acc 201 ch 8

If disposal of a plant asset occurs during the year, depreciation is

recorded for the fraction of the year to the date of the disposal.

When an asset is sold, a gain occurs when the

sale price exceeds the book value of the asset sold.

A truck was purchased for $90,000 and it was estimated to have an $6,000 salvage value at the end of its useful life. Monthly depreciation expense of $700 was recorded using the straight-line method. The annual depreciation rate is

10%

The book value (carrying value) of a plant asset is the difference between the

cost of the asset and the accumulated depreciation to date.

Intangible assets are the rights and privileges that result from ownership of long-lived assets that

do not have physical substance

Expenditures that maintain the operating efficiency and expected productive life of a plant asset are generally

expensed when incurred.

A truck costing $42,000 and on which $35,000 of accumulated depreciation has been recorded was discarded as having no value. The entry to record this event would include a

loss of $7,000.

Recording depreciation expense each period is necessary in accordance with the

matching principle

Research and development costs

must be expensed when incurred under generally accepted accounting principles.

If a plant asset is retired and is fully depreciated

no gain or loss on disposal will be recorded

The cost of an intangible asset with an indefinite life should

not be amortized.

Depreciation is the process of allocating the cost of a plant asset over its useful life in a(n)

systematic and rational manner.

On July 1, 2012, Dillman Kennels sells equipment for $44,000. The equipment originally cost $120,000, had an estimated 5-year life and an expected salvage value of $20,000. The Accumulated Depreciation account had a balance of $70,000 on January 1, 2012, using the straight-line method. The gain or loss on disposal is

$4,000 gain.

A company purchased factory equipment on June 1, 2012, for $80,000. It is estimated that the equipment will have a $5,000 salvage value at the end of its 10-year useful life. Using the straight-line method of depreciation, the amount to be recorded as depreciation expense at December 31, 2012, is

$4,375.

Cost allocation of an intangible asset is referred to as

amortization.

The four subdivisions for plant assets are

land, land improvements, buildings, and equipment.

Intangible assets

should be reported as a separate classification on the balance sheet.

Aber Company buys land for $150,000 on 12/31/11. As of 3/31/12, the land has appreciated in value to $152,000. On 12/31/12, the land has an appraised value of $155,400. By what amount should the Land account be increased in 2012?

$0.

On May 1, 2012, Irwin Company purchased the copyright to Quick Computer Tutorials for $75,000. It is estimated that the copyright will have a useful life of 5 years. The amount of Amortization Expense recognized for the year 2012 would be

$10,000.

Mitchell Corporation bought equipment on January 1, 2012 .The equipment cost $120,000 and had an expected salvage value of $20,000. The life of the equipment was estimated to be 6 years. The depreciable cost of the equipment is

$100,000.

A plant asset cost $96,000 and is estimated to have a $12,000 salvage value at the end of its 8-year useful life. The annual depreciation expense recorded for the third year using the double-declining-balance method would be

$13,500.

Jack's Copy Shop bought equipment for $90,000 on January 1, 2011. Jack estimated the useful life to be 3 years with no salvage value, and the straight-line method of depreciation will be used. On January 1, 2012, Jack decides that the business will use the equipment for a total of 5 years. What is the revised depreciation expense for 2012?

$15,000

On July 1, 2012, Fleming Company sells machinery for $96,000. The machinery originally cost $240,000, had an estimated 5-year life and an expected salvage value of $40,000. The Accumulated Depreciation account had a balance of $140,000 on January 1, 2012, using the straight-line method. The gain or loss on disposal is

$16,000 gain.

Pearson Company bought a machine on January 1, 2012. The machine cost $108,000 and had an expected salvage value of $18,000. The life of the machine was estimated to be 5 years. The depreciation expense using the straight-line method of depreciation is

$18,000.

Stine Company purchased machinery with a list price of $32,000. They were given a 10% discount by the manufacturer. They paid $200 for shipping and sales tax of $1,500. Stine estimates that the machinery will have a useful life of 10 years and a residual value of $10,000. If Stine uses straight-line depreciation, annual depreciation will be

$2,050.

On October 1, 2012, Mann Company places a new asset into service. The cost of the asset is $60,000 with an estimated 5-year life and $15,000 salvage value at the end of its useful life. What is the depreciation expense for 2012 if Mann Company uses the straight-line method of depreciation?

$2,250.

A machine that was purchased on January 1 for $15,000 has an estimated salvage value of $3,000. If the machine's depreciation rate is 20%, its annual depreciation is

$2,400.

Equipment was purchased for $51,000 on January 1, 2011. Freight charges amounted to $2,100 and there was a cost of $6,000 for building a foundation and installing the equipment. It is estimated that the equipment will have a $9,000 salvage value at the end of its 5-year useful life. What is the amount of accumulated depreciation at December 31, 2012, if the straight-line method of depreciation is used?

$20,040.

A company purchased land for $210,000 cash. Real estate brokers' commission was $15,000 and $21,000 was spent for demolishing an old building on the land before construction of a new building could start. Under the cost principle, the cost of land would be recorded at

$246,000.

A company sells a plant asset that originally cost $180,000 for $60,000 on December 31, 2012. The accumulated depreciation account had a balance of $90,000 after the current year's depreciation of $15,000 had been recorded. The company should recognize a

$30,000 loss on disposal.

Bates Company purchased equipment on January 1, 2011, at a total invoice cost of $800,000. The equipment has an estimated salvage value of $20,000 and an estimated useful life of 5 years. What is the amount of accumulated depreciation at December 31, 2012, if the straight-line method of depreciation is used?

$312,000.

Machinery was purchased for $85,000 on January 1, 2011. Freight charges amounted to $3,500 and there was a cost of $10,000 for building a foundation and installing the machinery. It is estimated that the machinery will have a $15,000 salvage value at the end of its 5-year useful life. What is the amount of accumulated depreciation at December 31, 2012, if the straight-line method of depreciation is used?

$33,400.

Equipment with a cost of $150,000 has an estimated salvage value of $10,000 and an estimated life of 4 years or 10,000 hours. It is to be depreciated by the straight-line method. What is the amount of depreciation for the first full year, during which the equipment was used 2,700 hours?

$35,000.

Equipment with a cost of $150,000 has an estimated salvage value of $10,000 and an estimated life of 4 years or 10,000 hours. It is to be depreciated by the units-of-activity method. What is the amount of depreciation for the first full year, during which the equipment was used 2,700 hours?

$37,800.

On January 1, a machine with a useful life of five years and a residual value of $5,000 was purchased for $25,000. What is the depreciation expense for year 2 under straight-line depreciation?

$4,000

A company purchased factory equipment on April 1, 2012, for $72,000. It is estimated that the equipment will have a $9,000 salvage value at the end of its 10-year useful life. Using the straight-line method of depreciation, the amount to be recorded as depreciation expense at December 31, 2012, is

$4,725.

On November 1, 2011, Lobb Company places a new asset into service. The cost of the asset is $27,000 with an estimated 5-year life and $3,000 salvage value at the end of its useful life. What is the depreciation expense for 2012 if Lobb Company uses the straight-line method of depreciation?

$4,800.

Conley Company purchased equipment for $40,000 on January 1, 2010, and will use the double-declining-balance method of depreciation. It is estimated that the equipment will have a 5-year life and a $2,000 salvage value at the end of its useful life. The amount of depreciation expense recognized in the year 2012 will be

$5,760.

Equipment with a cost of $256,000 has an estimated salvage value of $24,000 and an estimated life of 4 years or 12,000 hours. It is to be depreciated by the straight-line method. What is the amount of depreciation for the first full year, during which the equipment was used 3,300 hours?

$58,000.

Equipment costing $40,000 with a salvage value of $8,000 and an estimated life of 8 years has been depreciated using the straight-line method for 2 years. Assuming a revised estimated total life of 6 years and no change in the salvage value, the depreciation expense for Year 3 would be

$6,000.

A company purchased factory equipment for $250,000. It is estimated that the equipment will have a $25,000 salvage value at the end of its estimated 5-year useful life. If the company uses the double-declining-balance method of depreciation, the amount of annual depreciation recorded for the second year after purchase would be

$60,000.

A machine with a cost of $240,000 has an estimated salvage value of $15,000 and an estimated useful life of 5 years or 15,000 hours. It is to be depreciated using the units-of-activity method of depreciation. What is the amount of depreciation for the second full year, during which the machine was used 5,000 hours?

$75,000.

A company sells a plant asset that originally cost $300,000 for $100,000 on December 31, 2012. The accumulated depreciation account had a balance of $120,000 after the current year's depreciation of $30,000 had been recorded. The company should recognize a

$80,000 loss on disposal.

Carpino Company purchased equipment and these costs were incurred: Cash price $90,000 Sales taxes 4,500 Insurance during transit 750 Installation and testing 1,500 Total costs $96,750 What amount should be recorded as the cost of the equipment?

$96,750.

A company purchased office equipment for $20,000 and estimated a salvage value of $4,000 at the end of its 10-year useful life. The constant percentage to be applied against book value each year if the double-declining-balance (200% declining balance) method is used is

20%.

During 2012, Phelps Corporation reported net sales of $5,000,000, net income of $2,200,000, and depreciation expense of $80,000. Phelps also reported beginning total assets of $1,000,000, ending total assets of $1,500,000, plant assets of $800,000, and accumulated depreciation of $500,000. Phelps's asset turnover ratio is

4.0 times.

A plant asset was purchased on January 1 for $60,000 with an estimated salvage value of $12,000 at the end of its useful life. The current year's Depreciation Expense is $4,000 calculated on the straight-line basis and the balance of the Accumulated Depreciation account at the end of the year is $20,000. The remaining useful life of the plant asset is

7 years.

Which of the following is not properly classified as property, plant, and equipment?

A truck held for resale by an automobile dealership. (inventory)

Which one of the following items is not a consideration when recording periodic depreciation expense on plant assets?

Cash needed to replace the plant asset.

Identify the basic issues related to reporting intangible assets.

Companies report intangible assets at their cost less any amounts amortized. If an intangible asset has a limited life, its cost should be allocated amortized over its useful life. Intangible assets with indefinite lives should not be amortized.

Indicate how long-lived assets are reported in the financial statements.

Companies usually show plant assets under "Property, plant, and equipment"; they show intangibles separately under "Intangible assets". Either within the balance sheet or in the notes, companies disclose the balances of the major classes of assets, such as land, buildings, and equipment, and accumulated depreciation by major classes or in total. They describe the depreciation and amortization methods used, and disclose the amount of depreciation and amortization expense for the period. In the statement of cash flows, depreciation and amortization expense are added back to net income to determine net cash provided by operating activities. The investing section reports cash paid or received to purchase or sell property, plant, and equipment.

Which of the following methods will result in the highest depreciation in the first year?

Declining-balance.

Explain the concept of depreciation.

Depreciation is the process of allocating to expense the cost of a plant asset over its useful (service) life in a rational and systematic manner. Depreciation is not a process of valuation, and it is not a process that results in an accumulation of cash. Depreciation reflects an asset's decreasing usefulness and revenue-producing ability, resulting from wear and tear and from obsolescence. The cost of land is not subject to depreciation as land is assumed to have an infinite life.

Which of the following would not be included in the Equipment account?

Electricity used by the machine. (this is a normal operating expense)

Which of the following assets does not decline in service potential over the course of its useful life?

Land. (land is assumed to have an infinite life)

An expenditure for which of the following items would be considered a revenue expenditure?

Ordinary repair.

Describe methods for evaluating the use of plant assets.

Plant assets may be analyzed using the return on assets ratio and the asset turnover ratio. The return on assets ratio consists of two components: the asset turnover ratio and the profit margin ratio.

Describe how the cost principle applies to plant assets.

The cost of plant assets includes all expenditures necessary to acquire the asset and make it ready for its intended use. Cost is measured by the cash or cash equivalent price paid.

A company purchases a remote building site for computer operations. The building will be suitable for operations after some expenditures. The wiring must be replaced to computer specifications. The roof is leaky and must be replaced. All rooms must be repainted and recarpeted and there will also be some plumbing work done. Which of the following statements is true?

The cost of the building will include the cost of replacing the roof.

Compute periodic depreciation using the declining-balance method and the units-of-activity method.

The depreciation expense calculation for each of these methods is: Declining balance: = Book value at beginning of year X Declining-balance rate = Depreciation Expense Units-of-activity: = Depreciation cost per unit X Units of activity during year = Depreciation Expense

Compute periodic depreciation using the straight-line method, and contrast its expense pattern with those of other methods.

The formula for straight-line depreciation is: Cost - Salvage value Useful life (in years) The expense patterns of the three depreciation methods are as follows: Method Annual Depreciation Pattern Straight-line Constant amount Declining-balance Decreasing amount Units-of-activity Varying amount

Explain how to account for the disposal of plant assets.

The procedure for accounting for the disposal of a plant asset through sale or retirement is: (a) Eliminate the book value of the plant asset at the date of disposal. (b) Record cash proceeds, if any. (c) Account for the difference between the book value and the cash proceeds as a gain or a loss on disposal.

The balance in the Accumulated Depreciation - Equipment account represents the

amount charged to expense since the acquisition of the plant asset.

In computing periodic depreciation expense, salvage (residual) value is

an estimate of a plant asset's value at the end of its useful life.

The cost of land does not include

annual property taxes.

The cost of a long-term asset is expensed

as the asset benefits the company.

The book value (carrying value) of an asset is equal to the

asset's cost less accumulated depreciation.

Plant assets are ordinarily presented in the balance sheet

at cost less accumulated depreciation.

The cost of a patent should

be amortized over its useful life or 20 years, whichever is shorter.

Management should select the depreciation method that

best measures the plant asset's contribution to revenue over its useful life.

A gain or loss on disposal of a plant asset is determined by comparing the

book value of the asset with the proceeds received from its sale.

Expenditures that add to the utility of plant assets for more than one accounting period are

capital expenditures.

The declining-balance method of depreciation produces a(n)

decreasing depreciation expense each period.

All of the following statements are false regarding depreciation except

depreciation does not apply to land.

The term applied to the periodic expiration of a plant asset's cost is

depreciation.

Equipment that cost $54,000 and on which $45,000 of accumulated depreciation has been recorded was disposed of for $13,500 cash. The entry to record this event would include a

gain of $4,500.

The depreciation method that applies a constant percentage to depreciable cost in calculating depreciation is

straight-line.

When estimating the useful life of an asset, accountants do not consider

the cost to replace the asset at the end of its useful life.

All of the following statements are true regarding the declining-balance method of depreciation except

the declining-balance method produces lower depreciation expense in the early years as opposed to the later years.

Units-of-activity (units of production) is an appropriate depreciation method to use when

the productivity of the asset varies significantly from one period to another.

All the following are needed for the computation of depreciation except

training costs of manufacturing personnel.

A characteristic of a plant asset is that it is

used in the operations of a business.