Chapter 7

The FASB requires research and development costs to be expensed because

it is difficult to determine whether costs will result in future benefits.

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.

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

risidual

The estimated use the company expects to obtain from an asset before disposing of it is referred to as the _________ life of the asset.

service

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.

An accelerated depreciation method is appropriate when the asset will provide

greater benefits in the earlier years of the asset's life.

The issues that are important for tangible and intangible assets, include determining:

how to expense the cost of the asset over its life how to record the disposal of the asset what amounts to include in the cost

Which of the following items are intangible assets?

Trademarks, patent, copyright, & goodwill

True or false: Repairs and maintenance expenditures that do not increase the future benefit of the asset are expensed.

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

In accounting, expenditures recorded as assets are said to be _____.

capitalized

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

intangible asset.

Costs of periodically servicing equipment is an example of:

repair and maintenance

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 _____

Blank 1: depreciation Blank 2: amortization

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 the asset less the accumulated depreciation is the _______ _______ of the asset

Book Value

Sarah purchases land to be used for a new storage facility. Which of the following items are capitalized in the cost of land?

Commissions Legal fees to secure title Costs to remove an old building

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

capitalized

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

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

the same regardless of the depreciation method used

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

debit to loss credit to equipment debit to accumulated depreciation

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

the book value at the beginning of the year.

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

the estimated service life of the asset.

The cost of land improvements are capitalized separately from land because land improvements tend to have a ______ useful life

limited

The distinction between land and land improvements is that

Land has an indefinite life

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?

$240,000

The formula to calculate an activity-based depreciation rate is:

(cost - residual value)/estimated total production.

Which of the following items are expensed? - Costs related to maintaining equipment -Major repair that increases future benefits -Successful legal defense of a patent -Replacing a major component

Costs related to maintaining equipment

Straight-line, declining-balance, and activity-based refer to methods commonly used to _________ property, plant, and equipment.

Depreciate

What is the first issue that needs to be addressed in order to properly report tangible and intangible assets?

Determining the amounts to be included in the assets' initial cost

Long-term tangible assets include

Land, equipment, and buildings

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

Repairs and maintenance Improvements Additions

Which of the following items are capitalized?

Replacing a major component Successful legal defense of a patent Major repair that increases future benefits

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

Risidual

The term used to describe the amount the company expects to receive for an asset at the end of its service life is

Risidual value

Which of the following are commonly used depreciation methods?

Straight-line Activity-based Declining-balance

Match the type of depreciation method with the reporting basis.

Straight-line: commonly used for financial statement purposes MACRS: commonly used for tax reporting

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

Total depreciation recognized over the asset's service life.

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

additions. repairs and maintenance. improvements.

Because the future benefits of research and development costs are uncertain, FASB requires that research and development costs be treated as

an expense on the income statement.

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

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

The original cost of an asset minus accumulated depreciation is

book value.

The key factor in classifying items as repairs and maintenance is that

future benefits are not provided beyond those originally anticipated from the asset.

The formula for straight-line depreciation is

(cost - residual value)/service life.

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?

$40,000

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?

$60,000

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?

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

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.

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 (They both maintain given level of benefits)

Which of the following items should be capitalized as land improvements?

Cost of fences Cost of parking lots Cost of sidewalks

The term ________ means to record an expenditure as an asset.

Capitalize

Clarion purchases land and prepares it for use. Which of the following items should be capitalized as land improvements?

Cost of lawn sprinkler system Cost of sidewalks Cost of driveways

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?

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

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

Under what circumstances are accelerated depreciation methods most appropriate?

For an asset that will provide greater benefits in earlier years of its life. For an asset that will be used less in the later years of its life

Larry purchases land to be used for a new corporate headquarters. Which of the following items are capitalized in the cost of land?

Legal fees to secure title Costs to remove an old building Title insurance Grading the land

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 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

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

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.

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

recognize a loss of $2,400

When an asset is no longer useful, but cannot be sold, it is called an asset _______

retirement

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

revenue

The service life or useful life of an asset is

the amount of use that the company expects to obtain from the asset before disposing of it