MGMT 20000 Chapter 7 Review

Amortization refers to the allocation of the cost of _____ assets to expense.

tangible

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

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

Which of the following are long-term tangible assets? A. Property B. Equipment C. Trademark D. Accounts receivable E. Copyright

A. Property B. Equipment

Which account is credited in a journal entry to record depreciation on machinery? A. Depreciation Expense B. Accumulated Depreciation C. Machinery D. Cash

B. Accumulated Depreciation

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

B. False

The formula for straight-line depreciation is A. cost/service life. B. (cost + residual value)/service life. C. service life/(cost + residual value). D. (cost - residual value)/service life.

D. (cost - residual value)/service life.

Which account is credited in a journal entry to record depreciation on machinery? A. Cash B. Machinery C. Depreciation Expense D. Accumulated Depreciation

D. Accumulated Depreciation

Match each term with its definition. Depreciation Depletion Amortization __________________________________________ Allocation of the cost of an intangible asset Allocation of the cost of a tangible fixed asset Allocation of the cost of natural resources

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

Match the accounting treatment of costs associated with intangible assets with the description. Expensed Capitalized __________________________________________ Purchase price plus costs necessary to get asset ready for use Research and development costs

Expensed: Research and development costs Capitalized: Purchase price plus costs necessary to get asset ready for use

_____ value is the amount the company expects to receive for the asset at the end of its service life. (Enter one word per blank)

Residual

Units of production or units of output are alternative terms for the _____-_____ depreciation method.

activity-based

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

allocation

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

amortization

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

benefit

The original cost of the asset less the accumulated depreciation is the _____ _____ of the asset.

book value

Straight-line, declining-balance, and activity-based refer to methods commonly used to _____ property, plant, and equipment.

depreciate

The allocation of the cost of a tangible asset over its service life is referred to as _____. (Enter one word per blank)

depreciation

An asset that has no physical substance is called a(n) _____ asset.

intangible

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

less

The profit margin ratio is defined as _____ _____ divided by net sales. (Enter one word per blank)

net income

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

patent

A(n) _____ is the exclusive right to manufacture a product or use a process granted for a period of _____ years.

patent; 20

The depreciable cost of an asset is the asset's cost minus its estimated _____ value. (Enter one word per blank)

residual

When an asset is no longer useful, but cannot be sold, we have a _____.

retirement

The estimated use the company expects to obtain from an asset before disposing of it is referred to as the _____ life of the asset. (Enter one word per blank)

service

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

A(n) _____ is an exclusive right to display a word, slogan, symbol, or emblem that distinctively identifies a company, product, or service.

trademark

When we recognize depreciation, we allocate a portion of the asset's cost to each year in which the asset A. is owned by the company. B. provides benefits to the company. C. decreases in value.

B. provides benefits to the company.

Which of the following does not differ among the different depreciation methods? A. Depreciation recognized during the last year of the asset's service life. B. Depreciation recognized during the earlier years. C. Total depreciation recognized over the asset's service life.

C. Total depreciation recognized over the asset's service life.

When selling a fixed asset, the seller recognizes a gain or loss for the difference between the amount received and the _____ value of the asset sold. A. net present B. net realizable C. book D. fair

C. book

Otto Inc. retires old equipment with a book value of $2,400. Otto should A. debit cash for $2,400 B. recognize a loss of $2,400 C. recognize a gain of $2,400 D. not make a journal entry

B. recognize a loss of $2,400

The depreciation method that allocates an equal amount of the depreciable base to each year of the asset's service life is the A. double-declining-balance method. B. straight-line method. C. units-of-output method. D. MACRS

B. straight-line method.

Where is the account accumulated depreciation on equipment found on the financial statements? A. As a contra account to equipment on the balance sheet B. As a liability account on the balance sheet C. As an asset account on the balance sheet D. As an expense account on the income statement

A. As a contra account to equipment on the balance sheet

Which of these are parts of the journal entry to record depreciation? A. Credit Accumulated Depreciation B. Credit Depreciation Expense C. Debit Depreciation Expense D. Debit Accumulated Depreciation

A. Credit Accumulated Depreciation C. Debit Depreciation Expense

What is the formula for the profit margin ratio? A. Net income divided by net sales. B. Net income divided by average shareholders' equity. C. Gross profit divided by sales. D. Net income divided by average total assets.

A. Net income divided by net sales.

The formula for calculating declining balance depreciation is the depreciation rate per year times A. the cost less the residual value. B. the cost less the residual value less the accumulated depreciation. C. the book value at the beginning of the year.

C. the book value at the beginning of the year.

The service life or useful life of an asset is A. the time period from the purchase of the asset until it becomes impaired. B. determined by MACRS tables. C. the estimated use that the company expects to obtain from the asset before disposing of it.

C. the estimated use that the company expects to obtain from the asset before disposing of it.

The journal entry to retire old equipment that is not fully depreciated includes a: A. debit to accumulated depreciation B. debit to loss C. credit to equipment D. debit to cash E. credit to loss

A. debit to accumulated depreciation B. debit to loss C. credit to equipment

Which depreciation methods allocate the cost of long-term assets based on time? A. declining-balance B. activity methods C. straight-line D. valuation method

A. declining-balance C. straight-line

Long-term tangible assets include A. patents. B. equipment. C. goodwill. D. land. E. buildings.

B. equipment. D. land. E. buildings.

Wall Corporation exchanges old equipment for new equipment. The original cost of the old equipment was $100,000, and its accumulated depreciation at the date of exchange was $60,000. The new asset received had a fair value of $80,000 and a book value of $65,000. The journal entry to record this exchange will include which of the following entries? A. Credit equipment $100,000 B. Credit accumulated depreciation $60,000 C. Credit equipment $80,000 D. Debit equipment $65,000 E. Debit accumulated depreciation $60,000 F. Debit equipment $80,000 G. Credit gain on exchange of asset $40,000

A. Credit equipment $100,000 E. Debit accumulated depreciation $60,000 F. Debit equipment $80,000 G. Credit gain on exchange of asset $40,000

Which of the following are expenditures for assets subsequent to acquisition? A. Repairs and maintenance B. Improvements C. Freight charges D. Additions

A. Repairs and maintenance B. Improvements D. Additions

Which of the following items are initially recorded as an expense on the income statement? A. Research and development costs B. Purchased intangibles C. Advertising costs

A. Research and development costs C. Advertising costs

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. A. True B. False

A. True

The term used to describe the amount the company expects to receive for an asset at the end of its service life is A. residual value. B. historical cost. C. lower of cost or market value. D. impairment value.

A. residual value.

Straight-line deprecation is calculated as the depreciable cost divided by A. the estimated service life of the asset. B. the residual value of the asset. C. the cost of the asset.

A. the estimated service life of the asset.

Other terms used for an activity-based depreciation method are: A. units of output method B. units of production method C. productivity method D. base depreciation method

A. units of output method B. units of production method

Which of the following are commonly used depreciation methods? A. Value-based B. Activity-based C. Straight-line D. Increasing-balance E. Declining-balance

B. Activity-based C. Straight-line E. Declining-balance

For accounting purposes, depreciation is A. a decline in value of an asset. B. an allocation of a cost of an asset. C. the selling price of an asset.

B. an allocation of a cost of an asset.

The formula for calculating the double-declining-balance method is A. book value at beginning of the year less residual value x 2/ estimated service life. B. book value at beginning of year x 2/estimated service life C. historical cost x 1/service life. D. historical cost less residual value x 2/estimated service life.

B. book value at beginning of year x 2/estimated service 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 A. patent. B. trademark. C. copyright. D. franchise.

D. franchise.

The depreciable cost is A. historical cost less accumulated depreciation. B. cost of the asset minus depreciation expense. C. cost of the asset plus the residual value. D. the cost of the asset minus the residual value.

D. the cost of the asset minus the residual value.

Total depreciation recorded over an asset's service life is: A. highest when the double-declining balance method is used B. lowest when the activity-based method is used C. lowest when the straight-line method is used D. the same regardless of the depreciation method used

D. the same regardless of the depreciation method used

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 accumulated depreciation account is classified as a(n) A. contra asset. B. asset. C. liability. D. expense.

A. contra asset.

The formula to calculate the depreciation for the units-of-production method (activity-based depreciation) is ((cost - residual value)/total estimated production) x _____. A. current-year activity or production B. historical cost C. gross profit percentage D. total activity or production

A. current-year activity or production

The original cost of an asset minus accumulated depreciation is A. disposal value. B. book value. C. goodwill. D. residual value.

B. book value.

The formula to calculate an activity-based depreciation rate is: A. cost/actual production during the year. B. cost/estimated total production. C. (cost - residual value)/estimated total production. D. (cost - residual value)/actual production during the year.

C. (cost - residual value)/estimated total production.

Which statement is true about the straight-line method of depreciation? A. It recognizes expense proportionately with the amount of use of the asset. B. It is an accelerated method of depreciation. C. It allocates an equal amount of depreciation to each year the asset is used. D. It is the preferred method for companies expecting to use the asset more in its early years of life.

C. It allocates an equal amount of depreciation to each year the asset is used.

An asset that has no physical substance is referred to as a(n) A. finite asset. B. depreciable asset. C. intangible asset. D. current asset.

C. intangible asset.

A(n) _____ is a contractual arrangement in which one entity grants the purchaser the exclusive right to use the trade name, formulas, and product rights within a specific geographic area for a specific period of time. (Enter one word per blank)

franchise

The gain or loss on disposal of an asset is calculated as: A. amount received less the book value of asset sold B. the cost of the asset less the accumulated depreciation C. the fair value of the asset less the accumulated depreciation D. consideration received less the fair value of the asset sold

A. amount received less the book value of asset sold

Companies use accelerated depreciation for tax purposes because A. it reduces taxable income in the early years of the asset's life and provides better cash flows. B. it does a better job of matching expenses to revenues of the period. C. it is required by the IRS.

A. it reduces taxable income in the early years of the asset's life and provides better cash flows.

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? A. $20,000 B. $30,000 C. $26,000 D. $34,000

C. $26,000

On January 1, 2018, Lennox Corporation purchased equipment for $100,000. Lennox depreciated the equipment straight--line over 10 years with no residual value. What is the book value of the equipment on January 1, 2021? A. $60,000 B. $50,000 C. $70,000 D. $100,000

C. $70,000

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? A. Debit equipment $40,000 B. Debit equipment $35,000 C. Credit accumulated depreciation $40,000 D. Debit loss on exchange $10,000 E. Debit accumulated depreciation $40,000 F. Credit equipment $90,000 G. Debit loss on equipment $15,000

A. Debit equipment $40,000 D. Debit loss on exchange $10,000 E. Debit accumulated depreciation $40,000 F. Credit equipment $90,000

The types of expenditures that can occur subsequent to an asset's acquisition are A. improvements. B. goodwill. C. additions. D. repairs and maintenance.

A. improvements. C. additions. D. repairs and maintenance.

The purchase price and all costs to bring an asset to its desired condition and location for use should be _____. A. expensed B. capitalized C. accrued

B. capitalized

A retirement or abandonment of an asset is different from a sale of an asset because A. a gain is recognized for the undepreciated portion of the equipment. B. no cash is received. C. the residual value is included as a gain. D. a loss must be recognized for the remaining book value.

B. no cash is received. D. a loss must be recognized for the remaining book value.

An exclusive right to display a word, slogan, symbol, or emblem that distinctively identifies a company, product, or service is referred to as a A. copyright. B. franchise. C. patent. D. trademark.

D. trademark.