CH 11 Smartbook

Which of the following is true regarding a nonmonetary exchange of assets?

A gain or loss is recognized for the difference between the fair value and the book value of the asset given up.

Which of the following are required when a material error is discovered in a subsequent accounting period that impacts retained earnings?

A prior period adjustment is made to the beginning balance of retained earnings. Previous financial statements are retrospectively restated. A disclosure note describing the nature of the error and the impact of the correction on net income and earnings per share.

Depreciation

Allocation of the cost of a tangible fixed asset

Amortization

Allocation of the cost of an intangible asset

Depletion

Allocation of the cost of natural resources

What is the accounting treatment for the discovery of a material error in a previous year?

Previous years' financial statements are restated.

Which method in oil and gas accounting requires the cost of unsuccessful wells be expensed in the current period?

Successful efforts method

When assets are exchanged and the transaction lacks commercial substance, which of the following occurs?

The asset received is valued at the book value of the asset given.

What is the purpose of group or composite depreciation?

To reduce the record-keeping costs of determining depreciation.

Which of the following intangible assets are usually considered to have indefinite lives?

Trademarks

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

A company acquires equipment by signing an interest-bearing note payable for $20,000. The interest rate is realistic so the company will record

debit machine $20,000 credit note payable $20,000

A subsequent expenditure for an asset increases the future benefits of the asset if it

extends the asset's useful life. increases the quality of the goods or services produced by the asset. increases the operating efficiency of the asset.

Amortization is appropriate for intangible assets with

finite useful lives

Which of the following items should be capitalized in the cost of equipment?

installation and testing of equipment freight to deliver the equipment to its location insurance on equipment during shipping Purchase price

Which of the following items should always be capitalized in the cost of equipment?

installation and testing of equipment sales tax freight to deliver the equipment legal fees to establish title

Indicate which costs would be capitalized as part of the cost of manufacturing equipment.

insurance during transit set-up cost freight-in

Long-term assets are typically classified in one of these two categories:

intangible assets property, plant, and equipment

No amortization is recorded for

intangible assets with indefinite lives.

The two categories for intangible assets are

intangibles with finite lives. intangibles with indefinite lives.

The two important accounting issues related to self-constructed assets are

interest charges and allocation of overhead.

The FASB requires research and development costs to be expensed because

it is difficult to objectively determine the future benefits.

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.

The acronym MACRS stands for

modified accelerated cost recovery system.

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.

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

present value of the note payable, which is the face amount of the note.

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.

When a company receives an asset from an unrelated party by a donation, the assets are valued at fair value and

revenue is recorded.

The amount of use that the company expects to obtain from an asset before disposing of it is referred to as the

service life of the asset

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.

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.

In accounting, the term impairment refers to

an asset's significant decline in value.

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 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.

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

When assets are exchanged and the transaction lacks commercial substance, the asset received is valued at the

book value of the asset given up.

The purchase price and all costs to bring an asset to its desired condition and location for use should be ______.

capitalized

The gain or loss on disposal of an asset is calculated as

consideration received less the book value of asset sold.

For natural resources the depletion base is

cost less any anticipated residual value.

The cost of a natural resource less its anticipated residual value is called the

depletion base

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

When a company acquires assets by issuing debt or equity securities, the first indicator of fair value is the

fair value of the debt or equity securities given.

The basic principle for valuing assets in a nonmonetary exchange is to value the asset received at

fair value.

Which method in oil and gas accounting allows all costs to be capitalized as assets, and then expensed in the future as oil and gas are extracted?

full-cost method

When an asset has a significant decline in value and is written down, this is called ______.

impairment

From a financial reporting perspective, property, plant, and equipment and intangible assets exhibit the following characteristics

long-lived revenue-producing

Margot Company purchases land, building and equipment for a single purchase price. Margot should account for the purchase as a ______ purchase.

lump-sum

When assets are purchased in a group for a single sum, it is referred to as a

lump-sum purchase.

Group and composite depreciation commonly is used to

reduce costs of record-keeping.

The useful life of an intangible asset may be limited by what type of provisions?

regulatory contractual legal

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 service life or useful life of an asset is

the amount of use the company expects to obtain before disposing of the asset.

In a lump-sum purchase of assets, the cost must be allocated to the individual assets because

the assets have different useful lives.

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

An asset is exchanged for another asset and cash is received in the transaction. The fair value of the assets are not determinable. At what amount should the new asset be recorded?

Book value of the asset given up less the cash received.

Which of the following is an activity-based depreciation method?

Units-of-production method

Which statement is true about the straight-line method of depreciation?

It allocates an equal amount of depreciation to each year of the asset's service life.

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 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

An asset is exchanged for another asset and no cash is exchanged in the transaction. The fair value of the assets are not determinable. At what amount should the new asset be recorded?

Book value of the asset given.

Which of the following accounting changes must be justified in the notes to the financial statements?

Changes in depreciation methods

The retirement depreciation method assumes a _____ cost approach in determining depreciation expense at the time the assets are disposed.

FIFO

Donated assets should be recorded on the balance sheet at what amount?

Fair value

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 retirement method for recording depreciation expense records depreciation

when the assets are disposed of.

The acronym "MACRS" refers to a(n) _____ method that may be used for ______ purposes.

depreciation; tax

When assets are acquired in a noncash transaction, if the fair value of the noncash items given is not clearly evident, then the ______ value of the assets received is used to record the assets.

fair