ACCT_Chapter 7
The key factor in classifying items as repairs and maintenance is that
future benefits are not provided beyond those originally anticipated from the asset.
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 depreciation expense for year 1?
2 x 1/10 x $300,000 = $60,000 depreciation expense in year 1.
amortization
Allocation of the cost of an intangible asset over its service life
Linx purchases an intangible asset for $10,000. How should the $10,000 be reported in the financial statements?
As an asset for $10,000.
Linx Corporation internally develops an intangible asset with research and development costs of $10,000. How should Linx report this $10,000?
As an expense on the income statement.
Sarah purchases land to be used for a new storage facility. Which of the following items are capitalized in the cost of land?
Commissions Costs to remove an old building Legal fees to secure title
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 activity-based 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?
Reason: The depreciation rate per unit is ($120,000 - $20,000)/1,000,000 hours = $0.10 per machine hour. Year 2 depreciation is 50,000 hours x $0.10 = $5,000.
On January 1, year 1, Clem Corp. purchased equipment for $160,000. The equipment has a residual value of $10,000, and has a life of 100,000 hours. Clem uses the activity-based method of depreciation. In year 1, Clem used the machine 2,000 hours, and in year 2, Clem used the machine 3,000 hours. What is the depreciation expense for year 2?
Reason: The depreciation rate per unit is ($160,000 - $10,000)/100,000 hours = $1.50 per machine hour. Year 2 depreciation is 3,000 hours x $1.50 = $4,500.
On January 1, year 1, London Corp. purchases equipment for $400,000. The equipment has a 5-year service 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?
Reason: 2 x 1/5 x $400,000 = $160,000 depreciation expense in year 1. Book value is calculated as cost less accumulated depreciation ($400,000 - $160,000 = $240,000) book value at end of year 1.
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?
Reason: Depreciation expense is ($50,000 - 10,000)/5 = $8,000 per year. $50,000 less accumulated depreciation of $24,000 = $26,000.
On January 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 service life and a $10,000 residual value. What is the book value at the end of year 1?
The depreciation rate is 2 x 1/10 = 20%. $200,000 x 20% = $40,000 depreciation expense in year 1. Book value at the end of year 1 is cost less accumulated depreciation, $200,000 - $40,000 = $160,000.
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 service life and a $10,000 residual value. What is depreciation expense for year 1?
The depreciation rate is 2 x 1/5 = 40%. $100,000 x 40% = $40,000 depreciation expense in year 1.
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 asset's life?
Total assets are lower. Net income is lower.
Which of the following does not differ among the different depreciation methods?
Total depreciation recognized over the asset's service life.
When assets are purchased in a group for a single sum, it is referred to as a
basket purchase.
Recording depreciation results in the allocation of the cost of a long-term asset to the years during which the asset provides _______
benefits
Tasty Subs acquired a delivery truck on October 1, 2021, for $17,500. The company estimates a residual value of $1,900 and a six-year service life. It expects to drive the truck 120,000 miles. Actual mileage was 4,200 miles in 2021 and 17,400 miles in 2022. Required: Calculate depreciation expense using the activity-based method for 2021 and 2022, assuming a December 31 year-end. (Do not round your intermediate calculations.)
depreciation is (Cost - Salvage value) /Life in miles ($17,500 - $1,900)=$0.13/mile120,000 miles Year 2021 4,200 miles × $0.13 = $ 546 2022 17,400 miles × $0.13 = $ 2,262
Which of the following is not an example of a tangible asset
franchise rights
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
___is the exclusive right to manufacture a product or use a process granted for a period of_____ years.
patent and 20
Capitalized costs
purchase cost plus closing costs minus sale of salvaged materials
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 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.
what are the two long terms assets?
tangible and intangible
In a basket purchase of assets, the cost must be allocated to the individual assets because
the assets have different useful lives.
Other terms used for an activity-based depreciation method are:
units of production method units of output method
The residual value of an intangible asset is usually
zero
Intangible assets that are acquired from other entities are referred to as purchased intangibles, whereas intangibles that are created by a company are referred to as
internally developed intangibles.
The purchase price and all costs to bring an asset to its desired condition and location for use should be ______.
capitalized
is an exclusive right of protection given to a creator of a published work, such as a song, film, painting, photograph, or book.
copyright
The journal entry to retire old equipment that is not fully depreciated includes a:
credit to equipment debit to loss debit to accumulated depreciation
True or false: Internally developed goodwill should be capitalized as an asset.
false - costs of internally developed goodwill should be expensed as incurred
The cost of land improvements are capitalized separately from land because land improvements tend to have a______ useful life.
limited
The accounting for copyrights uses the same accounting rules as
patents
Costs of periodically servicing equipment is an example of:
repair and maintenance
expensed
research and development costs
expense when incurred
research and development costs incurred when developing a new product
Where is the account accumulated depreciation on equipment found on the financial statements?
As a contra account to equipment on the balance sheet
Which of the following items should be capitalized as land improvements?
Cost of sidewalks Cost of fences Cost of parking lots
If a company generates its own goodwill through advertising or training, how should these costs be treated?
Expense the costs as incurred.
In accounting, the term impairment refers to
an asset's significant decline in value.
The original cost of the asset less the accumulated depreciation is the of the asset.
book and value
Machines used in manufacturing, computers, printers, vehicles, furniture, and fixtures generally are classified as . (Enter only one word.)
equipment
tangible assets
land, land improvements, buildings, equipment, and natural resources
When we recognize depreciation, we allocate a portion of the asset's cost to each year in which the asset
provides benefits to the company.
A purchased intangible is valued at its original cost. Original cost for acquiring a patent would include.
purchase price. required filing fees. legal costs to acquire.
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
An exclusive right to display a word, slogan, symbol, or emblem that distinctively identifies a company, product, or service is referred to as a
trademark
an___is an exclusive right to display a word, slogan, symbol, or emblem that distinctively identifies a company, product, or service.
trademark
An estimated residual value the total amount of depreciation recorded over an asset's service life.
Blank 1: reduces, lowers, or decreases
Which of these are parts of the journal entry to record depreciation?
Credit Accumulated Depreciation Debit Depreciation Expense
Total depreciation recorded over an asset's service life is:
the same regardless of the depreciation method used
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 and use
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
the term______means to record an expenditure as an asset.
capitalize
straight line
commonly used for financial statement purpose
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?
$100,000/10 years = $10,000 depreciation per year. Historical cost of $100,000 less $30,000 depreciation (for 2018, 2019, and 2020) = $70,000. 70,000
The formula for straight-line depreciation is
(cost - residual value)/service life.
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 costs are capitalized as an asset for an internally developed patent
Filing fees Legal fees
Which of the following are long-term tangible assets?
Property Equipment
Green Inc. expenses the cost of small tools provided that the amount is less than $1,000. This accounting treatment is:
acceptable if the amount is considered immaterial
Goodwill is recognized only when one company another company.
acquires, buys, or purchases
Units of production or units of output are alternative terms for the - depreciation method.
activity based
two types of expenditures
capital and current period expenditure
In accounting, expenditures recorded as assets are said to be _____.
capitalized
Costs that produce future benefits are ______, but costs that produce benefits only in the current period are ______.
capitalized; expense
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
The depreciation rate we use under the declining-balance method is a multiple of the - method.
straight line
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 straight-line depreciation for year 1?
($100,000 - 20,000)/10 years = $8,000 per year
The formula to calculate an activity-based depreciation rate is:
(cost - residual value)/estimated total production.
Which of the following items should be capitalized in the cost of equipment?
-Freight to deliver the equipment -Legal fees to establish title -Sales tax -Installation and testing of equipment -Purchase Price -Insurance on equipment during shipping
Which of the following costs should be capitalized in the costs of acquiring a building?
-Realtor commissions -Remodeling building -Legal fees to obtain title -Purchase Price
depletion
Allocation of the cost of a natural resource over its service life
Which items are considered changes in estimates that would be treated on a prospective basis in the current period and future periods?
Change in residual value of an asset Change in service life of an asset
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?
Debit equipment $80,000 Credit equipment $100,000 Credit gain on exchange of asset $40,000 Debit accumulated depreciation $60,000
internally developed intangible asset
Product or process created internally for which patent may be obtained. Product or process created internally for which patent may be obtained.
capitalized
Purchase price plus costs necessary to get asset ready for use
Which of the following are commonly used depreciation methods?
Straight-line Activity-based Declining-balance
Which of the following are classified as natural resources?
Timber tracts Mineral deposits
Larry purchases land to be used for a new corporate headquarters. Which of the following items are capitalized in the cost of land?
Title insurance Grading the land Costs to remove an old building Legal fees to secure title
Attorney fees and other costs necessary to secure a patent should be
added to the patent account.
A new major component that is added to an existing asset is called
addition
Depreciation is a process of cost _________and not a process of valuation.
allocation
depreciation
allocation of the cost of a tangible asset over its service life - fixed asset
Allocating the cost of intangible assets to expense is referred to as .
amortization
The gain or loss on disposal of an asset is calculated as:
amount received less the book value of asset sold
For accounting purposes, depreciation is
an allocation of a cost of an asset.
The cost of a major improvement that extends the service life of an asset would be______, whereas the cost of maintenance that does not increase the future benefits would be _____
capitalized and expensed
____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.
copy right
The formula to calculate the depreciation for the units-of-production method or activity-based depreciation, is ((cost - residual value)/total estimated production) x ______.
current-year activity or production
Which depreciation methods allocate the cost of long-term assets based on time?
declining-balance straight-line
Straight-line, declining-balance, and activity-based refer to methods commonly used to property, plant, and equipment.
depreciate
The cost allocation for property, plant, and equipment is referred to as , while the cost allocation for intangible assets is referred to as
depreciation, amortization
When a company acquires a business in a business acquisition and the purchase price is greater than the fair value of the net assets acquired, the excess is reported as .
goodwill
Using the declining balance method, depreciation will be
higher in earlier years, but lower in later years.
Long-term tangible assets include
land. equipment. buildings.
long term assets
often represent a significant portion of the total assets of a company
The initial valuation of purchased intangible assets requires that the intangible asset is recorded at
original cost
The depreciable cost of an asset is the asset's cost minus its estimated
residual value
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 deprecation is calculated as the depreciable cost divided by
the estimated service life of the asset.
The service life or useful life of an asset is
the estimated use that the company expects to obtain from the asset before disposing of it.
capitalize on the balance sheet
the purchase price of an intangible asset
capitalize
to describe recording an expenditure as an asset
MACRS
Commonly used for tax reporting
Which of the following items typically are classified as equipment?
Computers and printers used in office Furniture and fixtures Machinery used in manufacturing
The service life of an intangible asset may be limited by what types of provisions?
Contractual Legal Regulatory
Which of the following expenditures are classified as repairs and maintenance for a vehicle owned by the company? (Select all that apply.)
Routine oil change Engine tune-up
Which of the following items are capitalized into the cost of a patent?
Attorney fees to secure patent Filing fees Purchase price
The distinction between land and land improvements is that:
land has an indefinite life
The depreciable cost is
the cost of the asset minus the residual value.
The residual value of an intangible asset is usually .
nothing
Which of the following are expenditures for assets subsequent to acquisition?
Improvements Additions Repairs and maintenance
True or false: Repairs and maintenance expenditures that do not increase the future benefit of the asset are expensed.
true
For a patent developed internally, the research and development costs are
expensed as incurred.
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
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
On July 1, year 1, Smith Corp. purchased equipment for $200,000. The equipment has an expected service life of 10 years with no residual value. Smith uses the straight-line method of depreciation. The partial year depreciation for year 1 is
$200,000/10 years = $20,000 per year x 1/2 year = $10,000 depreciation expense in year 1.
Which of the following items are initially recorded as an expense on the income statement?
Advertising costs Research and development costs
an--------occurs when an asset is no longer useful, but cannot be sold.
Blank 1: retirement, retire, retires, or retirements
On January 1, year 1, Clem Corp. purchased equipment for $160,000. The equipment has a residual value of $10,000, and has a life of 100,000 hours. Clem uses the activity-based method of depreciation. In year 1, Clem used the machine 2,000 hours, and in year 2, Clem used the machine 3,000 hours. Which of the following statements is true?
Clem will depreciate the machine for $150,000 over its service life.
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.
The cost of successfully defending a patent should be added to:
Patent account
Purchased intangible asset
Patents, copyrights, trademarks, or franchise rights acquired from other companies. Patents, copyrights, trademarks, or franchise rights acquired from other companies.
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
Reason: $100,000/5 years = $20,000 per year x 1/4 year = $5,000 depreciation expense in year 1. October 1 - December 31 is 3 months so 1/4 year.
Cray uses the activity-based depreciation method. Cray purchases equipment for $210,000 and expects to use the equipment for 60,000 machine hours. The machine has a residual value of $30,000. The depreciation rate is
Reason: $210,000 - $30,000 = $180,000/60,000 machine hours = $3.00 per machine hour.
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?
Reason: ($10,000 - 4,000)/4 years = $1,500 per year
On January 1, 20X1, Claire Corp. purchases 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
intagible assets
assets that can't be touched (patents, copyrights, trademarks, franchise, goodwill)
closing costs
attorney fees, agent commissions, title, title search, recording fees, back taxes, other oblications, clearing, filing, leveling, and removing old buildings
The formula for calculating the double-declining-balance method is
book value at beginning of year x 2/estimated service life
Goodwill may only be recognized
in a business acquisition
Companies use accelerated depreciation for tax purposes because
it reduces taxable income in the early years of the asset's life and provides better cash flows.
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.
Otto Inc. retires old equipment with a book value of $2,400. Otto should
recognize a loss of $2,400
The formula for calculating declining balance depreciation is the depreciation rate per year times
the book value at the beginning of the year.
A long-term asset is reported on the balance sheet at its original cost plus all expenditures necessary to get the asset ready for use.
true
True or false: The accounting treatment for the cost of copyrights is identical to that of patents.
true
The accumulated depreciation account is classified as a(n)
contra asset
The types of expenditures that can occur subsequent to an asset's acquisition are
improvements. repairs and maintenance. additions
A change in accounting estimate requires a company to account for the change
in the current and future years
A company pays $16,000 in property taxes on land that it acquired ten years ago. The property taxes pertain only to the current year. The company should record the property taxes as an expense in its current-year income statement.
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
The original cost of an asset minus accumulated depreciation is
book value.
Clarion purchases land and prepares it for use. Which of the following items should be capitalized as land improvements?
Cost of driveways Cost of sidewalks Cost of lawn sprinkler system
An asset that has no physical substance is referred to as a(n)
intangible asset.