Chapter 7

We _______ an expenditure if it benefits only the ________ period.

expense; current

Franchise

local outlets that pay for the exclusive right to use the franchiser company's name and to sell its products within a specified geographical area.

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

lower

book value

referred to as carrying value, equals the original cost of the asset minus the current balance in accumulated depreciation.

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.

What is the formula for the profit margin ratio?

net income/net sales

Krasel 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 $70,000. The new asset received had a fair value of $50,000 and a book value of $45,000. The journal entry to record this exchange will include which of the following entries?

-Credit gain on exchange of asset $30,000 -Credit equipment $90,000 -Debit accumulated depreciation $70,000 -Debit equipment $50,000

Tangible assets

Assets include land, land improvements, buildings, equipment, and natural resources.

After initially being recorded as an asset,

most capitalized expenditures are expensed over time as the asset is used in company operations.

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 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, 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 Reason: $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.

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 cash is received

Pearce Corporation exchanges old equipment for new equipment. The original cost of the old equipment was $120,000, and its accumulated depreciation at the date of exchange was $40,000. The new equipment received had a fair value of $50,000 and a book value of $32,000. The journal entry to record this exchange will include which of the following entries?

-Credit equipment $120,000 -Debit equipment $50,000 -Debit loss on exchange $30,000 -Debit accumulated depreciation $40,000

The types of expenditures that can occur subsequent to an asset's acquisition are

-repairs and maintenance -additions -improvements

Accumulated depreciation

A contra asset account, meaning that it reduces an asset account.We credit its contra account, which we offset against the equipment account in the balance sheet.

declining balance method

An accelerated depreciation method that records more depreciation in earlier years and less depreciation in later years

Intangible assets

Assets include patents, trademarks, copyrights, franchises, and goodwill.

straight line depreciation

Method that allocates an equal portion of the depreciable cost of plant asset (cost minus salvage) to each accounting period in its useful life.

The general rule for recording all such long-term assets can be simply stated:

We record a long-term asset at its cost plus all expenditures necessary to get the asset ready for use.

Trademark

a word, slogan, or symbol that distinctively identifies a company, product, or service

Units of production or units of output are alternative terms for the

activity-based depreciation method

Copyright

an exclusive right of protection given by the U.S. copyright office to the creator of a published work such as a song, film, painting, photograph, book, or computer software.

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.

book

The formula for calculating the double-declining-balance method is

book value at the beginning of year x2/ estimated service life

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

impairment

Otto Inc. retires old equipment with a book value of $2,400. Otto should

recognize a loss of $2,400

The depreciable cost is

the cost of the asset minus the residual value

service life

the estimated use that the company expects to receive from the asset

Amortization

the process of allocating to expense the cost of an intangible asset

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

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?

-Debit equipment $40,000 -Debit loss on exchange $10,000 -Debit accumulated depreciation $40,000 -Credit equipment $90,000

Which of these are parts of the journal entry to record depreciation?

-debit depreciation expense -credit accumulated depreciation

The journal entry to retire old equipment that is not fully depreciated includes a:

-debit to loss -debit to accumulated depreciation -credit to equipment

Which of the following items are initially recorded as an expense on the income statement?

-research and development costs -advertising costs

Which of the following are commonly used depreciation methods?

-straight-line -declining-balance -activity-based

depletion

allocation of the cost of natural resources

patent

an exclusive right to manufacture a product or to use a process. The U.S. patent and trademark office grants this right for a period of 20 years.

We __________ an expenditure as an asset if it increases _________ benefits.

capitalize; future

activity based depreciation

calculates depreciation based on the activity associated with the asset.Commonly used to allocate the cost of natural resources.

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

Goodwill

often is the largest intangible asset in the balance sheet. It is recorded only when one company acquires another company. It is recorded by the acquiring company for the amount that the purchase price exceeds the fair value of the acquired company's identifiable net assets.

Capitalize

recording an expenditure as an asset

residual value

The amount the company expects to receive from selling the asset at the end of its service life; also referred to as salvage value

Depreciation

allocating the cost of an asset to an expense over its service life. Usually for tangible assets.