chapter 7 - acct

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

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.

A retirement or abandonment of an asset is different from a sale of an asset because

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

Which of the following are long-term tangible assets?

property and equipment

Straight-line deprecation is calculated as the depreciable cost divided by

the estimated service life of the asset

What is the formula for the profit margin ratio?

net income divided by net sales

Which depreciation methods allocate the cost of long-term assets based on time?

straight-line declining-balance

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

MACRS

commonly used for tax reporting

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

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

recognize a loss of $2400

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

repairs and maintenance additions improvements

expensed

research and development costs

_____ value is the amount the company expects to receive for the asset at the end of its service life.

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

Which of the following are commonly used depreciation methods?

straight-line declining-balance activity-based

Other terms used for an activity-based depreciation method are:

units of production method units of output method

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

credit to equipment debit to loss debit to accumulated depreciation

The formula for straight-line depreciation is

(cost - residual value)/service life

For accounting purposes, depreciation is

an allocation of a cost of an asset

capitalized

Purchase price plus costs necessary to get asset ready for use

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

benefits

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 original cost of an asset minus accumulated depreciation is

book value

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

book value at beginning of year x 2/estimated service life

Long-term tangible assets

buildings, equipment and land

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

capitalized

straight-line

commonly used for financial statement purposes

The allocation of the cost of a tangible asset over its service life is referred to as

depreciation

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

impairment

Which of the following are expenditures for assets subsequent to acquisition?

improvements repairs and maintenance additions

In accounting, the term impairment refers to

an asset's significant decline in value

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

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

activity based

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

advertising costs research and development costs

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

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

amount received less the book value of asset sold

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

An asset that has no physical substance is referred to as a(n)

intangible asset

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.

The formula for calculating declining balance depreciation is the depreciation rate per year times

the book value at the beginning of the year

Total depreciation recorded over an asset's service life is:

the same regardless of the depreciation method used

Which of the following does not differ among the different depreciation methods?

total depreciation recognized over the asset's service life

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

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

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

less

The formula to calculate the depreciation for the units-of-production method (activity-based depreciation) is ((cost - residual value)/total estimated production) x ______.

current-year activity or production