair value of consideration given $ 17,200,000 Less: Fair value of identifiable net assets acquired: Fair value of identifiable assets acquired $ 23,420,000 Less: Fair value of liabilities assumed (9,900,000 ) (13,520,000 ) Goodwill $ 3,680,000
The retirement depreciation method assumes a _____ cost approach in determining depreciation expense at the time the assets are disposed
FIFO
True or false: Expenditures that qualify as an addition should be expenses in the period incurred.
False
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
True or false: When accounting for impairments, the two categories for recognizing and measuring the loss are tangible and intangible assets.
False *The categories for accounting for impairments are assets to be held and used and assets held for sale.
Which of the following costs may be capitalized into the cost of a trademark?
Fees for a successful legal defense, design costs, registration fees
Asset Grouping GW
Firms associate goodwill with the group of net assets in the reporting unit (RU), which is an operating segment or one level below an operating segment. The codification defines an operating segment as a component of a public entity with the following three characteristics: 1. It engages in business activities from which it may earn revenues and incur expenses 2. The entity's chief decision maker regularly reviews the performance of the segment 3. The segment's discrete financial information is available.
Product cost
For a manufacturing company, what type of cost is factory depreciation expense?
Under what circumstances are accelerated depreciation methods most appropriate?
For an asset that will be used extensively in earlier years of its life, or for an asset that will be used less in the later years of its life.
Under what circumstances are accelerated depreciation methods most appropriate?
For an asset that will be used extensively in earlier years of its life. For an asset that will be used less in the later years of its life.
1. Companies are allowed to use percentage depletion for income tax purposes 2. Depletion could exceed the assets costs for income tax purpose
For oil, gas, and most mineral natural resources?
Only if events or changes in circumstances indicate that the asset may not be recoverable
For plant, property and equipment, US GAAP requires the investigation of possible impairment
Which of the following items should be capitalized in the cost of equipment?
Freight to deliver the equipment to its location, Insurance on equipment during shipping, purchase price, installation and testing of equipment
revenue producing and long-lived
From a financial reporting perspective, property, plant, and equipment and intangible assets exhibit what characteristics:
Which assets are required to be tested for impairment annually? Intangible assets with finite lives Property,plant, and equipment Goodwill Intangible assets with indefinite lives
Goodwill Intangible assets with indefinite lives
Measurement of: Goodwill, Assets to be sold, Assets to be held and used
Goodwill: The excess of BV over implied FV Assets to be sold: The excess of BV over FV less costs to sell Assets to be held and used: The excess of BV over the FV
Gosling Corporation had a return on asset ratio of 4% in 2017 and 9% in 2018. This change in return on assets can be interpreted as
Gosling is using its assets more effectively to earn income
Assume that the value of indefinite-life intangible assets for which an impairment loss was recognized during the prior year has been recovered. Match the appropriate accounting treatment with the correct accounting standard.
IFRS - impairment losses must be reversed U.S. GAAP - impairment losses cannot be reversed
Accounting for Impairments: Goodwill under IFRS
IFRS associates goodwill with a cash-generating unit (CGU), which is the smallest identifiable group of assets that generates cash inflows that are largely independent of the cash inflows from other assets or groups of assets. After identifying the cash-generating unit, the firm determines the amount of any goodwill impairment.
Impaired Asset Disclosure Requirements: IFRS
IFRS disclosure requirements are identical to US GAAP with one exception. IFRS also requires disclosure of whether the recoverable amount was fair value less costs to sell or value in use. Because IFRS allows recoveries of impairment losses, it requires the following additional disclosures by segment: 1. The events and circumstances that led to the recognition of the impairment loss reversal 2. The amount of any impairment loss reversal in income or other comprehensive income 3. The amount of any impairment loss the firm reported in other comprehensive income for assets that it has previously revalued
When to test for impairment IFRS goodwill
IFRS requires an impairment test for goodwill at least annually. The firm can perform the fair value measurement for each unit at any time during the fiscal year, as long as it uses the measurement date consistently from year to year. A firm can also use different measurement dates for different units. IFRS indicates conditions under which a firm may waive the annual goodwill impairment test and instead utilize the prior year's test. In general, these conditions ensure that the makeup of the cash-generating unit has not changed substantially and that the prior test for impairment resulted in a considerable margin between the recoverable amount of the cash-generating unit and the carrying value of the cash-generating unit.
Impairment test IFRS goodwill
IFRS uses a one-step impairment test that has two parts to assess goodwill impairment. Part 1 - Determine the recoverable amount of the CGU, Part 2 - Compare the recoverable amount of the CGU to the carrying value of the CGU including goodwill The recoverable amount of the cash-generating unit is the greater of the fair value (less selling costs) of the CGU or the value in use of the cash-generating unit. The firm reports an impairment loss when the recoverable amount of the cash-generating units is less than the carrying value of the cash-generating unit, including goodwill. If the impairment loss is greater than the amount of reported goodwill, the firm first reduces goodwill and then prorates the remaining loss to the unit's other assets based on their carrying value. Under IFRS, if the impairment loss is greater than the carrying value (book value) of goodwill, the firm reduces the value of other assets on a prorated basis
expense the costs as incurred
If a company generates its own goodwill through advertising or training, how should these costs be treated?
it is difficult to objectively determine the future benefits
The FASB requires research and development costs to be expensed because
Which of the following statements regarding equipment is TRUE? If a company scraps equipment (no cash recovery), it recognizes a loss equal to the book value of the equipment at the time it is scraped. Insurance costs on equipment purchased, while it is in transit, are expensed as incurred. Labor costs for assembling and installing new equipment, training employees to use it, and conducting trial runs are all expensed as incurred. Fully depreciated equipment must never appear on a company's balance sheet.
If a company scraps equipment (no cash recovery), it recognizes a loss equal to the book value of the equipment at the time it is scraped.
The written down book value is the new cost basis for the future amortization - a later recovery of the impairment is prohibited
If an impairment loss is recognized for an intangible asset with a finite life, which of the following occurs?
expensed immediately
If equipment is purchased specifically for one research and development project, the cost of the equipment is
Depreciated over the shorter if its useful life or the life of the natural resource
If equipment is used in excavation of natural resources is not movable from site to site, it should be?
acquisition cost, development costs, and exploration costs.
If natural resources are developed by a company, the initial valuation should include
On a proactive basis
If there is a change in an intangible assets estimated useful life, the change is treated
Required disclosures for Asset impairments
Impaired Asset Disclosure Requirements: A firm recognizing an impairment loss on its financial statements should disclose: 1. The asset or asset group the was impaired 2. The events and circumstances that led to the recognition of the impairment (based on the impairment indicators) 3. The amount of the impairment loss in the notes to the financial statements (if the firm does not separately disclose this amount on the income statement) 4, The method or methods used to estimate the fair value of the asset
Accounting for Impairments: Goodwill
Impairment testing for goodwill is significantly different from the impairment tests we have discussed thus far. Goodwill is a unique asset that is not separable from the entity as a whole. Because a firm cannot separate goodwill from a specific set of net assets, it cannot associate goodwill with as specific stream of cash flows, as we did for tangible fixed assets and other intangible assets that have value in use.
Expenditures classified as _______ involve the replacement of a major component of an asset.
Improvements
Under what circumstances is depreciation included in inventory?
In a manufacturing environment When manufactured goods are not sold at the end of the period.
An assets significant decline in value
In accounting, impairment refers too?
gain / loss
In an exchange of nonmonetary assets, if the transaction lacks commercial substance, any _________ is deferred, but a ________ is recognized immediately.
Risk and Uncertainty
In calculating present value, a traditional approach incorporates what items into the discount rate?
Measurement Subsequent to Impairment IFRS
In contrast to US GAAP, IFRS allows firms to reverse impairment loss write-downs on property, plant, and equipment as well as finite-life intangible assets. If the asset's future cash generating ability improves and its fair value increases, IFRS views the fair value as relevant and reliable information. There are 2 important constraints: 1. The amount of the write-up (reversal) is limited to the amount of the original impairment loss. The reversal cannot exceed the original impairment loss. 2. The reversal cannot result in a company reporting a value that is higher than what it would be reporting if the asset had never been impaired. Firms report a reversal of an impairment loss in income.
Costs of acquiring assets
Included as part of assets acquisition costs
Cost of acquiring assets
Including as part of assets' acquisition costs
A subsequent expenditure for an asset increases the future benefits of the asset if it
Increases the operating efficiency of the asset increases the quality of the goods or services produced by the asset extends the asset's service life
The original amount a company adds to cost to determine the selling price is known as _____ _____
Initial markup
What costs are capitalized as an intangible asset for a franchise?
Initial payment for the franchise
Which of the following items should be capitalized in the cost of equipment?
Insurance of equipment during shipping, purchase price, freight to deliver the equipment to its location, installation and testing of equipment
Match each asset with its cost allocation method.
Intangible asset - Amortization Natural resources - Depletion Plant and equipment - Depreciation
Amortization
Intangible assets
Which of the following statements regarding capitalization of interest is FALSE? Interest cost capitalized in connection with the purchase of land to be used as a building site should be debited to the land account. The amount of interest cost capitalized should not exceed the actual interest cost incurred during the construction period. Under IFRS, interest earned on borrowed funds not immediately needed for construction should be offset against interest cost incurred when determining the amount of interest cost to be capitalized. Avoidable interest is the amount of interest cost that a company could theoretically avoid if it had not made expenditures for the asset.
Interest cost capitalized in connection with the purchase of land to be used as a building site should be debited to the land account. (would be debited to interest expense)
Self-constructed buildings include which of the following costs?
Interest costs incurred during construction, material costs incurred for construction of building, labor costs incurred for construction of building
Which statement is true about the straight-line method of deprecation? It recognizes expense proportionately with the amount of use of the asset. It allocates an equal amount of depreciation to each year the asset is used. It is the preferred method for companies expecting to use the asset more in its early years of life. It is an accelerated method of depreciation.
It allocates an equal amount of depreciation to each year the asset is used.
Which of the following costs should be capitalized in the costs of acquiring a building?
Legal fees to obtain title, remoding building, realtor commissions
In a business acquisition, goodwill equals the purchase price
Less the fair value of net assets acquired
Copyright
Life of creator plus 70
a separate component of operating expense
Loss on impairment of goodwill is typically reported as?
Which of the following are accelerated methods of depreciation?
MACRS Declining-balance method Double-declining balance method
lump-sum
Margot Company purchases land, building and equipment for a single purchase price. Margot should account for the purchase as a ___________ purchase.
IFRS; cash generating unit GAAP; reporting unit
Match the level of testing for goodwill impairment with the applicable accounting standard IFRS; GAAP;
Expenditures subsequent to acquisition may be properly capitalized when they increase the asset's service life or increase its productive capacity. However, most companies set thresholds for capitalizing these expenditures based on
Materiality
straight-line method
Method that allocates an equal portion of the depreciable base to each year of the asset's service life.
Units-of-output method
Method that matches usage of assets with revenues generated from the asset
Units-of-output Method
Method that matches usage of the asset with revenues generated from the asset
Which of the following are classified as natural resources?
Mineral deposits Oil deposits
more than 50%
More likely than not
Walmart's 2014 asset turnover and profit margins were 3.0 and 5% respectively. Caterpillar's 2014 asset turnover and profit margins were 0.5 and 30% respectively. Given these figures, which company would be more attractive to investors and why? Walmart because it has a higher asset turnover Caterpillar because it has a higher profit margin Walmart because the sum of its asset turnover and profit margin is higher than the sum of Caterpillar's asset turnover and profit margin Neither company is preferable to the other because their return on assets calculation is equal
Neither company is preferable to the other because their return on assets calculation is equal
trademark
Norbert Company has an exclusive right to display a specific symbol and routinely uses it on its promotional materials, company letterhead, and other media to distinguish its company from other firms. This right is referred to as a
asset retirement
Obligations associated with the disposition of property, plant, equipment, and natural resources are called ___________________ obligations.
IFRS uses a one-step impairment test that has 2 parts
Part 1: Determine the asset's recoverable amount Part 2. Compare the asset's recoverable amount to its carrying value The asset's recoverable amount is the greater of 1. The asset's estimated fair value less costs to sell, or 2. It's value in use, the present value of the future cash flows the firm expects to derive from an asset Firms then compare the recoverable amount to the carrying value of the assets. 1. If the recoverable amount is less than the carrying value of the asset, then the entity is required to measure the impairment loss. 2. If the recoverable amount is greater than the carrying value of the asset, then there is no impairment loss Under IFRS, the impairment loss is simply the difference between the recoverable amount and the carrying value of the asset The journal entry to record the impairment loss is the same format under both US GAAP and IFRS. When recording the impairment loss, the firm eliminates the balance in the accumulated depreciation or accumulated amortization account, and then reduces the asset account. The asset account will reflect its recoverable amount (which is the higher of fair value less costs to sell or value in use) After recognizing this impairment, the firm carries the asset at its recoverable amount with no accumulated depreciation or amortization. The recoverable amount becomes the new cost of the asset as if it were just acquired.
Impairment Test, Timing
Property to be held and used ^When events or circumstances indicate book value may not be recoverable Indefinite life ^At least annually, or more frequently if indicated Asset to be sold ^ When considered held for sale
furniture, machinery, cars and trucks
Property, plant, and equipment typically include
Correctly match the intangible asset with the description
Purchased intangible asset - patents, copyrights, trademarks, or franchise rights acquired from other companies. Internally developed intangible asset - Product or process created by company personnel for which protective patent is obtained.
Indicate whether each item is a research and development cost or a non-R&D item
R&D:-modification of a formula or design -searching for application of new research findings -design, construction and testing of prototype or model Non-R&D cost:-adaptation of an existing capability for a customer -routine efforts to improve an existing product -engineering follow-through in early phases of commercial production
Which methods are acceptable for recording the cost of improvements to an asset? Reduce the asset for the cost of the improvement and expense the improvement. Reduce the accumulated depreciation account. Capitalize the cost of the new component and remove the old component and its related accumulated depreciation. Record as a disposition of the old and an acquisition of the new component.
Reduce the accumulated depreciation account. Capitalize the cost of the new component and remove the old component and its related accumulated depreciation. Record as a disposition of the old and an acquisition of the new component.
The service life of an intangible asset may be limited by what types of provisions?
Regulatory, Contractual, Legal
Match each type of expenditure with its definition.
Repairs and maintenance - Expenditures to maintain a given level of benefit Additions - Expenditures to acquire a new major component to an existing asset Improvements - Expenditures to replace a major component of an asset Rearrangements - Expenditures to restructure an asset without making any improvements to the asset
Which of the following are expenditures for assets subsequent to acquisition?
Repairs and maintenance, Improvements, additions
Which of the following items are capitalized?
Replacing a major component, Successful legal defense of a patent, Major repair that increases future benefits
Which of the following costs are expensed under both U.S. GAAP and IFRS?
Research costs only
(Blank) value is the amount the company expects to receive for the asset at the end of its service life
Residual
______ value is the amount the company expects to receive for the asset at the end of its service life less any anticipated diposal costs.
Residual
_____ value is the amount the company expects to receive for the asset at the end of its service life less any anticipated disposal costs.
Residual / Salvage
Which of the following expenditures are classified as repairs and maintenance for a vehicle owned by the company?
Routine oil change engine tune-up
Which of the following items should be capitalized in the cost of equipment?
Sale tax, installation and testing of equipment, freight to deliver the equipment, legal feed to establish title
Match each factor to its definition.
Service life - The estimated use that the company expects to receive from the asset Allocation method - The pattern in which the usefulness is expected to be consumed Allocation base - The value of the usefulness that is expected to be consumed
The estimated use that the company expects to receive from the asset?
Service life.
The amortization of an intangible asset occurs over the period of time that is (blank) of the legs., regulatory, contractual, or service life
Shorter
Measurement Subsequent to Impairment *
Similar to accounting for impairment losses on PPE and finite-life intangible assets, US GAAP does not permit subsequent reversals of impairment losses. After the write-down, the firm reports the asset at its revised carrying value.
Smart Company rarely had to write down inventory. In the past, when inventory write-downs were necessary, the company debited cost of goods sold. Recently, write-downs have become more common and Smart is concerned about the distortion of its gross profit percentage. What alternative is available under GAAP? -Smart Company could record a non-operating loss -Smart Company could debit a separate loss account and include it as an operating expense -Smart Company could record the loss as extraordinary because its rarely occurred
Smart Company could debit a separate loss account and include it as an operating expense
Place the two step of measuring impairments in the correct order.
Step 1: recoverability test Step 2: measurement of the impairment loss
(Cost - residual value)/useful life
Straight line depreciation formula?
Which of the following are not accelerated methods of depreciation?
Straight-line depreciation, units-of-output depreciation
specific
The ___________ interest method uses the interest rate from the actual construction loan on a self-constructed asset, whereas the weighted-average method uses a weighted-average rate on all construction loans outstanding.
Long-term Operating Assets Held for Sale or Disposal
The accounting for assets held for sale or disposal under US GAAP and IFRS is substantially converged. The concepts and judgements that underlie the accounting treatment of assets held for sale are the same as those involved in the accounting treatment of impairments for long-term operating assets.
indefinite
The accounting literature provides that intangible assets with _________ useful lives are not amortized.
depletion expense
The allocation of a natural resource to the periods extracted is referred to as
Which of the following statements regarding capitalization of interest is TRUE? Interest cost capitalized in connection with the purchase of land to be used as a building site should be debited to the land account and not to the building account. The amount of interest cost capitalized during the period should not exceed the actual interest cost incurred. When excess borrowed funds not immediately needed for construction are temporarily invested, any interest earned should be offset against interest cost incurred when determining the amount of interest cost to be capitalized. The minimum amount of interest to be capitalized is determined by multiplying a weighted average interest rate by the weighted average accumulated expenditures without regard to the interest rate on any amount of specific debt in place.
The amount of interest cost capitalized during the period should not exceed the actual interest cost incurred.
full-cost
The approach used for accounting for self-constructed assets where all overhead costs are allocated to production and to self-constructed assets is called the __________ approach.
When group depreciation is used, and an asset is sold, which of the following occurs? A loss is recorded for the difference between the cost of the asset and the proceeds. The asset's cost is removed from the books. No gain or loss is recorded. Accumulated depreciation is reduced for the proceeds of the sale.
The asset's cost is removed from the books. No gain or loss is recorded.
accumulated expenditure
The average debt necessary to self-construct as asset is referred as the average
The formula for calculating declining balance depreciation is the depreciation rate per year times
The book value at the beginning of the year
equipment
The broad term encompasses machinery used in manufacturing, computers and other office equipment, vehicles, furniture, and fixtures is _______________.
The must be reversed
The correct treatment of recovered impairment losses relating to indefinite-life intangible assets under IFRS?
prior period adjustment
The correction of an error in previously issued financial statements.
capitalized / expensed
The cost of a major improvement that extends the useful life of an asset would be ___________. whereas the cost of maintenance that does not increase the future benefits would be __________.
Depletion base
The cost of a natural resource is less its anticipated residual value is called the ___________________ ______________.
exploration costs before production begins, acquisition for the use of land, and restoration costs at the end of the extraction
The cost of natural resources include
restoration
The costs to return land or other property to its original condition after extracting natural resources are referred to as ____________ costs.
Which of the following statements regarding "depreciation methods" is TRUE? The double-declining-balance method does not deduct salvage value when computing the depreciation base. The units-of-production method is appropriate when depreciation is a function of time. An accelerated depreciation method is appropriate when the asset's economic usefulness is the same each year. Depletion of a natural resource asset most often occurs on a straight-line basis.
The double-declining-balance method does not deduct salvage value when computing the depreciation base.
Which of the following statements regarding nonmonetary exchanges is TRUE? A loss is recorded only when the exchange lacks commercial substance. A deferred gain is essentially a "lost gain" because it is never recovered by the company. The entire gain is recognized on an exchange that lacks commercial substance with cash received when the cash received is greater than 25% of the sum of the cash received and the fair value of the asset received. Cash is never a part of a nonmonetary exchange.
The entire gain is recognized on an exchange that lacks commercial substance with cash received when the cash received is greater than 25% of the sum of the cash received and the fair value of the asset received.
Assets to be held and used
The excess of book value over the fair value
direct labor, direct material, and manufacturing overhead
What are the cost components for self-constructed assets?
net sales
The fixed asset turnover ratio is calculated as __________ divided by average fixed assets.
sales
The fixed-asset turnover ratio indicates the level of ________ generated by each dollar of fixed assets
the asset is substantially complete and ready for use or when interest costs are no longer being incurred
The interest capitalization period begins with the first expenditure and ends when
a debit to loss on impairment of goodwill
The journal entry to recognize a loss of impairment of good will would include a ?
one- step
The measurement of an impairment loss for intangible assets with indefinite useful lives is a(n) _______________ process?
The assets book value and its fair value
The measurement of an impairment loss in step 2 is the difference between?
Allocation method
The pattern in which the usefulness is expected to be consumed
Which of the following most accurately reflects the concept of depreciation as used in accounting? The process of charging the decline in value of an economic resource to income in the period in which the benefit occurred. The process of allocating the cost of tangible assets to expense in a systematic and rational manner to those periods expected to benefit from the use of the asset. A method of allocating asset cost to an expense account in a manner which closely matches the physical deterioration of the tangible asset involved. An accounting concept which allocates the portion of a long-lived asset used during a period to a contra asset account so the net book value of the asset reflects the fair value of the asset.
The process of allocating the cost of tangible assets to expense in a systematic and rational manner to those periods expected to benefit from the use of the asset.
Fair value less costs to sell
The recoverable amount is the higher of the assets value-in use and its??
1. Allocation method 2. Allocation base 3. Service life
The three factors that should be established to measure cost allocation are?
full-cost method and successful efforts method
The two generally accepted methods for oil and gas accounting for US GAAP are the
interest charges and allocation of overhead
The two important accounting issues related to self-constructed assets are
Definitions Allocation Base Allocation Method Service Life
The value of the usefulness that is expected to be consumed. The pattern in which the usefulness is expected to be comsumed. The estimated use that the company expects to recieve from the asset.
If an impairment loss is recognized for an intangible asset with a finite life, which of the following occurs?
The written-down book value is the new cost basis for future amortization. Later recovery of the impairment is prohibited.
If an impairment loss is recognized for an intangible asset with a finite life, which of the following occurs? A recovery can be recognized up to the initial amount of the impairment. Future impairment losses are prohibited. The written-down book value is the new cost basis for future amortization. Recovery of the impairment is prohibited.
The written-down book value is the new cost basis for future amortization. Recovery of the impairment is prohibited.
1. Recoverability test: An impairment occurs when the undiscounted sum of estimated future cash flows from an asset is less than the assets book value. 2. Measurement: If the recoverability test indicates an impairment has occurred, an impairment loss is recored for the difference between the assets book value and its fair value
To determine whether an impairment loss has occurred and for how much to record the loss is a two step process
What is the purpose of group or composite depreciation?
To reduce the record-keeping costs of determining depreciation.
True or false: If an impairment loss is recognized, later recovery of the loss is prohibited.
True
True or false: Repairs and maintenance expenditures related to an asset do not increase future benefits.
True
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
True or false: Under U.S. GAAP, if an impairment loss is recognized for an intangible asset with a finite life, recovery of the impairment loss is prohibited.
True
False: it is called allocation base
True or false: the total amount of cost to be allocated over an assets service life is called its residual value?
1. With finite lives 2. With indefinite lives
Two categories for intangible assets are?
Measurement Subsequent to Impairment GW
US GAAP does not permit subsequent reversals of goodwill impairment losses. After the write-down, the firm reports goodwill at its revised carrying value.
Recoverable amount
Under IFRS reporting, an impairment loss is measured as the difference between the book value and the?
When to test for impairment IFRS
Under IFRS, firms must review the impairment indicators every year to determine whether an impairment test is needed. Similar to US GAAP, a company assesses whether the indicators exist by considering both external factors (such as market interest rates, economic environment, technological breakthrough, or a decline in market capitalization) and internal factors (such as the evidence of obsolescence and restructuring activities in the entity). Additionally, IFRS requires an annual test for indefinite-life intangibles even in the absence of indicators. For indefinite-life intangible assets, the existence of impairment indicators can prompt more frequent testing. Impairment tests are more frequent for indefinite-life intangible assets because they are not amortized, and there is more risk that firms will overvalue them than with PPE or finite-life intangibles, which firms carry at net book value.
the lower of its book value or fair value less costs to sell
Under US GAAP, when property, plant, and equipment are held for sale, the assets are reported at
Later recovery of the impairment loss is prohibitied
Under US gaap, if company recognized an impairment loss
In a manufacturing environment
Under what circumstances is depreciation included in inventory?
The amount of use that the company expects to obtain from an asset before disposing of it is referred to as the life of the asset.
Units-of-production method
Which of the following is an activity-based depreciation method?
Units-of-production method
Accounting for Impairments: PPE, Finite-Life Intangible Assets and Indefinite-Life Intangible Assets: IFRS
Unlike US GAAP, IFRS impairment testing is similar for all types of long-lived assets other than goodwill.
The issues that are important for tangible and intangible assets, include determining:
What amounts to include in the cost, how to record the disposal of the asset, how to expense the cost of the asset over its life
As a separate line item on the income statement or in a disclosure note
What are the acceptable disclosures for research and development expenses?
1. assets to be held and used 2. Assets held for sale
What are the categories for accounting for impairments?
1. A significant decrease in market price 2. A significant adverse change in how the assets is being used or in its physical condition 3. A significant adverse change in legal factors or in the business climate 4. An accumulation of costs significantly higher than the amount originally expected for the acquisition or construction of an asset
When to test for impairment?
1. Increasing the residual value of an asset 2. Change in useful life of an asset
Which items are considered changes in estimates that would be treated on a prospective basis in the current period or future periods?
1. Timberlands 2. Farm animals 3. Fruit trees
Which of the following are examples of biological assets?
1. A significant decrease in market price 2. A significant adverse change in how asset is being used
Which of the following events would require the investigation of possible impairment?
1. A systematic and ration allocation method 2. A pattern in which the services are obtained from its use
Which of the following items should be considered when choosing an allocation method for a long-term asset?
Impairment losses cannot be reversed
Which of the following statements correctly describes the treatment of the recovery of previously recognized goodwill impairment losses under IFRS and US GAAP
implicit interest
Zwerg Company purchases equipment costing $45,500 and signs a non-interest bearing note for $52,000. The difference between the cost of the equipment and the amount of the note represents:
Research / development
_____________ is planned search or critical investigation aimed at discovery of new knowledge, whereas ____________ is the translation of new findings into a plan or design for a new product or process.
Development
________________ costs are incurred after a natural resource has been discovered but before production begins.
If an impairment loss is recognized for an intangible asset with a finite life, which of the following occurs?
_later recovery of the impairment is prohibited -the written-down book value is the new cost basis for future amortization
In a business acquisition, if the fair value of net assets exceed the fair value of the consideration exchanged, a bargain purchase occurs. This bargain purchase is recorded as a gain on the I/S in the year of acquisition an extraordinary gain on the I/S in the current period a contra asset account called negative goodwill as other comprehensive income for the period
a gain on the I/S in the year of acquisition
For assets used in the manufacturing of a product, depreciation expense should be recorded as an expense of the current period an extraordinary loss of the period a part of the cost of inventory a contra expense account
a part of the cost of inventory
Which of the following items should be considered when choosing an allocation method for a long-term asset? (Select all that apply.) the cost of the asset compared to its residual value the probability for an impairment loss a pattern in which the services are obtained from its use a systematic and rational allocation method
a pattern in which the services are obtained from its use, a systematic and rational allocation method
On January 1, year 1, Green Tractor Corp. purchased equipment for $100,000. The equipment has a useful life of 4 years, and a residual value of $20,000. Using the sum-of-the-years'-digits method, what is the depreciation expense for year 1? a) $32,000 b) $20,000 c) $40,000 d) $25,000
a) $32,000 1+2+3+4 = 10 100,000 - 20,000 = 80,000 * 4/10 = $32,000
On January 1, year 1, Roark Corp. purchased equipment for 120,000. The equipment has a residual value of $20,000, and has a life of 1,000,000 hours. Roark uses the units-of-production method of depreciation. In year 1, Roark used the machine 30,000 hours, and in year 2, Roark used the machine 50,000 hours. What is the depreciation expense for year 2? a) $5,000 b) $8,000 c) $6,000 d) $3,000
a) $5,000 $100,000 - 20,000 = 100,000 $100,000 * 50,000hrs / 1,000,000hrs = $5,000
On October 1, year 1, Kirby Corp. purchased equipment for $100,000. The equipment has a useful life of 5 years with no residual value. Kirby uses the straight-line method of depreciation. The partial year depreciation for year 1 is a) $5,000 b) $20,000 c) 2,500 d) $10,000
a) $5,000 $100,000/5 years = 20,000 * 3/12 = 5,000
Raphael Corp. incorrectly expensed a major addition to equipment when the company should have capitalized the expenditure. What are the financial statement effects of this error? a) Assets are understated. b) Expenses are understated. c) Net Income is understated. d) Liabilities are overstated
a) Assets are understated. c) Net Income is understated.
Which statement is true about the straight-line method of depreciation? a) It allocates an equal amount of depreciation to each year the asset is used. b) It recognizes expense proportionately with the amount of use of the asset. c) It is the preferred method for companies expecting to use the asset more in its early years of life. d) It is an accelerated method of depreciation.
a) It allocates an equal amount of depreciation to each year the asset is used.
The journal entry to record the amortization of an intangible asset would include a a) credit to the intangible asset b) credit to amortization expense c) debit to amortization expense d) debit to accumulated amortization
a) credit to the intangible asset c) debit to amortization expense
The formula to calculate the depletion rate of a natural resource is the _____ divided by the estimated extractable amount of natural resources. a) depletion base b) costs to extract in the current year c) historical cost d) amount extracted
a) depletion base
The key factor in classifying items as repairs and maintenance is that a) future benefits are not provided beyond those originally anticipated from the asset. b) the invoice must be less than $1,000 for productive assets. c) the asset must be a current asset used in the normal course of business.
a) future benefits are not provided beyond those originally anticipated from the asset.
Which of the following are accelerated methods of depreciation? a) sum-of-the-years'-digits method b) declining balance method c) double-declining-balance method d) straight-line depreciation
a) sum-of-the-years'-digits method b) declining balance method c) double-declining-balance method
Straight-line depreciation is calculated as the depreciable base divided by a) the estimated useful life of the asset b) the residual value of the asset c) the cost of the asset
a) the estimated useful life of the asset
On January 1, 2016, Canseco Plumbing Fixtures purchased equipment for $62,000. Residual value at the end of an estimated four-year service life is expected to be $6,000. The company expects the machine to operate for 10,000 hours. The machine operated for 3,800 and 4,600 hours in 2016 and 2017, respectively.
a. Calculate depreciation expense for 2016 and 2017 using straight line method
Declining-Balance Method
accelerated method that multiplies a constant percentage
Declining-balace method
accelerated method that multiploes a constant percentage rate times the decreasing book value
The cumulative amount of a tangible asset's cost that has been depreciated in all prior year plus the current year is called -amortization expense -accumulated depreciation -accumulated amortization -depreciation expense
accumulated depreciation
Goodwill is recognized only when one company __________ another company
acquires
Unit of production or units of output are alternative terms for the _. _ depreciation method.
activity, based
Units of production or units of output are alternative terms for the ________ _______ depreciation
activity-based
On January 1, 20X1, Claire Corp. purchased a patent. One month after acquiring the patent, Claire paid $3,000 in legal fees to successfully defend its right to the patent. The $3,000 should be:
added to the Patent account
Attorney fees and other cost necessary to secure a patent should be
added to the patent account
straight-line method
allocates an equal portion of the depreciable base to each year of the asset's service life
Deprciation is a process of cost ___________, and not a process of valuation.
allocation
Depreciation is a process of cost _____, and not a process of valuation.
allocation
Depreciation is a process of cost _________, and not a process of valuation.
allocation
Depreciation
allocation of the cost of a tanggible fixed asset
Intangible asset
amortization
The journal entry to record the amortization for a patent would include a debit to (blank) and credit to (patent)
amortization expense; patent
Which of the following statements describe the accounting rules for a franchise agreement? (Select all that apply.) amortize the cost of the franchise over its life expense the cost of the franchise in year of acquisition capitalize the cost of the franchise expense periodic payments as incurred capitalize the periodic payments each year
amortize the cost of the franchise over its life, capitalize the cost of the franchise, expense periodic payments as incurred
A new major component that is added to an existing asset is called
an addition
For acouting purposes, depreciation is
an allocation of a cost of an asset
For accounting purposes, depreciation is
an allocation of a cost of an asset.
In accounting, the term impairment refers to allocation of an asset over its useful life offsetting liabilities against the related assets an asset's significant decline in value cost recovery of an asset for investment purposes
an asset's significant decline in value
In accounting, the term impairment refers to
an asset's significant decline in value.
Start-up costs such as legal fees and state filings to incorporate should be treated as -an asset and amortized over 5 years -an expense in the period incurred -an extraordinary loss of the period -accumulated other comprehensive income
an expense in the period incurred
Because it is difficult to estimate the future value of R&D, FASB requires that R&D costs be treated as a liability on the balance sheet an expense on the income statement an asset on the balance sheet a contra asset on the balance sheet
an expense on the income statement
Because it is difficult to estimate the future value of research and development, FASB requires that research and development costs be treated as
an expense on the income statement
Because it is difficult to estimate the future value of research and development, FASB requires that research and development costs be treated as -an expense on the income statement -a contra asset on the balance sheet -an asset on the balance sheet -a liability on the balance sheet
an expense on the income statement
If a company replaces a major component of an asset with a new component with the same characteristics of an old component, it is classified as repairs and maintenance an improvement an addition a rearrangement
an improvement
If a company replaces a major component of an asset with a new component with the same characteristics of an old component, it is classified as -an addition -repairs and maintenance -an improvement -a rearrangement
an improvement
Which of the following intangible assets is NOT amortized? an internally generated brand name a purchased customer list a purchased ten year franchise license a registered patent
an internally generated brand name
At the beginning of 2014, Robotics Inc. acquired a manufacturing facility for $12.4 million. $9.4 million of the purchase price was allocated to the building. Depreciation for 2014 and 2015 was calculated using the straight-line method, a 20-year useful life, and a $1.4 million residual value. In 2016, the estimates of useful life and residual value were changed to 15 years and $540,000, respectively. What is depreciation on the building for 2016?
annual deprec. 12.4-9.4=3 million/20= 2014=150,000 2015=150,000 +2014(150,000) 12.4-300,000=12,100,000 2013 depreciation years were changed to 15-2 years that have already happened=13 12,100,000-540,000=11,560,000/13= 889,230.76 rounded 889,231
Intangible assets with indefinite useful lives should be tested for impairment
annually or more frequently if events or changes in circumstances indicate possible impairment
Intangible assets with indefinite useful lives should be tested for impairment -on the last day of the fiscal year-end -annually or more frequently if events or changes in circumstances indicate possible impairment -only if events or changes in circumstances indicate possible impairment
annually or more frequently if events or changes in circumstances indicate possible impairment
Intangible assets with indefinite useful lives should be tested for impairment
annually or more frequently if events or changes in circumstances indicate possible impairment.
In order for a cost to be capitalized, the following must be present: the useful life of an asset must be increased the quantity of assets must be increased the quality of assets must be increased any of these answers are correct
any of these answers are correct
The group and composite methods of depreciation are similar because they both
apply straight-line depreciation to the assets based on average service lives of the assets
A company issues its equity securities to purchase land. The common stock is not publicly traded. The best indicator of fair value is the appraised value of the land estimated value of the stock
appraised value of the land
The composite depreciation method is used is used when assets:
are dissimilar and have different service lives.
The composite depreciation method is used when assets
are dissimilar and have different services lives
Where is the account accumulated depreciation on the equipment found on the financial statements?
as a contra asset account to equipment on the balance sheet
Obligations associated with disposition of property, plant, equipment, or natural resources are called -accumulated depreciation -nonrecurring fixed assets -asset retirement obligations -contra-asset-liabilities
asset retirement obligations
Profit margin mulitplies by assets turn overs equals return on ___________.
assets
Raphael Corp. incorrectly expensed a major addition to equipment when the company should have capitalized the expenditure. What are the financial statement effects in the year the error was made? (Select all that apply.) expenses are understated assets are understated liabilities are overstated net income is understated
assets are understated, net income is understated
When accounting for impairments, the two categories for recognizing and measuring the loss are
assets to be held and used and assets held for sale
When accounting for impairments, the two categories for recognizing and measuring the loss are assets with finite lives and assets with indefinite lives property and equipment assets to be held and used and assets held for sale tangible and intangible assets
assets to be held and used and assets held for sale
When accounting for impairments, the two categories for recognizing and measuring the loss are
assets to be held and used and assets held for sale.
When is it appropriate to recognize a liability for an asset retirement obligation? (Select all that apply.) at the asset's retirement date when the asset is impaired and cost is not recoverable at the inception of the asset's life if legal obligation exists over the asset's life as incurred
at the inception of the asset's life if legal obligation exists, over the asset's life as incurred
Which of the following items are capitalized into the cost of a patient?
attorney fees to secure patent purchase price filling fees
Asset turnover ratio is net sales divided by
average total assets
Return on assets is calculated as net income divided by
average total assets
Which of the following would be included in a journal entry to record the allocation of the cost of a natural resource for the period? a) Debit accumulated depletion. b) Credit the natural resource. c) Debit depletion expense. d) Credit depletion expense.
b) Credit the natural resource. c) Debit depletion expense.
Which of the following would be considered "expenditures subsequent to acquisition" for a building? a) Real estate fees paid six months after acquisition b) Repairing a major roof leak three years after use c) Payment of appraisals fees related to purchase of building d) Cost of installing solar panels after three months of use of the building
b) Repairing a major roof leak three years after use d) Cost of installing solar panels after three months of use of the building
Which of the following are characteristics of goodwill? a) Amortized periodically b) Subject to impairment testing c) Indefinite life d) Finite life
b) Subject to impairment testing c) Indefinite life
Intangible assets with indefinite useful lives should be tested for impairment a) on the last day of the fiscal year-end. b) annually or more frequently if events or changes in circumstances indicate possible impairment. c) only if events or changes in circumstances indicate possible impairment.
b) annually or more frequently if events or changes in circumstances indicate possible impairment.
Which items are considered changes in estimates that would be treated on a prospective basis in the current period and future periods? a) forgetting to record depreciation expense in the previous period b) change in residual value of an asset c) change in useful life of an asset d) incorrectly capitalizing an item when it should be expensed
b) change in residual value of an asset c) change in useful life of an asset
Which assets are not required to be tested for impairment annually, but only if events and circumstances indicate the book value may not be recoverable? a) goodwill b) intangible assets with finite lives c) intangible assets with indefinite lives d) property, plant, and equipment
b) intangible assets with finite lives d) property, plant, and equipment
The two categories for intangible assets are a) intangibles with infinite lives. b) intangibles with finite lives. c) intangibles with undefined lives. d) intangibles with indefinite lives.
b) intangibles with finite lives. d) intangibles with indefinite lives.
The total amount of cost to be allocated over an asset's service life is called its allocation method time base residual
base
The total amount of cost to be allocated over an asset's service life is called its allocation -residual -time -method -base
base
If a company uses the straight line depreciation method on its only plant asset, factory machinery, the credit to accumulated depreciation from period to period over the useful life of the asset will be constant vary with the number of units sold vary with the number of units produced vary with the sales revenue
be constant
Collison and Ryder Company (C&R) has been experiencing declining market conditions for its sportswear division. Management decided to test the assets of the division for possible impairment. The test revealed the following: book value of division's assets, $27.9 million; fair value of division's assets, $21.7 million; sum of estimated future cash flows generated from the division's assets, $28.7 million. What amount of impairment loss should C&R recognize?
because the undicsounted sum of future cash flows of 28.7 million exceeds book value of 27.9 million, there is no impairment loss
Using the LIFO retail method, a new layer at retail is determined by subtracting what from ending inventory at retail? -goods available for sale at retail -beginning inventory at cost -net sales at retail -beginning inventory at retail
beginning inventory at retail
double-declining balance
beginning of period book value x depreciation rate per year 2016 62000x50%=31000 2017 31000x50%=15500
Recording depreciation results in the allocation of the cost of a long-term asset to the years during which the asset generates __________
benefits
The objective in choosing an appropriate depreciation method is to properly allocate the cost of the asset to the _____ provided by the asset during its life.
benefits
For IFRS reporting, living animals and plants, including trees in a timber tract or in a fruit orchard, are referred to as ... assets.
biological
When sellinf 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
When selling a fixed asset, the seller recognizes a gain or loss for the difference between the amount received and the (blank) value of the asset sold
book
When selling a fixed asset, the seller recognizes a gain or loss for the difference between the consideration received and the __________ value of the asset sold.
book
The original cost of an asset minus accumulated depreciation is
book value
The original cost of an asset minus accumulated depreciation is:
book value
The original cost of the asset less the accumulated depreciation is the (blank) of the asset
book value
The original cost of the asset less the accumulated depreciation is the ___________ ____________ of the asset
book value
An asset impairment for assets to be held for sale is measured as the excess of the
book value over the fair value less costs to sell
An asset impairment for assets to be held for sale is measured as the excess of the book value over the fair value less costs to sell accumulated depreciation less fair value historical cost less fair value
book value over the fair value less costs to sell
An asset impairment for assets to be held for sale is measured as the excess of the -historical cost less fair value -accumulated depreciation less fair value -book value over the fair value less costs to sell
book value over the fair value less costs to sell
An asset impairment for assets to be held for sale is measured as the excess of the
book value over the fair value less costs to sell.
To determine whether an impairment loss should be recorded for goodwill, a company should determine if the fair value of the reporting unit is less than its
book value.
McDonald Company acquired machinery on January 1, 2009 which it depreciated under the straight-line method with an estimated life of fifteen years and no salvage value. On January 1, 2014, McDonald estimated that the remaining life of this machinery was six years with no salvage value. How should this change be accounted for by McDonald? as a prior period adjustment as the cumulative effect of a change in accounting principle in 2014 by setting future annual depreciation equal to 1/6 of the book value on January 1, 2014 by continuing to depreciate the machinery over the original fifteen year life
by setting future annual depreciation equal to 1/6 of the book value on January 1, 2014
If an impairment loss is recognized for an intangible asset with a finite life, which of the following occurs? a) Future impairment losses are prohibited. b) A recovery can be recognized up to the initial amount of the impairment. c) Recovery of the impairment is prohibited. d) The written-down book value is the new cost basis for future amortization.
c) Recovery of the impairment is prohibited. d) The written-down book value is the new cost basis for future amortization.
Which of the following items should be considered when choosing an allocation method for a long-term asset? a) the probability for an impairment loss b) the cost of the asset compared to its residual value c) a systematic and rational allocation method d) a pattern in which the services are obtained from its use
c) a systematic and rational allocation method d) a pattern in which the services are obtained from its use
The total cost of an asset's recorded amount to be expensed over its service life is referred to as its a) fair value b) cost basis c) allocation base d) valuation base
c) allocation base
The term (blank) means to record the expenditure as an asset
capitalize
Computer software purchased for internal use should be capitalized and amortized over its useful life expensed immediately capitalized as part of the computer hardware
capitalized and amortized over its useful life
If equipment is purchased for research and development, but has an alternative future use, the cost of the equipment is -expensed in the year the equipment is retired -capitalized and not expensed to research and development -expensed immediately -capitalized and depreciated as R&D expense in the current and future periods
capitalized and depreciated as R&D expense in the current and future periods
Consistent with the new guidance on revenue recognition, the incremental costs to obtain and fulfill a long-term contract should be capitalized as part of the cost of the long-term project capitalized as an intangible asset expensed when incurred
capitalized as an intangible asset
Costs incurred after technological feasibility but before the software is available to customers should be treated as R&D expenses treated as an ordinary loss in the period incurred expensed in the period incurred capitalized as an intangible asset
capitalized as an intangible asset
Costs incurred after technological feasibility is established but before the software is available is customers should be -expensed in the period incurred -capitalized as an intangible asset -treated as research and development expenses -treated as an ordinary loss in the period incurred
capitalized as an intangible asset
Select the correct accounting treatment for subsequent expenditures relating to long-term assets with the corresponding description.
capitalized as incurred- expenditure increases future benefits derived from asset expensed as incurred - expenditure yields benefits in current period only.
Expenditures needed to get land ready for its intended use should be: -capitalized as part of the cost of a related building -capitalized as part of the cost of land -expensed as incurred
capitalized as part of the cost of land
An expenditure made in connection with a machine being used by an enterprise should be expensed immediately if it merely extends the useful life but does not improve the quality. expensed immediately if it merely improves the quality but does not extend the useful life. capitalized if it maintains the machine in normal operating condition. capitalized if it increases the quantity of units produced by the machine.
capitalized if it increases the quantity of units produced by the machine.
The cost of setting up a corporation includes legal fees, fees paid to the state of incorporation, and fees paid to promoters to sell shares of stock. These costs are said to benefit the corporation for its entire life. These costs should be capitalized, but never amortized capitalized and amortized over the life of the company capitalized and amortized over 5 years expensed as incurred
capitalized, but never amortized (indefinite life so it can't be amortized)
Accounting for land improvements requires that the costs of land improvements are (Select all that apply.) expensed in the current period capitalized depreciated or amortized over the periods benefited included in the cost of land
capitalized, depreciated or amortized over the periods benefited
The cost of major improvement that extends the service life of an asset would be ___________ , whereas the cost of maintenance that increase the future benefits would be __________.
capitalized, expensed
Accounting for land improvements require that the land improvements are __________ and then ____________ over periods benefited by their use.
capitalized; depreciated
The cost of a major improvement that extends the service life of an asset would be (blank), whereas the cost of maintenance that does not increase the future benefits would be (blank)
capitalized; expensed
The retirement of a long-lived asset differs from a sale in that upon retirement, no (blank) is received
cash
Which items are considered changes in estimates that would be treated on a prospectice basis in the current period and future periods?
change in residual value of an asset change in service life of an asset
Which items are considered changes in estimates that would be treated on a prospective basis in the current period and future periods?
change in useful life of an asset increasing the residual value of an asset
Which items are considered changes in estimates that would be treated on a prospective basis in the current period and future periods? (Select all that apply.) change in useful life of an asset increasing in the residual value of an asset incorrectly capitalizing an item when it should be expensed forgetting to record depreciation expense in the previous period
change in useful life of an asset, increasing in the residual value of an asset
Which of the following accounting changes must be justified in the notes to the financial statements? changes in estimated residual value changes in depreciation methods changes in the remaining service life
changes in depreciation methods
A nonmonetary exchange is considered to have ... substance if the future cash flows will change as a result of the exchange.
commercial
A nonmonetary exchange is considered to have _____ substance if the future cash flows will change as a result of the exchange
commercial
Straight-Line Method
commonly used for financial statement purposes; allocates an equal portion of the depreciable base to each year of the asset's service life
Which of the following irems typically are classifies as equipment?
computerm and printers used in office, furniture and fixtures, machinery used in manufactoring
The practice of recognizing decreases in inventory but not increases is consistent with what? -full disclosure -going concern -conservatism -matching
conservatism
The gain or loss on disposal of an asset is calculated as the fair value of the asset less accumulated depreciation the cost of the asset less accumulated depreciation consideration received less fair value of asset sold consideration received less book value of asset sold
consideration received less book value of asset sold
Which of the following would be considered "expenditures subsequent to acquisition" for a building? (Select all that apply.) cost of installing solar panels after three months of use of the building payment of appraisals fees related to purchase of building repairing a major roof leak three years after use real estate fees paid six months after acquisition
cost of installing solar panels after three months of use of the building, repairing a major roof leak three years after use
Clarion purchases land lends and prepares it for use. Which of the following items should be capitalized as land improvements?
cost of sidewalks, cost of driveways, cost of lawn sprinkler systems
Which of the following items should be capitalize as land improvements? (Select all that apply.) cost of land cost of sidewalks cost of parking lots cost of fences
cost of sidewalks, cost of parking lots, cost of fences
straight-line depreciation
cost-salvage/useful life in years 5600/4=14000 2016 =14000 2017=14000
Which of these are parts of the journal entry to record depreciation?
credit accumulated depreciation debit depreciation expense
Cheng Corp. exchanges equipment in a transaction that has commercial substance. The original cost of the asset surrendered was $90000 and its accumulated depreciation at the date of exchange was $40000. The asset received had a fair value of $40000 and a book value of $35000. What journal entry should be recorded? (Select all that apply.) credit equipment old $90000 debit loss on equipment $15000 debit equipment $35000 credit equipment old $50000 debit equipment new $40000 debit loss on exchange $10000 debit accumulated depreciation $40000
credit equipment old $90000, debit equipment new $40000, debit loss on exchange $10000, debit accumulated depreciation $40000
What would be included in the journal entry to record the allocation of the cost of a natural resource for the period?
credit natural resource debit depletion expense
Mining Ventures purchases land and the rights to explore for $100000. Exploration costs are $20000 and development costs are $30000. The estimated cost of restoration, calculated as the present value of expected cash outflows, is $50000. The journal entry to record the acquisition of the mine will include which of the following entries? (Select all that apply.) credit to asset retirement liability $50000 debit to asset retirement obligation $150000 credit to cash $200000 debit to mining assets of $200000 credit to cash $150000
credit to asset retirement liability $50000, debit to mining assets of $200000, credit to cash $150000
Marston acquired assets for $100,000. At the end of year 3, the assets had accumulated depreciation of $40,000. An impairment loss was indicated, and the fair value of the assets was $48,000. The journal entry to record the impairment loss will include a
credit to assets of $52,000 Debit to accumulated depreciation of $40,000 Debit to loss on impairment of $12,000
Krasel Corp. exchanges equipment in a transaction that has commercial substance. The original cost of the asset surrendered was $90000, and its accumulated depreciation at the date of exchange was $70000. The asset received had a fair value of $50000 and a book value of $45000. The entry to record the transaction includes (Select all that apply.) credit to gain on exchange of asset for $30000 debit to equipment for $45000 credit to equipment for $70000 credit to equipment old for $90000 debit to equipment new for $50000 debit to accumulated depreciation $70000
credit to gain on exchange of asset for $30000, credit to equipment old for $90000, debit to equipment new for $50000, debit to accumulated depreciation $70000
Evans Corp. incorrectly expensed $10,000 in the previous year when it purchased equipment. The entry to correct this error will include a
credit to retained earnings
The journal entry to record the allocation of the cost of a natural resource will include a -credit to the natural resource -debit to accumulated depletion -credit to depreciation expense -debit to amortization expense
credit to the natural resource
Under the LIFO retail inventory method, the cost of a new layer added during the period is determined by multiplying the retail value of the layer by the -cost-to-retail percentage based on the goods available for sale -beginning-inventory cost-to-retail percentage -current-period cost-to-retail percentage
current-period cost-to-retail
The formula to calculate the depreciation for the units-of production method is ((cost-residual value)/total estimated production) X ________).
current-year activity or production
The formula to calculate the depreciation for the units-of-production method is (cost-residual value)/total estimated production x ________.
current-year activity or production
A company can manipulate income by overstating an impairment loss. The financial statement effects of this are
current-year income is low future income is unrealistically high future depreciation, depletion, or amortization is unrealistically low.
On January 1, year 1, London Corp. purchases equipment for $400,000. The equipment has a 5-year life and a $50,000 residual value. London uses the double-declining-balance method of depreciation. What is the book value at the end of year 1? a) $350,000 b) $200,000 c) $190,000 d) $240,000
d) $240,000
What is the purpose of group or composite depreciation? a) To eliminate the need for impairment testing. b) To classify assets by type as required by GAAP. c) To eliminate the accounting entries when disposing of assets. d) To reduce the record-keeping costs of determining depreciation.
d) To reduce the record-keeping costs of determining depreciation.
The allocation of the cost of an intangible asset over its useful life is called a) accretion b) depletion c) depreciation d) amortization
d) amortization
Allocation of the cost of a natural resource is called a) amortization b) accretion c) depreciation d) depletion
d) depletion
On December 30, 2017, Rocket Corp. disposed of equipment with a historical cost of $100000 and accumulated depreciation of $70000. The equipment was sold for $80000 cash. The journal entry to record the sale will include which of the following entries? (Select all that apply.) debit accumulated depreciation $70000 credit gain on sale of equipment $50000 credit gain on sale of equipment $20000 debit cash $80000 credit to equipment $100000 debit loss on sale of equipment $20000 debit gain on sale of equipment $50000 credit cash $80000
debit accumulated depreciation $70000, credit gain on sale of equipment $50000, debit cash $80000, credit to equipment $100000
Which of the following would be included in a journal entry to record the allocation of the cost of a natural resource for the period? (Select all that apply.) debit depletion expense debit accumulated depletion credit depletion expense credit the natural resource
debit depletion expense, credit the natural resource
The journal entry to record the amortization of an intagible asset would include
debit to amortization credit to the intangible asset
A journal entry to record the amortization of an intangible asset would include a
debit to amortization expense credit to the intangible asset
The journal entry to record depreciation expense includes (Select all that apply.) debit to accumulated depreciation debit to depreciation expense credit to accumulated depreciation credit to depreciation expense
debit to depreciation expense, credit to accumulated depreciation
Marston acquired assets for $100,000. At the end of year 3, the assets had accumulated depreciation of $40,000. An impairment loss was indicated, and the fair value of the assets was $48,000. The journal entry to record the impairment loss will include a
debit to loss on impairment of $12,000. debit to accumulated depreciation of $40,000. credit to assets of $52,000.
Marston acquired assets for $100000. At the end of year 3, the assets had accumulated depreciation of $40000. An impairment loss was indicated, and the fair value of the assets was $48000. The journal entry to record the impairment loss will include (Select all that apply.) debit to loss on impairment of $12000 credit to assets of $52000 debit to accumulated depreciation of $40000 credit to assets of $100000 credit to accumulated depreciation of $40000 debit to assets of $48000
debit to loss on impairment of $12000, credit to assets of $52000, debit to accumulated depreciation of $40000
The journal entry to recognize a loss on impairment of goodwill would include a
debit to loss on impairment of goodwill
The journal entry to retire old equipment that is not fully depreciated includes a:
debit to loss, credit to equipment, debit to accumulated depreciation
Which depreciation method allocate the cost of long-term assets based on time?
declining-balance straight-line
Merger Company applies the lower of cost and net realizable value rule to individual inventory items. If the company were to apply the rule to the entire inventory balance, the chance of recording an inventory loss would -increase -be the same -decrease
decrease
The sum-of-the-years'-digits(SYD) method of depreciation is an accelerated method in which depreciation expense decreases each year by -decreasing the denominator each year in the depreciation rate -increasing the depreciable base each year -decreasing the numerator each year in the depreciation rate -reducing the residual value each year in the depreciation formula
decreasing the numerator each year in the depreciation rate
The portion of a tangible asset's cost that is recognized as an expense in the current year is called -accumulated depreciation -depreciation expense -amortization expense -accumulated amortization
depreciation expense
The portion of a tangible asset's cost that is recognized as an expense in the current year is called -amortization expense -depreciation expense -accumulated depreciation -accumulated amortization
depreciation expense
The portion of a tangible asset's cost that is recognized as an expense is the current year is called
depreciation expense
The portion of intangible asset's cost that is recognized as an expense in the current year is called depreciation expense accumulated depreciation accumulated amortization amortization expense
depreciation expense
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
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
Match each term with its definition depreciation / depletion / amortization allocation of the cost of natural resources / allocation of the cost of an intangible asset / allocation of the cost of a tangible fixed aset
depreciation... allocation of the cost of a tangible fixed asset depletion... allocation of the cost of natural resources amortization... allocation of the cost of an intangible asset
The allocation of the cost of a tangible fixed asset is referred to as I ____________________ , whereas the allocation of the cost of an intangible asset is referred to as ________________
depreciation/ amortization
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
A company acquires a mine and incurs costs such as expenditures to build tunnels and shafts before production may begin. These expenditures are classified as -restoration costs -development costs -exploration costs -acquisition costs
development costs
Accounting for impairment of value of assets with finite lives and those with indefinite lives
differs
What are the cost components for self-constructed assets? (Select all that apply.) direct material manufacturing overhead operating expenses direct labor
direct material, manufacturing overhead, direct labor
An asset that is traded for another asset is treated as an exchange, whereas an asset that is sold or retired is treated as a:
disposition
An asset that is traded for another asset is treated as an exchange, whereas an asset that is sold ot retired is treated as a(n) _____________.
disposition
The cost of land typically includes the purchase price and all of the following costs except grading, filling, draining, and clearing costs costs to tear down a building on the property when it was purchased driveways, fences, and parking lotss assumption of liens or mortgages on the property at the time of the purchase
driveways, fences, and parking lots
The profit margin ratio indicates the amount of net income achieved for
each dollar of sales
Ringler Corporation exchanges one plant asset for a similar plant asset and gives cash in the exchange. The exchange is not expected to cause a material change in the future cash flows for either entity. If a gain on the disposal of the old asset is indicated, the gain will be reported in the Other Revenues and Gains section of the income statement. effectively reduce the amount to be recorded as the cost of the new asset. effectively increase the amount to be recorded as the cost of the new asset. be credited directly to the owner's capital account.
effectively reduce the amount to be recorded as the cost of the new asset.
Which of the following are included in R&D costs? (Select all that apply.) equipment in the lab labor costs of research personnel sales commissions administrative expenses allocation of overhead for lab facilities
equipment in the lab, labor costs of research personnel, allocation of overhead for lab facilities
A change in depreciation method is considered a change in accounting _____ that is achieved by a change in accounting principle.
estimate
A change in depreciation method is considered a change in accounting ______ that is achieved by a change in accounting principle
estimate
The formula to calculate the depletion rate of a natural resource is the depletion base divided by the -total cost of the natural resource -amount extracted in the current year -estimated extractable amount of natural resource -estimated cost per ton of the natural resource
estimated extractable amount of natural resource
An asset that is traded for another asset is treated as a(n) _, whereas an asset that is sold or retired is treated as a disposition.
exchange
If a company generates its own goodwill through advertising or training, how should these costs be treated? capitalize the costs and test for impairment at year end capitalize the costs and amortize them over the expected life of the goodwill expense the costs as incurred record as an extraordinary loss in the current year
expense the costs as incurred
Expenditures for repairs and maintenance should be _ in the period incurred.
expensed
Expenditures for repairs and maintenance should be _____ in the period incurred.
expensed
Expenditures for repairs and maintenance should be ________ in the period incurred.
expensed
If an intangible right is not successfully defended, the legal costs should be
expensed
If an intangible right is not successfully defended, the legal costs should be _____________.
expensed
The costs of restructuring an asset so that it has new capabilities, but where it is uncertain if the restructuring will provide future benefits, should be
expensed
For a patent developed internally, the research and development costs are
expensed as incurred
For a patent developed internally, the research and development costs are expensed as incurred recorded as contra asset to the patent capitalized into the cost of the patent recorded as patent amortization expense
expensed as incurred
Recurring cost
expensed during the period they are incurred
Recurring costs
expensed during the period they are incurred
If equipment is purchased specifically for one research and development project, the cost of the equipment is -capitalized and expensed over its useful life -expensed in the year the equipment is retired -never expensed -expensed immediately
expensed immediately
Expenditures for repairs and maintenance should be -expensed over the useful life of the asset -expensed in the period incurred -capitalized
expensed in the period incurred
If an intangible right is not successful to defend, the legal cost should be:
expensed.
If a company generates its own goodwill through advertising or training, how should these costs be treated?
expenses the costs as incurred
Consistent with IFRS rules for R&D, the costs of research-related activities are recorded as (blank), while the costs of development-related actives are recorded as (blank)(blank)
expenses; intangible assets
If a company generates its own goodwill through advertising or training, how should these costs be treated?
exprese the cost as incurred.
A subsequent expenditure for an asset increases the future benefits of the asset if it (Select all that apply.) repairs and maintains the asset in working order extends the asset's useful life increases the operating efficiency of the asset increases the quality of goods/services produced by the asset
extends the asset's useful life, increases the operating efficiency of the asset, increases the quality of goods/services produced by the asset
Consistent with US GAAP and IFRS, donated assets generally are valued at ... value.
fair
When a company receives an asset from an unrelated part by a donation, the assets are valued at ... value.
fair
An impairment loss for intangible assets with indefinite lives is calculated as the book value less the
fair value
An impairment loss for intangible assets with indefinite lives is calculated as the book value less the -replacement cost -net realizable value -net present value -fair value
fair value
Donated assets should be recorded on the balance sheet at what amount? -fair value -zero -net realizable value -book value of the donor
fair value
The basic principle for valuing assets in a nonmonetary exchange is to value the asset received at book value plus the cash given book value of the asset given up fair value book value of the asset plus cash received
fair value
The basic principle for valuing assets in a nonmonetary exchange is to value the asset received at -fair value -book value of the asset received plus cash received -book value of the asset given up -book value plus the cash given
fair value
U.S. GAAP
fair value
An impairment loss for intangible assets with indefinite lives is calculated as the book value less the
fair value.
An exchange of assets that has commercial substance is valued at the ... value of the assets given or received, whichever is more clearly evident, but an exchange that lacks commercial substance is valued at the ... value of the assets given.
fair, book
An exchange of assets that has commercial substance is valued at the _____ value of the assets given or received, whichever is more clearly evident, but an exchange that lacks commercial substance is valued at the _____ value of the assets given
fair, book
True or false: Companies must use the same depreciation method for all assets
false
True or false: When accounting for impairments, the two categories for recognizing and measuring the loss are tangible and intangible assets.
false
True or false: repairs and maintenance expenditures should be capitalized in the period incurred.
false
True or false: Expenditures that qualify as an addition should be expensed in the period incurred
false, additions that involve adding a new major component to an existing asset should be capitalized because future benefits are increased
True or false: Repairs and maintenance expenditures should be capitalized in the period incurred
false, repairs and maintenance expenditures should be expensed in the period incurred
Which of the following costs are capitalized as an asset for an internally developed patent?
filing fees legal fees
Amortization is appropriate for intangible assets with
finite useful lives
A ratio used to measure how effectively a manager is using PPE is the ... ratio fixed asset turnover current return on equity return on sales
fixed asset turnover
Under what circumstances are accelerated depreciation methods appropriate? (Select all that apply.) for an asset that has high repair and maintenance costs early in life for an asset used evenly throughout its life and the life is measured in years for an asset that has high repair and maintenance costs later in life for an asset that will be used extensively in earlier years of its life
for an asset that has high repair and maintenance costs later in life, for an asset that will be used extensively in earlier years of its life
Under what circumstances are accelerated depreciation methods most appropriate
for an asset that will be used extensively in earlier years of its life & less in the later years of its life
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
A contractual arrangement in which one entity grants the purchaser the exclusive right to use the tradename, formulas, and product rights within a specific geographic area for a specific period of time is called a -patent -franchise -trademark -copyright
franchise
A contractual arrangmenet in which one entity grants the purchaser the exclusive right to use the trade name, formulas, and product rights within a specific geographic are for a specific period of time is called a
franchise
A(n) _ is a contractual arrangement in which one entity grants the purchaser the exclusive right to use the trade name, formulas, and products rights within a specific geographic area for a specific period of time.
franchise
The key factor in classifying items as repairs and maintenance is that -the invoice must be less than $1,000 for productive assets -future benefits are not provided beyond those originally anticipated from the asset -the asset must be a current asset used in the normal course of business
future benefits are not provided beyond those originally anticipated from the asset
The key factor is classifying items as repairs and maintenance is that
future benefits are not provided beyond those originally anticipated from the asset
The key factor in classifying items as repairs and maintenance is that
future benefits are not provided beyond those originally anticipated from the asset.
The rationale for expenditures being capitalized as assets is based on whether the expenditures benefit _________
future periods
The rationale for expenditures being capitalized as assets is based on whether the expenditures benefit:
future periods
An intangible asset that is measured as the consideration paid less the fair value of the net identifiable assets is called ...
goodwill
The future economic benefits arising from other assets acquired in a business combination that are not individually identified and separately recognized are referred to as -restricted intangible assets -unidentifiable assets -identified intangible assets -goodwill
goodwill
When a company acquires a business in a buiness acquisition and the consideration paid is greater than the fair value of the net assets acquire, the excess is reported as
goodwill
When a company purchases another company and the purchse price is greater than the fair value of the net assets acquired, this excess is reffered to as ___________.
goodwill
Which asset cannot be directly associated with any specific identifiable right and is not separable from the company as a whole?
goodwill
Which of the following items are intangible assets? (Select all that apply.) goodwill accounts receivable buildings land trademarks
goodwill, trademarks
The _______ depreciation method is used when assets have similar service lives and other attributes, whereas the ________ depreciation method is used for dissimilar assets.
group; composite
Using the declining balance method, depreciation will be _________ during the earlier years, but ___________ in later years
higher; lower
Which of the following is true regarding PPE or intangibles held for sale? (Select all that apply.) the assets are reclassified as held for sale in accumulated other comprehensive income until sold. if the fair value less costs to sell is below book value, an impairment loss is recognized. the assets held for sale are not depreciated or amortized. the loss is recognized for the amount of accumulated depreciation and the assets are held at historical cost until sold.
if the fair value less costs to sell is below book value, an impairment loss is recognized, the assets held for sale are not depreciated or amortized
The _____ approach for self-constructed assets advocates including only the additional overhead costs incurred in the construction of the asset, whereas the full-cost approach requires the allocation of overhead to self-constructed assets
incremental
Goodwill and some trademarks are examples of intangible assets that are assumed to have an (blank) life
indefinite
In accounting terminology, the life of a trademark is considered
indefinite
In accounting terminology, the life of a trademark is considered indefinite infinite finite definite
indefinite
Intangible assets are categorized as thoes with finite lives and thoes with __________ lives.
indefinite
Intangible assets are categorized as those with finite lives and those with (blank) lives
indefinite
Intangible assets are categorized as those with finite lives and those with _____ lives.
indefinite
Intangible assets are categorized as those with finite lives and those with __________ lives.
indefinite
Intangible assets with _____ useful lives should be tested for impairment annually.
indefinite
Which of the following are characteristics of goodwill?
indefinite life and subject to impairment testing.
Which of the following are characteristics of goodwill? (Select all that apply.) indefinite life amortized periodically finite life subject to impairment testing
indefinite life, subject to impairment testing
Intangible assets with _____ useful lives should be tested for impairment annually.
indifinite
Amortization refers to the allocation of the cost of _ assets to expense.
intangible
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
No amortization is recorded for intangible assets with indefinite lives intangible assets valued at fair value intangible assets with finite lives intangible assets used in production
intangible assets with indefinite lives
No amortization is recorded for -intangible assets with indefinite lives -intangible assets with finite lives -intangible assets valued at fair value -intangible assets used in production
intangible assets with indefinite lives
Which assets are required to be tested for impairment annually? -intangible assets with finite lives -property, plant, and equipment -intangible assets with indefinite lives
intangible assets with indefinite lives
No amortization is recorded for
intangible assets with indefinite lives.
The two categories for intangible assets are:
intangible with finite lives and intangibles with indefinite lives.
Long-term assets are classified as
intangible, tangible
No amortization is recorded for
intangibles assets with indefinite lives
The two categories for intangible assets are
intangibles with indefinite lives. intangibles with finite lives.
Intangible assets that are acquired from other entities are referred to as purchased intangibles, whereas intangibles are created by a company are referred to as
internally developed intangibles
Assets that do not qualify for interest capitalization are assets built for a company's own use assets constructed as a discrete project for sale or lease inventories routinely manufactured
inventories routinely manufactured
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 it recognizes expense proportionately with the amount of use of the asset it is an accelerated method of depreciation it is the preferred method for companies expecting to use the asset more in its early years of life
it allocates an equal amount of depreciation to each year the asset is used
Which statement is true about the straight-line method of depreciation?
it allocates an equal of depreciation to each year the asset is used.
US GAAP provides that an intangible should be recognized apart from goodwill when (Select all that apply.) it arises from contractual or legal rights it has a fair value greater than the book value it is an identifiable asset it can be separated from the acquired entity
it arises from contractual or legal rights, it is an identifiable asset, it can be separated from the acquired entity
Which of the following is an important limitation of the gross profit method? -it does not consider units that are currently in transit -it does not use a reliable estimate of gross profit -it dose not explicitly consider possible theft or spoilage of inventory
it does not explicitly consider possible theft or spoilage of inventory
The FASB requires research and development costs to be expensed because
it is difficult to objectively determine the future benefits
The FASB requires research and development costs to be expensed because
it is difficult to objectively determined the future benefits
An asset is no longer an asset when...
it no longer provides a future economic benefit.
Companies use accelerated depreciation for tax purposes because
it reduced taxable income in the early years of an assets life
Companies use accelerated depreciation for tax purposes because -it reduces taxable income in the early years of the asset's life -it does a better job of matching expenses to revenues of the period -it increases taxable income in the early years of the asset's life
it reduces taxable income in the early years of the asset's life
Companies use accelerated depreciation for tax purposes because:
it reduces taxable income in the early years of the assets life and provides better cash flows.
Which of the following is a characteristic of intangible assets but NOT PPE? lacks physical existence long term asset used in the primary operations of the business to generate revenues accounts increase with a debit and decrease with a credit
lacks physical existence
Which of the following long-lived assets would not be depreciated?
land
The distinction between land and land improvements is that
land has an indefinite life
Fences and parking lots are reported on the balance sheet as current assets land improvements land PPE
land improvements
If an impairment loss is recognized for an intangible asset with a finite life, which of the following occurs? (Select all that apply.) a recovery can be recognized up to the initial amount of the impairment later recovery of the impairment is prohibited future impairment losses are prohibited the written-down book value is the new cost basis for future amortization
later recovery of the impairment is prohibited, the written-down book value is the new cost basis for future amortization
Under U.S. GAAP, if a company recognizes an impairment loss,
later recovery of the impairment loss is prohibited
Expenditures subsequent to acquisition may be properly capitalized when they increase the asset's useful life or increase its productive capacity. However, most companies set thresholds for capitalizing these expenditures based on -objectivity -neutrality -materiality -relevance
materiality
Under U.S. GAAP, if a company recognizes an impairment loss, -the asset is revalued at fair value at the end of each period -recovery of the loss can be made within the next accounting period -recovery of the loss is limited to the actual amount of the loss -later recovery of the impairment loss is prohibited
later recovery of the impairment loss is prohibited
Under U.S. GAAP if a company recognizes an impairment loss,
later recovery of the impairment loss is prohibited.
Under U.S. GAAP, if a company recognizes an impairment loss,
later recovery of the impairment loss is prohibited.
The useful life of an intangible asset may be limited by what type of provisions?
legal regulatory contractual
What costs are capitalized as intangible asset for a franchise?
legal costs for the franchise agreement initial payment for the franchise
What costs are capitalized as an intangible asset for a franchise? (Select all that apply.) legal costs for the franchise agreement periodic payments for services by the franchisor interest on the note payable to purchase the franchise initial payment for the franchise
legal costs for the franchise agreement, initial payment for the franchise
What costs are capitalized as intangible asset for a franchise? (Select all that apply.) legal costs for the franchise agreement interest on the note payable to purchase the franchise periodic payments for services by the franchisor initial payment for the franchise
legal costs for the franchise agreement, initial payment for the franchise
A purchased intangible is valued at its original cost. Original cost for acquiring a patent would include.
legal costs to acquire required filing fees purchase price
Which of the following items should be capitalized in the cost of equipment?
legal feed to establish title, installation and testing of equipment, freight to deliver the equipment, sales tax
If obsolescence were expected to limit the longevity of a protected product, the useful life of a patent might be _________ its legal life.
less than
Which of the following represents a criticism of the lower of cost and net realizable value rule? -application of the rule results in lower than expected income -the rule violates the matching principle -losses that have not actually occurred are recognized
losses that have not actually occurred are recognized
Which method can be applied to individual inventory items, categories of inventory, or the enitre inventory? -lower of cost or market only -lower of cost and net realizable only -lower of cost or market and lower of cost and net realizable value
lower of cost or market and lower of cost and net realizable value
Margot Company purchases land, building and equipment for a single purchase price. Margot should account for the purchases as a _____ purchase -lump-sum -single-sum -bargain
lump-sum
The _____ concept requires that the cost of an asset should be allocated to the period in which revenue is produced.
matching
The ______ principle requires that the cost of an asset should be allocated to the periods in which revenue is produced.
matching
The _____________ principle requires that the cost of an asset should be allocated to the periods in which revenue is produced.
matching
The allocation of the cost of an asset through depreciation, depletion, or amortization is an example of the ________ principle.
matching
Expenditures subsequent to acquisition may be properly capitalized when they increase the asset's useful life or increase its productive capacity. However, most companies set thresholds for capitalizing these expenditures based on
materiality
Which of the following costs are capitalized for self-constructed assets? materials and labor only labor and overhead only materials and overhead only materials, labor, and overhead
materials, labor, and overhead
Units-of-output method
method that matches usage of the asset with revenues generated from the asset
WHich of the following are classificed as natural resources?
mineral deposits, oil deposits
MACRS is the depreciation method most often used for tax returns in the United States. The acronym MACRS stands for _____ _____ _____ recovery system.
modified accelerated cost
The acronym MACRS stands for
modified accelerated cost recovery system.
Under the new ASU, step one of the goodwill impairment test is required if relevant events and circumstances indicate that it is probable that the fair value of the reporting unit is less than its book value possible that the fair value of the reporting unit is less than its book value more likely than not that the fair value of the reporting unit is less than its book value
more likely than not that the fair value of the reporting unit is less than its book value
Under the new ASU, step one of the goodwill impairment test is required if relevant events and circumstances indicate that it is -probable that the fair value of the reporting unite is less than its book value -more likely than not that the fair value of the reporting unit is less than its book value -possible that the fair value of the reporting unit is less than its book value
more likely than not that the fair value of the reporting unit is less than its book value
Group depreciation is calculated by
multiplying the group depreciation rate by the total cost of assets in the group for that period
Group depreciation is calculated by:
multiplying the group depreciation rate by the total cost of assets in the group for that period.
Superior mining Inc. purchases a large piece of land with rich mineral deposits and plans to start extracting the mineral-rich ore immediately. The cost of the piece of land should be reported in this category: -natural resources -land -intangible asset-mineral rights
natural resources
_ _ are physically diminished as minerals and other materials are extracted from the ground and are sold or used in the production process, whereas equipment, land, and buildings have physical characteristics that remain unchanged.
natural resources
The profit margin ratio is defined as (blank blank) divided by net sales
net income
The profit margin ratio is defined as (blank) divided by net sales.
net income
The profit margin ratio is defined as _____________ ___________ devided by net sales.
net income
Woodruff Corp. incorrectly capitalized an expenditure instead of treating it as an expense. What is the financial statement effect of this error in the year the error was made?
net income is overstated
Galsner Corp. incorrectly capitalize $500000 of expenditures that should have been classified as expenses in the current period. What are the financial statements effects of this error? (Select all that apply.) net income is overstated assets are overstated liabilities are understated retained earnings is understated
net income is overstated, assets are overstated
incorrect expense of major addition to equipment when the company should have capitalized, What are the financial statement effects of this error?
net income is understated assets are understated.
Which of the following must be included in the determination of ending inventory at retail when applying the retail inventory method? -net markups only -net markdowns only -net markups and net markdowns
net markups and net markdowns
If inventory values recover after a lower of cost and net realizable value write-down, the write-down must -be reversed for any moment -be reversed if it is a material amount -not be reversed
not be reversed
For capitalized interest on self-constructed assets, weighted-average expenditures is determined by weighting the individual expenditures by the number of months from incurrence to the end of the construction period weighted-average amount borrowed during the period average risk-free rate for the period average interest rate for the period
number of months from incurrence to the end of the construction period
For capitalized interest on self-constructed assets, weighted-average expenditures is determined by weighting the individual expenditures by the -number of months from incurrence to the end of the construction period -weighted-average amount borrowed during the period -average risk-free rate for the period -average interest rate for the period
number of months from incurrence to the end of the construction period
For capitalized interest on self-constructed assets, weighted-average expenditures is determined by weighting the individuals expenditures by the average risk-free rate for the period average interest rate for the period number of months from incurrence to the end of the construction period weighted-average amount borrowed during the period
number of months from incurrence to the end of the construction period
Impairment
occurs when an asset's total future cash-generating ability falls below its carrying value.
A change in accounting estimate requires a company to account for the change
on a prospective basis in the current year and future years.
If there is a change in an intangible asset's estimated useful life, the change is treated
on a prospective basis.
The new ASU on goodwill impairment provides the option to decide whether step _____ is necessary based on qualitative factors.
one
The measurement of an impairment loss for intangible assets with indefinite useful lives is a(n) ____ process.
one-step
For PPE, US GAAP requires the investigation of possible impairment annually if the group or composite depreciation method is used only if events or changes in circumstances indicate that the asset may not be recoverable at the end of each reporting period every 3 years from the date of acquisition of the asset
only if events or changes in circumstances indicate that the asset may not be recoverable
For plant, property, and equipment, U.S. GAAP requires the investigation of possible impairment -annually if the group or composite depreciation method is used -at the end of each reporting period -every 3 years from the date of acquisition of the asset -only if events or changes in circumstances indicate that the asset may not be recoverable
only if events or changes in circumstances indicate that the asset may not be recoverable
For property, plant, and equipment, U.S. GAAP requires the investigation of possible impairment
only if events or changes in circumstances indicate that the asset may not be recoverable
For plant, property, and equipment, U.S. GAAP requires the investigation of possible impairment
only if events or changes in circumstances indicate that the asset may not be recoverable.
When using the retail method to approximate average cost, the cost-to-retail percentage is applied to which goods? -only the ending inventory -all goods available for sale -all goods sold during the period -only the beginning inventory
only the ending inventory
The accounting for copyright uses the same accounting rules are
patents
Wriglee, Inc. went to court this year and successfully defended its patent from infringement by a competitor. The cost of this defense should be charged to patents and amortized over the remaining legal life of the patent. patents and amortized over the remaining useful life of the patent. legal fees and amortized over 5 years or less. expenses of the current period.
patents and amortized over the remaining useful life of the patent.
A company acquires equipment by signing a note payable. If the note does not bear interest, the company should record the equipment at the future value of payments on the note payable present value of the equipment or note maturity value of the note payable
present value of the equipment or note
Which of the following are required when a material error is discovered in a subsequent accounting period that impacts retained earnings? (Select all that apply.) previous financial statements are retrospectively restated a prior period adjustment is made to the beginning balance of retained earnings the error is accounted for on a prospective basis in the current year and future years the cumulative effect of the error is corrected in retained earnings and other account balances are unchanged a disclosure note describing the nature of the error and the impact of the correction on net income and EPS
previous financial statements are retrospectively restated, a prior period adjustment is made to the beginning balance of retained earnings, a disclosure note describing the nature of the error and the impact of the correction on net income and EPS
A company discovers a material error in a previous year's financial statements. If retained earnings requires correction, it is reported as a _____ _____ adjustment.
prior period
For a manufacturing company, what type of a cost is factory depreciation expense? -product cost -period cost -direct cost
product cost
Match the timing of when to test for impairment with the type of asset. property to be held and used / indefinite life intangible assets other than goodwill / assets to be sold when events or circumstances indicate book value may not be recoverable / at least annually or more frequently if indicated / when classified as held for sale
property to be held and used... when events or circumstances indicate book value may not be recoverable indefinite life intangible assets other than goodwill... at least annually or more frequently if indicated assets to be sold... when classified as held for sale
A change in depreciation method is treated as a change in estimate that is achieved by a change in accounting principle, and is accounted for
prospectively in the current and future periods.
Norma installs a new motor in its manufacturing equipment. The new motor is expected to increase output by 20%. The cost of the new motor should be capitalized because it:
provides a future benefit
Which of the following items are capitalized into the cost of a patent? (Select all that apply.) purchase price filing fees accretion attorneys fees to successfully defend patent depreciation
purchase price, filing fees, attorneys fees to successfully defend patent
Which of the following costs should be capitalized in the costs of aquiring a building?
purchase price, legal feeds to obtain title, deliquent property taxes
Which of the following costs should be capitalized in the costs of acquiring a building? (Select all that apply.) purchase price legal fees to obtain title utilities for the building interest on the loan
purchase price, legal fees to obtain title
Consistent with the new ASU on goodwill impairment testing, a company may omit annual testing for impairment based on its assessment of
qualitative factors
Which of the following should be included in the cost of building? -fire insurance premiums relating to building -real estate commissions relating to purchase of building -cost paving parking lot in front of building -cost of clearing and adjacent to building
real estate commissions relating to purchase of building
Which of the following costs should be capitalized in the costs of acquiring a building?
realtor commissions, legal fees obtained title, remodeling building
The types of expenditures that can occur subsequent to an asset's acquisition are...
rearrangements, improvements, additions, repairs and maintenance.
In measuring an impairment loss, the difference between the asset's book value and its fair value is
recognized as a impairment loss
In measuring an impairment loss, the difference between the asset's book value and its fair value is -recognized as an extraordinary loss -recognized as a gain -recorded in a revaluation account in OCI -recognized as an impairment loss
recognized as an impairment loss
In measuring an impairment loss, the difference between the asset's book value and its fair value is
recognized as an impairment loss.
U.S. GAAP
recorded as expense during period incurred
IFRS
recorded as intagible asset
Glueck Company purchases a machine with an original cost of 100,000. The company expects that the machine will be worth 20,000 at the end of its service life. The 20,000 is referred to as the asset's
residual or sale value
The term used to describe the amount the company expects to receive for an asset at the end of its service life less any anticipated disposal costs is the
residual value
The term used to describe the amount the company expects to receive for an asset at the end of its service life less any anticipated disposal costs is the impairment value historical cost residual value LCM rule
residual value
The term used to describe the amount the company expects to receive for an asset at the end of its service life less any anticipated disposal costs is the -lower-of-cost-or-market value -impairment value -residual value -historical cost
residual value
Ther term used to describe the amount the compnay expects to reveive for an asset at the end of its service life is
residual value
Berner Mining Company estimates that after it completes extraction of valuable metals from a tract of land, $245,000 will be necessary to return the land to its original condition. This cost is considered a(n) -overhead cost -residual cost -operating expense -restoration cost
restoration cost
The costs included in the natural resource account includes (Select all that apply.) restoration development acquisition equipment exploration
restoration, development, acquisition, exploration
Recording depreciation results in the allocation of the cost of a long-term asset to the years during which the asset generates:
revenue
The matching concept requires that cost of an asset should be allocated to the periods in which:
revenue is produced.
From a financial reporting perspective, PPE and intangible assets exhibit the following characteristics (Select all that apply.) short-lived revenue-producing valued at fair value long-lived
revenue-producing, long-lived
Which of the following expenditures are classified as repairs and maintenance for a vehicle? (Select all that apply.) routine oil change engine tune-up new engine installation
routine oil change, engine tune-up
Under MACRS, which one of the following is NOT considered in calculating depreciation for tax purposes? salvage value cost of asset property recovery class half year convention
salvage value
The _____ life of a long-lived asset cannot exceed the physical life.
service
Which of the following terms is equivalent to an asset's useful life to a particular company?
service life
Which of the following terms is equivalent to an asset's useful life to a particular company? -physical life -service life -base life -life expectency
service life
Match each factor to its definite. service life / allocation method / allocation base the pattern in which the usefulness is expected to be consumed / the cost of the asset that is expected to be consumed / the estimated use that the company expects to receive from the asset
service life... the estimated use that the company expected to receive from the asset allocation method... the pattern in which the usefulness is expected to be consumed allocation base... the cost of the asset that is expected to be consumed
The amortization of an intangible asset occurs over the period of time that is the (blank) of the legal, regulatory, contractual, or service life
shorter
The amortization of an intangible asset occurs over the period of time that is the _ of the legal, regulatory, contractual, or service life.
shorter
The amortization of an intangible asset occurs over the period of time that is the __________ of the legal, regulatory, contractual, or service life
shorter
A company issues its equity securities to purchase land. The common stock is publicly traded and both the value of the stock and the land is known. The best indicator of fair value is the value of the stock land
stock
A company issues its equity securities to purchase land. The common stock is publicly traded, and both the value of the stock and the land is known. The best indicator of fair value is the value of the -stock -land
stock
Smith Company calculates annual depreciation of equipment by using the following formula: [(cost-residual value) / useful life]. Smith is applying the depreciation method referred to as sum of the years digits declining balance straight line
straight line
Which of the following amortization methods is normally used for intangible assets? sum of the years digits straight line units of production double declining balance
straight line
Which of the following are not accelerated methods of depreciation? (Select all that apply.) sum of the years digits straight line units of production declining balance
straight line, units of production
Smith Company calculates annual depreciation of equipment by using the following formula: [(cost-residual value)/useful life]. Smith is applying the depreciation method referred to as -sum-of-the-years digits -declining balance -straight-line
straight-line
Smith Company calculates annual depreciation of equipment by using the following formula: [(cost-residual value/useful life]. Smith is applying the depreciation method referred to as
straight-line
When a company uses accelerated depreciation, it is common practice to change to which depreciation method approximately halfway through the asset's life? -Sum-of-the years'-digits -units-of-output -straight-line
straight-line
On October 1, 2016, the Allegheny Corporation purchased machinery for $123,000. The estimated service life of the machinery is 10 years and the estimated residual value is $2,000. The machine is expected to produce 220,000 units during its life. Required: Calculate depreciation for 2016 and 2017 using each of the following methods. Partial-year depreciation is calculated based on the number of months the asset is in service.
straight-line 123,000-2,000/10=12,100 2016 12100x fraction of year oct-dec 3/12= 3,025 2017 12,100* 12/12=12,100 sum of the years digits -base* 1.rate per year x 2.faction of year -rate per year equation= 1.# of years remaining/sum of years digits number of yearsx(number of years+1)/2 10(10+1)/2 10*11=100/2=55 answer 1. 10/55 121,000 x # of years remaining/55 2. oct-dec 3/12 2016 121,000 x 10/55 x 3/12=550 rounded -1/1/2017-9/30/2017 121,000 x 10/55 x 9/12=16,500 rounded -10/1/2017-12/31/2017 121,000x9/55x3/12=4949
Match the type of depreciation method with the reporting basis.
straight-line commonly used for financial statement purposes MACRS commonly used for tax reporting
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
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 -MACRS -double-declining-balance method -units-of-output method
straight-line method
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
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.
The declining balance method of depreciation is a multiple of the:
straight-line rate of depreciation
Which of the following are commonly used depreciation methods?
straight-line, declining-balance, and activity-based
Emil Company expects that its asset will be more useful during early years of its life than during later years. In addition, the company estimates that repair costs will increase over time. Which methods may help equalize total expenses recognized over the service life of this asset?
sum of the years digits declining balance
Long-lived assets are typically classified in two categories:
tangible and intangible
When computing the amount of interest to be capitalized, the concept of avoidable interest refers to the total interest cost actually incurred during the construction period the weighted average cost of capital for stockholders' equity that portion of total interest cost during the construction period that would not have been incurred if expenditures for the asset construction had not been made that portion of weighted average accumulated expenditures on which no interest cost was incurred
that portion of total interest cost during the construction period that would not have been incurred if expenditures for the asset construction had not been made
Which of the following are required disclosures for an impairment loss assuming the loss is not disclosed separately on the face of the income statement? (Select all that apply.) the amount of the loss the facts and circumstances leading to the impairment the date acquired and the date of expected disposal the description of the impaired asset the method used to determine fair value
the amount of the loss, the facts and circumstances leading to the impairment, the description of the impaired asset, the method used to determine fair value
the service life or useful life of an asset is
the amount of use that company expects to obtain from the asset before disposing of it
The service life or useful life of an asset is .....
the amount of use that the company expects to obtain from the asset before disposing of it
The formula for calculating declining balance depreciation is the depreciation rate per year times -the cost less the residual value -the cost less the residual value less the accumulated depreciation -the book value at the beginning of the year
the book value at the beginning of the year
What is an allocation base?
the cost of an asset that is expected to be consumed
Service life
the estimated use that the company expects to receive from the asset
Measure each type of impairment: assets to be sold
the excess of book value over fair value less costs to sell.
Measure each type of impairment: goodwill
the excess of book value over implied fair value.
When the expected cash flow approach is used to measure an asset retirement obligation at fair value, what assumptions or estimates must be made by the accountant? (Select all that apply.) the expected cash flows a discount rate for the cash flows the probabilities of cash flows
the expected cash flows, the probabilities of cash flows
In determining whether an impairment loss should be recognized for goodwill, a company compares the book value of the reporting unit with
the fair value of the reporting unit.
When a plant asset is acquired through the issuance of common stock, the cost of the plant asset is properly measured by the fair value of the stock fair value of plant asset the fair value of the stock or plant asset, whichever is more clearly identifable par value of the common stock
the fair value of the stock or plant asset, whichever is more clearly identifiable
Interest capitalization on a self-constructed asset begins when interest costs can be imputed the first expenditure is made the asset is placed in service the asset is substantially complete
the first expenditure is made
Kerry acquires equipment valued at $81630 by signing a 3 year noninterest bearing note payable for $100000. The difference between the $100000 repayment and the value of the equipment represents the gain on the acquisition of the asset interest income for the period the implicit interest on the note goodwill
the implicit interest on the note
All of the following are conditions that must be satisfied before interest capitalization can begin on a qualifying asset EXCEPT interest cost is being incurred expenditures for the assets have been made activities that are necessary to get the asset ready for its intended use are in progress the interest rate on specific debt is equal to or greater than the company's cost of capital
the interest rate on specific debt is equal to or greater than the company's cost of capital
In a basket or lump-sum purchase of assers. the total acquisition cost is allocated to the individual assets by multiplying the lump-sum purchase price times
the relative fair value percentage of each asset
Total depreciation recorded over an asset's service life is:
the same regardless of the depreciation method used
The term "depreciable base," or "depreciation base," as it is used in accounting, refers to the total amount to be charged (debited) to expense over an asset's useful life. the cost of the asset less the related depreciation recorded to date. the estimated market value of the asset at the end of its useful life. the acquisition cost of the asset.
the total amount to be charged (debited) to expense over an asset's useful life.
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 assets life?
total assets are higher and net income is lower
When the retail inventory method is used to approximate average cost, the cost-to-retail percentage is calculated by dividing _____ by _____ -the total cost of goods available for sale; total goods available for sale at retail -cost of goods purchased; total goods available for sale at retail -retail amounts of goods purchased; total cost of goods available for sale
total cost of goods available for sale; total goods available for sale at retail
A(n) ... is an exclusive right to display a word, symbol, or emblem that distinctively identifies a company, product, or service.
trademark
A(n) ____________ 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 serivce is referred to as a _____________________.
trademark
An exclusive right to display a word, symbol, slogan, or emblem that distinctively identifies a company, product, or service is referred to as a
trademark
The two important accounting issues related to self-constructed assets are treatment of interest charges residual value allocation of overhead date placed in service
treatment of interest charges, allocation of overhead
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
True or false: All long-term assets are subject to impairment rules.
true
True or false: repairs and maintenance expenditures related to an asset do not increase future benefits.
true
True or false: start-up costs such as legal fees and state filings to incorporate should be expensed in the period incurred.
true
True or false: the formula for capitalizing interest is the interest ratio times the weighted average accumulated expenditures.
true
True or false: The sum-of-the-years'-digits(SYD) method of depreciation is an accelerated method in which depreciation expense decreases each year
true, the SYD method has no logical foundation other than it is an accelerated method
An impairment occurs when the fair value of the asset is less than the book value of the asset undiscounted sum of estimated future cash flows is less than the asset's book value book value of the asset is less than the fair value of the asset discounted sum of past cash flows is more than the asset's book value
undiscounted sum of estimated future cash flows is less than the asset's book value
An impairment occurs when the -fair value of the asset is less than the book value of the asset -book value of the asset is less than the fair value of the asset -undiscounted sum of estimated future cash flows is less than the asset's book value -discounted sum of past cash flows is more than the asset's book value
undiscounted sum of estimated future cash flows is less than the asset's book value
An impairment occurs when the
undiscounted sum of estimated future cash flows is less than the assets books value
When the two-step process is used for impairment losses, the _____ estimates of cash flows are used in step 1 to determine whether an impairment loss is indicated, but the _____ estimates of cash flows are used to determine the amount of the loss.
undiscounted, discounted
The most common method of recording depletion for accounting purposes is the percentage depletion method units of activity method MACRS method straight line method
units of activity method
What depreciation methods are not accelerated methods of depreciation?
units of output method straight line method
If a company bases depreciation expense on the life of a machine in hours, and depreciated the machine for the number of hours used during the year, it is using the __________ method of depreciation.
units of production
If a company bases depreciation expense on the life of a machine in hours, and depreciates the machine for the number of hours used during the year, it is using the ... method of depreciation. straight line units of production double declining blance sum of the years digits
units of production
If a company bases depreciation expense on the life of a machine in hours, and depreciates the machine for the number of hours used during the year, it is using the______ method of depreciation -sum-of-the-years'-digits -double-declining-balance -straight-line -units-of-production
units of production
Theoretically, which depreciation method provides the best estimate of expense to correspond with the usage of the asset?
units of production depreciation
Which of the following are not accelerated methods of depreciation?
units-of-output depreciation straight-line depreciation
If a company bases depreciation expense on the life of a machine in hours, and depreciates the machine for the number of hours used during the year, it is using the ______ method of depreciation.
units-of-production
The ________ life of a long-lived asset cannot exceed the physical life.
useful
The amount of use that the company expects to obtain from an asset before disposing of it is referred to as the _________ life of an asset.
useful
The amount of use that the company expects to obtain from an asset before disposing of it is referred to as the _____ life of the asset.
useful / service
When calculating the amount of interest to capitalize on a self-constructed asset, the critical inputs used are an interest rate and -total amount paid to construct the asset -long-term debt outstanding at year-end -weighted average accumulated expenditures -historical cost of the building
weighted average accumulated expenditures
For capitalization of interest on self-constructed assets, the average accumulated expenditures is the average total assets during the period weighted-average expenditures during the construction period the total expected cost of the construction project the weighted average of all assets purchased during the period
weighted-average expenditures during the construction period
For capitalization of interest on self-constructed assets, the average accumulated expenditures is the -weighted-average expenditures during the construction period -average total assets during the period -the weighted average of all assets purchased during the period -the total expected cost of the construction project
weighted-average expenditures during the construction period
Goodwill may only be recognized when assets are impaired when another company is acquired when a company pays less than fair value for an intangible when intangible assets are undervalued
when another company is acquired
Assets to be sold
when classified as held for sale
assets to be sold
when considered help for sale
The retirement method for recording depreciation expense records depreciation
when the assets are disposed of.
Assets held for sale should be tested for impairment
when they are considered held for sale
Assets held for use that have a significant impairment of value should be
written down
The residual value of an intangible asset is usually
zero
The residual value of an intangible asset is usually the fair value at the date acquired cost less amortization cost minus salvage zero
zero
The residual value of an intangible asset is usually _____.
zero
The residual value of an intangible asset is usually...
zero
The residual value of an intangible asset is normally:
zero.
focus of chapter:
(2 departures from historical cost accounting: 1. impairments 2. Long-term operating assets held for sale Appendix discusses revaluations under IFRS, which occur when a company reports a long-term asset at its fair value, rather than its historical cost. With both impairments and revaluations, the economic value of a long-term asset differs from its depreciated historical cost (carrying value)
The formula for straight-line depreciation is
(cost-residual value)/useful life
match each asset with its cost allocation method.
----------------------
Base
The total amount of cost to be allocated over an assets service life is called its allocation _______?
Depreciable base
The total cost of plant and equipment to be expense over its service life is referred to as its?
What are the two steps in the two-step process of measuring impairments?
measurement of the impairment loss recoverability test
The two-step process for determining wether to record an impairment loss are the ______ test and the measurement of the impairment loss.
recoverability
The costs to return land or other property to its original condition after extracting natural resources are referred to as acquisition costs development costs restoration costs exploration costs
restoration costs
Which of the following items should always be capitalized in the cost of equipment? (Select all that apply.) sales tax freight to deliver the equipment installation and testing of equipment legal fees to establish title training costs for equipment operators
sales tax, freight to deliver the equipment, installation and testing of equipment, legal fees to establish title
The amount of use that the company expects to obtain from an asset before disposing of it is referred to as the ______ life of the asset.
service
Which of the following are not accelerated methods of depreciation? Sum-of-the-years-digits method Striaght-line depreciation Declining balance method Units-of-output depreciation
straight-line depreciation units-of-output depreciation
Which of the following are classified as natural resources? timber tracts equipment patents land improvements mineral deposits
timber tracts, mineral deposits
When the two-step process is used for impairment losses, the ______ estimates of cash flows are used in the step 1 to determine wether an impairment loss is indicated, but the ______ estimates of cash flows are used to determine the amount of the loss.
undiscounted; disconted
True or False: Repairs and maintenance expenditures should be capitalized in the period incurred.
False
True or fals: The total amount of cost to be allocated over an assets service life is called its residual value.
False
a part of the cost of inventory
For assets used in the manufacturing of a product, depreciation expense should be recorded as?
Implied fair value
If goodwill impairment is indicated, it is measured as the excess of the book value over its
Impairment indicators
1. A significant decrease in the market price of a long-lived asset (asset group) 2. A significant adverse change in the extent or manner in which a long-lived asset (asset group) is being used or in its physical condition. 3. A significant adverse change in legal factors or in the business climate that could affect the value of a long-lived asset (asset group), including an adverse action or assessment by a regulator 4. An accumulation of costs significantly in excess of the amount originally expected for the acquisition or construction of a long-lived asset (asset group) 5. A current-period operating or cash flow loss combined with a history of operating or cash flow losses or a projection or forecast that demonstrates continuing losses associated with the use of a long-lived asset (asset group) 6. A current expectation that, more likely than not (>50%), a long-lived asset (asset group) will be sold or otherwise disposed of significantly before the end of its previously estimated useful life. The term more likely than not refers to a level of likelihood that is more than 50%. Firms develop their own impairment indicators based on the guidelines above
Measurement Subsequent to Impairment
After a write-down, conditions could change and the asset's future cash-flow generating ability could recover. In this case, the asset's fair value may be higher than its carrying value after the impairment. However, once an impairment loss is taken, US GAAP does not permit subsequent reversals of write-downs for long-term operating assets held for use in operations. The revised carrying value after the write-down becomes the new cost for subsequent depreciation and amortization.
True or false: Expenditures that qualify as an addition should be expensed in the period incurred.
False
Crane Corp. purchased equipment on January 1, year 1, for 100,000. The equipment had a 10-year life and was depreciated using the double-declining-balance method. In year 3, Crane changed its depreciation method to the straight-line method. The depreciation expense recognized in year 3 is
depreciation rate is 1/10x2=20%. Year 1 depreciation is 100,000x20%=20,000. Year 2 depreciation is book value of 80,000x20%=16,000. The book value at the beginning of year 3 is 100,000-36,000=64,000. depreciation expense using the straight-line method in year 3 is 64,000/8 years remaining= 8,000
The cost allocation methods used for noncurrent assets are
depreciation,depletion, and amortization
At the acquisition date, July 2, 20X1, reporting unit R has a fair value of $370,000 and a carrying amount (including goodwill of $100,000) of $470,000. On December 31, 20X1, the fair value of the assets and liabilities assigned to reporting unit R is $330,000, and the fair value of R is $400,000. The goodwill impairment loss reportable is: $0. $30,000. $40,000. $100,000.
1 $30,000 Impairment of goodwill is a two-step process: Step 1, Compare: (a) year-end fair value of reporting unit $400,000 (b) carrying amount, including goodwill $470,000 If (b) exceeds (a), go to step 2. If (a) exceeds (b), no impairment. Step 2, Compare: (a) implied fair value of reporting unit goodwill ($400,000 - $330,000) $ 70,000 (b) carrying amount of goodwill $100,000 Since (b) exceeds (a) by $30,000, an impairment loss of $30,000 is recognized. If (a) exceeds (b), no impairment.
Chen Corporation purchased equipment on January 1, year 1, for 100,000. The equipment was depreciated using the units-of-output method. During years 1 and 2, respectively, Chen recorded depreciation expense of 10,000 and 30,000. During year 3, Chen changed to the straight-line depreciation method and estimated that the equipment had a remaining useful life of 10 years. What is the depreciation expense Chen should report during year 3?
100,000-40,000=60,000 60,000/10 years=6,000 per year
On October 1, year 1, Kirby Corp. purchased equipment for 100,000. The equipment has a useful like of 5 years with no residual value. Kirby uses the straight-line method of depreciation. The partial year depreciation for year 1 is
100,000/5 years=20,000x 1/4=5,000
40,000 1,000,000/500,000 = 2.00 tons extracted x 2.00 = 40,000 depletion expense
JM mining has a coal mine with depletion base of $1,000,000. It is estimated that 500,000 tons will be extracted over the mines useful life. During year 1, JM extracted 20,000 tons of coal. The depletion expenses for year 1 is?
Obligations associated with the disposition of PPE and natural resources are called ... obligations.
asset retirement
A(n) ... 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. patent franchise copyright trademark
copyright
The accounting method for reversing impairment losses (sales subsequently increase and future cash flow predictions are positive)
depends on whether a company uses IFRS or US GAAP
A(n) ... is a contractual arrangement in which one entity grants the purchaser the exclusive right to use the tradename, formulas, and product rights within a specific geographic area for a specific period of time.
franchise
The key factor in classifying items as repairs and maintenance is that
future benefits are not provided beyond those originally anticipated from the asset
Western Company incurred the following costs during the year related to the creation of a new product: Salaries of researchers $100000 Depreciation on R&D equipment $30000 Utilities at R&D facility $5000 Patent filing and legal costs $8000 Payment for services in connection with R&D $10000 Adaptation costs for specific needs of customer $2000 What amount should Western report as R&D expense in its income statement? $147000 $155000 $115000 $145000 $153000
$145000 (the patent filing and legal costs and the adaptation costs are excluded)
If a company replaces a major component of an asset with a new component with the same characteristics of an old component, it is classified as
an improvement
1. Increases the operating efficiency of the asset. 2. Extends the assets useful life 3. Increases the quality of the goods or services produced by the asset
A subsequent expenditure for an asset increases the future benefits of the asset if it?
Reporting unit
A(n) ________________ _________________ is an operating segment of a company or a component of an operating segment for which discrete financial information is available and management regularly reviews the operating results of that component.
Which of the following are expenditures for assets subsequent to acquisition? Freight Additions Imprrovements Repairs and maintenance
Additions Imprrovements Repairs and maintenance
Undiscountod sum of estimated future cash flows is less than the assets book value
An impairment occurs when?
Accounting for Impairments: PPE & Finite-Life Intangible Assets
The accounting procedures for the determination of impairment are identical for property, plant and equipment and finite-life intangible assets
depreciation; amortization
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 _________________.
Service or useful life
The amount of use that the company expects to obtain from an asset before disposing of it is referred to as the ________________ life of the asset?
Debit depletion expense Credit the natural resource
Which of the following would be included in a journal entry to record the allocation of the cost of a natural resource for the period?
Book value over the fair value less costs to sell
an asset impairment for assets to be held for sale is measured as the excess of the
Marston acquired assets for 100,000. At the end of year 3, the assets had accumulated depreciation of 40,000. An impairment loss was indicated, and the fair value of the assets was 48,000. The journal entry to record the impairment loss will include a
-debit to accumulated depreciation of 40,000 -debit to loss on impairment of 12,000 -credit of assets of 52,000
Which of the following is an intangible asset that is subject to the recoverability test when testing for impairment? 1 A patent 2 Goodwill 3 R&D costs for a patent 4 A trademark with indefinite useful life
1 A patent The FASB requires that non-goodwill intangible assets with finite lives be amortized, whereas similar assets with indefinite lives are not amortized. Both classifications of non-goodwill intangibles are required to be reviewed for impairment. Intangible assets with finite lives are tested for recoverability whenever events or changes in circumstances indicate that the carrying value may not be recoverable. Intangible assets that have indefinite lives are not amortized and therefore are not tested for recoverability. However, they are reviewed for impairment at least annually. Patents fall into the first group, and are tested for recoverability. Goodwill and the trademark have infinite lives and fall into the second group; they are reviewed at least annually for impairment. Research and development (R&D) costs are expensed, not capitalized.
Determine any impairment loss
When the asset's carrying value is greater than its fair value, a company reports an impairment loss, calculated as the carrying value less the fair value. (Carrying value - fair value) The asset's fair value is the amount the asset holder will receive from the sale of an asset in a current transaction between willing parties. Because the definition of fair value is based on selling an asset, it is often called an exit price. Quoted prices in active markets are the best evidence of fair value. If market prices are not available (which is frequently the case), then accountants base fair-value estimates on the best information available or use valuation techniques such as market comparable, review of recent transactions, and discounted cash flow valuation. In the absence of market prices, we use discounted future cash flows in this chapter. When recording the impairment loss, the firm eliminates the balance in the accumulated depreciation (or accumulated amortization) account and reduces the asset amount. Specifically, it recognizes the impairment loss by: 1. Debiting the loss 2. Debiting the accumulated deprecation or accumulated amortization for its entire balance. 3. Crediting the asset account for the sum of the loss and the accumulated depreciation or accumulated amortization. These steps ensure that the asset's carrying value reflects its fair value. That is. after recognizing the impairment, the firm carrie the asset at its fair value with no accumulated depreciation or amortization. There is a new basis of accounting as if the asset were just acquired.
Ott Company acquired rights to a patent from Grey under a licensing agreement that required an advance royalty payment when the agreement was signed. Ott remits royalties earned and due, under the agreement, on October 31 each year. Additionally, on the same date, Ott pays, in advance, estimated royalties for the next year. Ott adjusts prepaid royalties at year-end. Information for the current year ended December 31 is as follows: Date Amount 01/01 Prepaid royalties $ 65,000 10/31 Royalty payment (charged to royalty expense) 110,000 12/31 Year-end credit adjustment to royalty expense 25,000 In its December 31 balance sheet, Ott should report prepaid royalties of: 1 $25,000. 2 $40,000. 3 $85,000. 4 $90,000.
4 $90,000. Here one needs to convert from the cash method to the accrual method as to the deferred amount of royalty expenses. The royalty payment was charged to (added to) royalty expense, but there was also a year-end credit adjustment downwards to royalty expense. The only reasonable debit to the year-end credit to royalty expense would be to debit (add to) prepaid royalties, as this could only be deferred (not properly accrued this year) royalty expenses. So far, prepaid royalties have had a debit balance of $65,000, and if one adds an additional debit to prepaid royalties of $25,000, there will be an ending balance of prepaid royalties of $90,000.
Which items are considered changes in estimates that would be treated on a prospective basis in the current period and future periods?
- change in useful life of an asset -change in residual value of an asset
When a long-term operating asset's future economic value is impaired, the firm:
1. Recognizes the decline in value as a loss on the income statement in the period that it determines the impairment occurred 2. Reduces the the asset's carrying value on the balance sheet because its economic value has declined. The impairment loss is a noncash expense that has no impact on the statement of cash flows.
On October 1, year 1 Johnson Corp. purchased equipment for 100,000. The equipment has a useful life of 5 years with no residual value. Johnson uses the double-declining-balance method of depreciation. The partial year depreciation for year 1 is
10,000
On January 1, Year 1, Alpha Co. signed an annual maintenance agreement with a software provider for $15,000 and the maintenance period begins on March 1, Year 1. Alpha also incurred $5,000 of costs on January 1, Year 1, related to software modification requests that will increase the functionality of the software. Alpha depreciates and amortizes its computer and software assets over five years using the straight-line method. What amount is the total expense that Alpha should recognize related to the maintenance agreement and the software modifications for the year ended December 31, Year 1? 1 $5,000 2 $13,500 3 $16,000 4 $20,000
2 $13,500 The annual expenses would be the $15,000 maintenance contract multiplied by 10/12 of the year covered, or $15,000 × 10/12 = $12,500 from March to the end of the year. Also, expenses would cover 1/5 ($1,000) of the $5,000 from the other costs for one of the five years: $12,500 + $1,000 = $13,500 total.
Two-step impairment Test
2 steps: 1. Assess recoverability 2. Compare the carrying value to fair value, if required (referred to as the "fair value" test)
On January 2, 20X1, Paye Co. purchased Shef Co. at a cost that resulted in recognition of goodwill of $200,000 having an expected benefit period of 10 years. During the first quarter of 20X1, Paye spent an additional $80,000 on expenditures designed to maintain goodwill. Due to these expenditures, on December 31, 20X1, Paye estimated that the benefit period of goodwill was 40 years. For 20X1, Paye assessed impairment to be $7,000. In its December 31, 20X1, balance sheet what amount should Paye report as goodwill? 1 $180,000 2 $195,000 3 $193,000 4 $273,000
3 $193,000 FASB ASC 350-20-25-3 provides that any costs of developing, maintaining, or restoring goodwill should be deducted from income when incurred. Obviously, the $80,000 expenditure falls into this category. The $200,000 of purchased goodwill should be assessed for impairment each year. Initial cost of goodwill $200,000 Less: 20X1 impairment 7,000 Unamortized amount on December 31, 20X1 $193,000
A company reported $6 million of goodwill in last year's statement of financial position. How should the company account for the reported goodwill in the current year? 1 Determine the current year's amortizable amount and report the current year's amortization expense. 2 Determine whether the fair value of the reporting unit is greater than the carrying amount and report a gain on goodwill in the income statement 3 Determine whether the fair value of the reporting unit is less than the carrying amount and report an impairment loss on goodwill in the income statement. 4 Determine whether the fair value of the reporting unit is greater than the carrying amount and report the recovery of any previous impairment in the income statement.
3 Determine whether the fair value of the reporting unit is less than the carrying amount and report an impairment loss on goodwill in the income statement. Goodwill is impaired when the carrying amount exceeds the goodwill's implied fair value. If the implied value of the goodwill has decreased below the carrying value, write the goodwill down and recognize a loss.
When to test for impairment
After identifying the asset group, the firm then determines if impairment testing is required. If impairment testing is required, it then performs a two-step test to determine if there is an impairment. If there is an impairment, the firm then computes the amount of the loss. Firms conduct an impairment test whenever events and circumstances referred to as impairment indicators indicate than an asset may be impaired.
Residual Value
Glueck company purchases a machine with an original cost of $100,000. The company expects that the machine will be worth $20,000 at the end of its service life. The $20,000 is referred to as the assets?
Assess recoverability
If the impairment indicators suggest an impairment of a long-term operating asset, the firm assess the asset's recoverability. In general, the recoverability of an asset refers to the firm's ability to recover the asset's carrying value based on the sum of the undiscounted cash flows from the use and disposal of the asset. 1. If the sum of the undiscounted future cash flows is less than the carrying value of the asset, then the asset is impaired and the company must measure the impairment loss. 2. If the sum of the undiscounted future cash flows is greater than the carrying value of the asset, then the asset is not impaired.
Indicate whether each item is an R&D cost or a non-R&D item. modification of a formula or design searching for applications of new research findings design, construction & testing of prototype or model engineering follow-through in early phases of commercial production adaptation of an existing capability for a customer routine efforts to improve an existing product
R&D: modification of a formula or design, design, construction & testing of prototype or model, searching for applications of new research findings non-R&D: adaptation of an existing capability for a customer, engineering follow-through in early phases of commercial production, routine efforts to improve an existing product
Measurement for each type of impairment. Assets to be held and used. Goodwill Assets to be sold
The excess of the book value over the fair value. The excess of the book value over the implied fair value. the excess of book value over fair value less costs to sell.
estimated extractable amount of natural resource
The formula to calculate depletion rate of a natural resource is the depletion base divided by the
Credit to natural resource
The journal entry to record the allocation of the cost of a natural resource will include a?
Categories and Steps Associated with the Impairment of Long-term Operating Assets
The method of accounting for the impairment of long-term operating assets depends upon the type of asset. - Property, plant, and equipment and finite-life intangible assets - Indefinite-life intangible assets - Goodwill The key steps related to accounting for impairments of long-term operating assets include the following: - Asset grouping - When to test for impairment - Impairment test - Measurement subsequent to impairment
