Chapter 7 - Operating Assets

The disposal of a fixed asset may result in a gain or loss on disposal. Which of the following would be part of the entry to record a gain on the disposal of a fixed asset?

Gain on Disposal is credited.

Depreciation methods are the standardized calculations required to determine periodic depreciation. Which of the following is the most commonly used depreciation method?

Straight-line

Intangible operating assets represent future economic benefits to the company, but unlike tangible assets, they lack physical substance. Which of the following is an intangible asset?

Patent

On January 1, Alpha Company acquires a patent for $70,000 and expects to receive economic benefits from it for 5 years, so amortization expense is $14,000. What account will be credited for the amortization expense entry?

Patent for $14,000

As a natural resource is removed from the earth, the cost of the natural resource is allocated to each unit of natural resource removed. This process of allocation is called

depletion.

The historical cost principle requires that a company record its fixed assets at the

exchange price at the time the asset is purchased.

If a fixed asset is impaired, a company should reduce the asset's book value to

fair value.

Under the units-of-production depreciation method, what is the depreciation cost per unit if the cost of the asset is $10,000, the residual value is $1,000, the expected usage of the asset is 9,000 units, and the fair market value of the asset is $12,000?

$1.00 [($10,000 - $1,000)/9,000]

A particular franchise has a legal life of 10 years. On January 1, Alpha Company acquires it for $70,000 and expects to receive economic benefits for 5 years. The company Alpha purchased the franchise from expected the economic life to be 7 years. How much amortization expense will Alpha have the first year?

$14,000

In addition to expenditures made when property, plant, and equipment are acquired, companies will incur costs over the life of the asset that range from ordinary repairs and maintenance to major overhauls, additions, improvements, and betterments. When a manufacturing firm spends $150,000 to upgrade one of its robotic machines to make it more productive, the expenditure would be classified as a(n)

capital expenditure

The book value of an asset is calculated as

cost minus accumulated depreciation.

The disposal of a fixed asset may result in a gain or loss on disposal. Which of the following would be part of the entry to record a loss on the disposal of a fixed asset?

Loss on Disposal is debited

Which of the following is the first step to revise the calculation of depreciation expense?

Obtain the book value of the asset at the date of the revision of depreciation.

On January 1, Einstein Excavating bought a dump truck for $35,000, estimating that it would have a residual value of $0 and a useful life of 5 years. Einstein uses the straight-line depreciation method, and the book value of the asset on December 31 of the same year was $28,000. Lakeview then completed an overhaul to the engine of the dump truck for $6,000 that extended the useful life to a remaining 7 years. What is the revised depreciation expense for the upcoming year?

$4,857

Depreciation is a(n)

cost allocation process

Which of the following statements about intangible assets is true?

Goodwill is considered to have an indefinite life unless it is found to be impaired.

Which of the following accounting principles provides the conceptual basis for measuring and recognizing depreciation?

Matching principle

Accounting for natural resources is similar to accounting for fixed assets. Which of the following is one of the ways natural resources are different from fixed assets?

Most natural resources can generally be replaced or restored only by an act of nature.

Three items of information are necessary in order to measure depreciation. Which of the following is NOT one of these three items?

The fair market value of the fixed asset

Older assets tend to be __________ than newer assets.

less efficient

If a fixed asset is impaired, a company should reduce the asset's book value to fair value in the year

when the impairment occurs.

On March 1, Duke Company acquired a new high lift from Function, Inc. Duke paid $25,000 in cash and paid sales taxes of $3,000. Duke also paid Joe's Freight $5,000 to haul the high lift across the state to deliver it to its factory. Duke paid $500 to have the machine oiled and lubricated after the first month of operating it. How much should Duke Company record as the cost of the high lift?

$33,000

On January 1, Tomcat Enterprises bought a building for $300,000, estimating that it would have a residual value of $0 and a useful life of 40 years. Tomcat uses the straight-line depreciation method, and the book value of the asset on December 31 of the same year was $292,500. Tomcat then decided that the building would have a remaining useful life of 20 years. What is the revised depreciation expense for the upcoming year?

$14,625 ($292,500 book value - $0 residual value/20 years remaining of revised useful life = $14,625)

The declining balance depreciation method is used by Famous Company. Assume an asset costs $100,000 and has an expected useful life of 10 years, a residual value of zero, a current book value of $80,000, a straight-line rate of 10%, and a double-declining-balance rate of 20%. Using double-declining-balance depreciation, how much depreciation expense will be recognized for the current year?

$16,000 ($80,000 × 20%)

On January 1, Lakeview Rentals bought a backhoe for $30,000, estimating that it would have a residual value of $5,000 and a useful life of 10 years. Lakeview uses the straight-line depreciation method, and the book value of the asset on December 31 of the same year was $27,500. Lakeview then completed an overhaul to the backhoe for $6,000 that extended the useful life to a remaining 10 years. What is the revised depreciation expense for the upcoming year?

$2,850 ($27,500 book value + $6,000 overhaul) - $5,000 residual value/10 years)

Tannehill Company bought a machine for $150,000. Three years later when the book value is $60,000, Tannehill suspects that the machine is impaired. It estimates that future cash flows from the machine will be approximately $50,000 and its current fair value is $40,000. The impairment loss is

$20,000. ($40,000 - $60,000)

Shiny Metals Mining purchased a silver mine for $2,500,000. The estimated residual value is $0. It is estimated that there are 2,500,000 ounces of silver in the mine. What will the amount of depletion be in August if it extracts 5,000 ounces of silver from the mine?

$5,000 [($2,500,000 cost - $0 residual value)/2,500,000]

The amount of depreciation expense recorded each period is reported on the

income statement.

A company has the following information: Net property, plant, and equipment, beginning of year: $100,000; net property, plant, and equipment, end of year: $150,000; net sales: $250,000; and depreciation expense: $6,000. The fixed asset turnover ratio is

2 times. $250,000/[($100,000 + $150,000)/2]

Generally accepted accounting principles (GAAP) do not require a specific depreciation method for any company. Which of the following depreciation methods results in the greatest total amount of depreciation expense over the entire life of the asset?

All depreciation methods result in the same amount being recorded as depreciation expense over the life of the fixed asset.

A company is required to review an asset for impairment if events or circumstances lead the company to believe that the asset may be impaired. Which of the following is one of the steps in impairment testing?

An impairment exists if the future cash flows expected to be generated by the asset are less than the asset's book value.

Which of the following is the second step to revise the calculation of depreciation expense?

Compute depreciation expense using the revised amounts for book value, useful life, and/or residual value

Which of the following depreciation methods is classified as an accelerated depreciation method?

Declining balance

Operating assets are long-lived assets. Which of the following is NOT an operating asset?

Inventory

Which of the following statements is true about accounting for land?

Land has an unlimited life.

When a fixed asset is disposed of, the asset's book value (cost and accumulated depreciation) is removed from the accounting records. At that time, any gain or loss on disposition of the asset is recognized. Which of the following statements describes a gain?

The book value of the asset is less than the proceeds received from disposal.

An improvement is an expenditure that

increases efficiency or productivity of an asset.

Which of the following is NOT a reason to revise the calculation of depreciation expense?

The number of units produced by the asset in the current year is higher than the number produced last year.

The cost of an intangible asset with a finite life, like a tangible asset, is allocated to accounting periods over the life of the asset. This process is referred to as

amortization

As the service potential of operating assets declines, the costs of these assets are allocated to an expense for the accounting periods in which the assets are used. This process is called __________ for property, plant, and equipment.

depreciation

The more efficiently a company uses its assets, the __________ the fixed asset turnover ratio will be.

higher

Rarely do disposals occur on the first or last day of an accounting period. Therefore, the disposal of property, plant, and equipment usually first requires a journal entry to

record depreciation expense up to the date of disposal.

All of the following are true EXCEPT that

routine maintenance costs are included in the capitalized cost of equipment.

An impairment of an asset is a permanent decline in the future benefit or __________ of the asset.

service potential

Fixed assets are usually disposed of voluntarily. However, disposition may also be involuntary. Voluntary disposal occurs when assets are

sold at auction.

While a company will choose between the three depreciation methods as it prepares its financial statements, the depreciation method used in preparing the tax return is specified by

the Internal Revenue Code.