Chapter 7

Machines used in manufacturing, computers, printers, vehicles, furniture, and fixtures generally are classified as __________.

equipment

Select all that apply Which of the following are expenditures for assets subsequent to acquisition? Multiple select question. Improvements Repairs and maintenance Freight charges Additions

Improvements Repairs and maintenance Additions

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

impairment

Depreciation is a process of cost _________, and not a process of valuation.

allocation

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

capitalize

he exclusive legal right to manufacture a product or to use a process is called a(n) __________.

patent

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? $25,000 $30,000 $60,000 $50,000

$60,000

At the beginning of year 1, Looby Corp. purchases equipment for $100,000. The equipment has a residual value of $20,000 and an expected service life of 10 years. What is straight-line depreciation for year 1? $28,000 $8,000 $30,000 $10,000

$8,000

The formula to calculate an activity-based depreciation rate is: Multiple choice question. (cost - residual value)/actual production during the year. cost/estimated total production. (cost - residual value)/estimated total production. cost/actual production during the year.

(cost - residual value)/estimated total production.

Depreciation Depletion Amortization

Allocation of the cost of a tangible fixed asset Allocation of the cost of natural resources Allocation of the cost of an intangible asset

On January 1, year 1, Clem Corp. purchased equipment for $160,000. The equipment has a residual value of $10,000, and has a life of 100,000 hours. Clem uses the activity-based method of depreciation. In year 1, Clem used the machine 2,000 hours, and in year 2, Clem used the machine 3,000 hours. Which of the following statements is true? Clem must change to straight-line method in year 3. Clem will depreciate the machine for $160,000 over its service life. Clem will depreciate the machine for $150,000 over its service life. The maximum depreciation is the $10,000 residual value

Clem will depreciate the machine for $150,000 over its service life.

Which of these are parts of the journal entry to record depreciation? Multiple select question. Credit Accumulated Depreciation Credit Depreciation Expense Debit Depreciation Expense Debit Accumulated Depreciation

Credit Accumulated Depreciation Debit Depreciation Expense

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? Credit accumulated depreciation $40,000 Credit equipment $90,000 Debit loss on exchange $10,000 Debit equipment $40,000 Debit accumulated depreciation $40,000 Debit equipment $35,000 Debit loss on equipment $15,000

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

Which of the following are commonly used depreciation methods? Multiple select question. Declining-balance Activity-based Value-based Increasing-balance Straight-line

Declining-balance Activity-based Straight-line

Select all that apply Larry purchases land to be used for a new corporate headquarters. Which of the following items are capitalized in the cost of land? Grading the land Current year's property taxes Legal fees to secure title Costs to remove an old building Title insurance

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

Select all that apply Which of the following are long-term tangible assets? Accounts receivable Trademark Property Copyright Equipment

Property Equipment

Select all that apply Which of the following items should be capitalized in the cost of equipment? Sales tax Freight to deliver the equipment Insurance paid in advance for the first year of use Legal fees to establish title Installation and testing of equipment

Sales tax Freight to deliver the equipment Legal fees to establish title Installation and testing of equipment

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

Select all that apply The types of expenditures that can occur subsequent to an asset's acquisition are Multiple select question. goodwill. additions. repairs and maintenance. improvements.

additions. repairs and maintenance. improvements.

In accounting, the term impairment refers to Multiple choice question. allocation of an asset over its service life. an asset's significant decline in value. offsetting liabilities against the related assets. cost recovery of an asset for investment purposes.

an asset's significant decline in value.

When assets are purchased in a group for a single sum, it is referred to as a Multiple choice question. composite purchase. basket purchase. business consolidation. group asset divestiture.

basket purchase.

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. Multiple choice question. net realizable fair net present book

book

The first step in determining whether an impairment loss should be recorded is to determine if the sum of estimated future cash flows from an asset is less than the asset's Multiple choice question. book value. net present value. net realizable value. fair value.

book value

Which depreciation methods allocate the cost of long-term assets based on time? valuation method declining-balance straight-line activity methods

declining-balance straight-line

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

depreciation

Ling Corporation's long-term asset has a book value of $200,000 and an estimated fair value of $195,000. Ling estimates that the future cash flows associated with the asset are $198,000. To determine whether the asset may be impaired, Ling should compare the asset's book value to its Multiple choice question. estimated future cash flows. estimated fair value. estimated residual value.

estimated future cash flows.

A(n) __________ is a contractual arrangement in which one entity grants the purchaser the exclusive right to use the trade name, formulas, and product rights within a specific geographic area for a specific period of time.

franchise

**** When a company purchases another company and the purchase price is greater than the fair value of the net assets acquired, this excess is referred to as ______. Multiple choice question. goodwill unidentifiable assets identified intangible assets restricted intangible assets

goodwill

Using the declining balance method, depreciation will be Multiple choice question. lower in earlier years, and lower in later years. lower in earlier years, but higher in later years. higher in earlier years, but lower in later years. higher in earlier years, and higher in later years

higher in earlier years, but lower in later years.

Goodwill may only be recognized Multiple choice question . when assets are impaired. when intangible assets are undervalued. when a company pays less than fair value for an intangible. in a business acquisition.

in a business acquisition.

A change in accounting estimate requires a company to account for the change Multiple choice question. by retroactively restating the financial statements as an error in the previous periods as a prior period adjustment in the current and future years

in the current and future years

An asset that has no physical substance is referred to as a(n) Multiple choice question. finite asset. intangible asset. current asset. depreciable asset.

intangible asset.

When we recognize depreciation, we allocate a portion of the asset's cost to each year in which the asset Multiple choice question. decreases in value. is owned by the company. provides benefits to the company.

provides benefits to the company

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

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, useful, or depreciable

The formula for calculating declining balance depreciation is the depreciation rate per year times Multiple choice question. the book value at the beginning of the year. the cost less the residual value. the cost less the residual value less the accumulated depreciation.

the book value at the beginning of the year.

The service life or useful life of an asset is Multiple choice question. the time period from the purchase of the asset until it becomes impaired. the estimated use that the company expects to obtain from the asset before disposing of it. determined by MACRS tables.

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

Total depreciation recorded over an asset's service life is: Multiple choice question. lowest when the straight-line method is used lowest when the activity-based method is used the same regardless of the depreciation method used highest when the double-declining balance method is used

the same regardless of the depreciation method used

A(n) ____________ is an exclusive right to display a word, slogan, symbol, or emblem that distinctively identifies a company, product, or service.

trademark

The residual value of an intangible asset is usually Multiple choice question. cost minus salvage. cost less amortization. the fair value at the date acquired. zero.

zero

Allocating the cost of intangible assets to expense is referred to as _____

amortization

Asset turnover ratio is net sales divided by ___________. average total assets. average accounts receivable. average noncurrent assets. average current assets.

average total assets.

A(n) ____________ is the exclusive right to manufacture a product or use a process granted for a period of _____ years.

patent 20

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 (depreciable)

The formula for straight-line depreciation is Multiple choice question. (cost + residual value)/service life. cost/service life. service life/(cost + residual value). (cost - residual value)/service life.

(cost - residual value)/service life.

The profit margin ratio is defined as _______ _______ divided by net sales.

net; income

A(n) ________ is an exclusive right of protection given to a creator of a published work, such as a song, film, painting, photograph, or book.

copyright

A long-lived asset is assumed to be impaired if its estimated future cash flows are _________ than its book value.

less

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

less

Match the type of depreciation method with the reporting basis.

straight-line- commonly used for financial statement purposes MACRS-commonly used for tax reporting

The depreciable cost is Multiple choice question. historical cost less accumulated depreciation. cost of the asset minus depreciation expense. cost of the asset plus the residual value. the cost of the asset minus the residual value.

the cost of the asset minus the residual value.

Select all that apply Which of the following costs should be capitalized in the costs of acquiring a building? purchase price interest on the loan realtor commissions utilities for the building legal fees to obtain title

purchase price realtor commissions legal fees to obtain title

Otto Inc. retires old equipment with a book value of $2,400. Otto should Multiple choice question. debit cash for $2,400 not make a journal entry recognize a gain of $2,400 recognize a loss of $2,400

recognize a loss of $2,400

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

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

true

The original cost of an asset minus accumulated depreciation is Multiple choice question. disposal value. goodwill. residual value. book value.

book value.

The original cost of the asset less the accumulated depreciation is the ______ ________ of asset

book; value

True or false: Depreciation is a valuation method for property and equipment.

false Depreciation is not a valuation of assets, but a form of cost allocation.

The purchase price and all costs to bring an asset to its desired condition and location for use should be ______. Multiple choice question. capitalized expensed accrued

capitalized

Long-term tangible assets include patents. equipment. buildings. land. goodwill.

equipment. buildings. land.

A(n) _________ is the exclusive right to manufacture a product or use a process granted for a period of _______ years.

patent; 20

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

residual

Select all that apply Clarion purchases land and prepares it for use. Which of the following items should be capitalized as land improvements? Cost of land Cost of driveways Cost of sidewalks Legal fees to acquire land Cost of lawn sprinkler system

Cost of driveways Cost of sidewalks Cost of lawn sprinkler system

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

limited

Which items are considered changes in estimates that would be treated on a prospective basis in the current period and future periods? Multiple select question. Change in service life of an asset Forgetting to record depreciation expense in the previous period Incorrectly capitalizing an item when it should be expensed Change in residual value of an asset

increasing/change the residual value of an asset change in useful/service life of an asset

At the beginning of year 1, Valerie Corp. purchases equipment for $10,000. The equipment has a residual value of $4,000 and an expected service life of 4 years. What is straight-line depreciation for year 1? Multiple choice question. $4,000 $1,000 $1,500 $6,000

$1,500

On January 1, 2021, 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, 2024? Multiple choice question. $20,000 $34,000 $30,000 $26,000

$26,000Depreciation expense is ($50,000 - 10,000)/5 = $8,000 per year. $50,000 less accumulated depreciation of $24,000 = $26,000.

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? Multiple choice question. $36,000 $45,000 $40,000 $50,000

$40,000

On January 1, 2021, 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, 2024? Multiple choice question. $50,000 $70,000 $60,000 $100,000

$70,000$100,000/10 years = $10,000 depreciation per year. Historical cost of $100,000 less $30,000 depreciation (for 2021, 2022, and 2023) = $70,000.

A purchased intangible is valued at its original cost. Original cost for acquiring a patent would include: net present value of future cash flows. accretion expense. legal costs to acquire. required filing fees. purchase price.

-legal costs to acquire. -required filing fees. -purchase price.

Compute the asset turnover ratio using the following information: net sales is $100,000 for the year, last year's assets in place were $900,000 and this year's assets in place are $1,100,000. Receivables for both years are $50,000.

10% Reason: Net sales/average total assets = $100,000/[($900,000 + $1,100,000)/2] = 10%

Which account is credited in a journal entry to record depreciation on machinery? Multiple choice question. Machinery Cash Depreciation Expense Accumulated Depreciation

Accumulated Depreciation is recorded with a debit to Depreciation Expense (+E, -SE) and a credit to Accumulated Depreciation (-A).

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 equipment $50,000 Debit equipment $32,000 Debit accumulated depreciation $40,000 Credit equipment $120,000 Debit loss on exchange $30,000 Credit accumulated depreciation $40,000

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

If a company generates its own goodwill through advertising or training, how should these costs be treated? Multiple choice question. Capitalize the costs and test for impairment. Expense the costs as incurred. Capitalize the costs and amortize them over the expected life of the goodwill. Record as an extraordinary loss in the current year.

Expense the costs as incurred.

True or false: Internally developed goodwill should be capitalized as an asset.

False Reason: Costs of internally developed goodwill should be expensed as incurred.

Select all that apply Which of the following items typically are classified as equipment? Furniture and fixtures Office supplies Machinery held for resale Computers and printers used in office Machinery used in manufacturing

Furniture and fixtures Computers and printers used in office Machinery used in manufacturing

What is the formula for the profit margin ratio? Multiple choice question. Gross profit divided by sales. Net income divided by average total assets. Net income divided by average shareholders' equity. Net income divided by net sales.

Net income divided by net sales.

Select all that apply Which of the following costs should be capitalized in the costs of acquiring a building? Current year property taxes Realtor commissions Insurance on the building Legal fees to obtain title Remodeling building

Realtor commissions Legal fees to obtain title Remodeling building

Expensed Capitalized

Research and development costs Purchase price plus costs necessary to get asset ready for use

Which of the following items are initially recorded as an expense on the income statement? Multiple select question. Purchased intangibles Research and development costs Advertising costs

Research and development costs Advertising costs

Select all that apply Which of the following are classified as natural resources? Timber tracts Land and land improvements Building Mineral deposits

Timber tracts Mineral deposits

Which of the following does not differ among the different depreciation methods? Multiple choice question. Depreciation recognized during the earlier years. Depreciation recognized during the last year of the asset's service life. Total depreciation recognized over the asset's service life.

Total depreciation recognized over the asset's service life.

Part C A retirement or abandonment of an asset is different from a sale of an asset because Select All Applied a loss must be recognized for the remaining book value. no cash is received. the residual value is included as a gain. a gain is recognized for the undepreciated portion of the equipment.

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

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

activity-based

The accumulated depreciation account is classified as a(n) Multiple choice question. expense. liability. contra asset. asset.

contra asset

A(n) ______________ is protected by law and gives the creator of a published work the exclusive rights to reproduce and sell the work for the life of the creator plus 70 years.

copyright

The journal entry to retire old equipment that is not fully depreciated includes a: Multiple select question. debit to loss credit to equipment debit to accumulated depreciation credit to loss debit to cash

debit to loss credit to equipment debit to accumulated depreciation

Straight-line, declining-balance, and activity-based refer to methods commonly used to ________

depreciate

The distinction between land and land improvements is that: Multiple choice question. land has an indefinite life land is depreciated and land improvements are not land has a definite life there is no distinction, they are treated the same for accounting purposes

land has an indefinite life

The depreciable cost of an asset is the asset's cost minus its estimated _______ value

residualF

The depreciation method that allocates an equal amount of the depreciable base to each year of the asset's service life is the Multiple choice question. MACRS straight-line method. double-declining-balance method. units-of-output method.

straight-line method

**** The depreciable cost is Multiple choice question. cost of the asset plus the residual value. cost of the asset minus depreciation expense. the cost of the asset minus the residual value. historical cost less accumulated depreciation.

the cost of the asset minus the residual value.

Select all that apply Sarah purchases land to be used for a new storage facility. Which of the following items are capitalized in the cost of land? Legal fees to secure title Current year's property taxes Costs to remove an old building Commissions

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

What are the financial statement effects of using the declining balance method of depreciation as compared to the straight-line method in the first year of an asset's life? Multiple select question. Total assets are higher. Net income is higher. Total assets are lower. Net income is lower.

Total assets are lower. Net income is lower.

The measurement of an impairment loss in step 2 is the difference between Multiple choice question. the asset's book value and its fair value. the asset's fair value and its lower-of-cost-or-market value. the asset's estimated future cash flows and its fair value. the asset's book value and its net present value.

the asset's book value and its fair value.

In a basket purchase of assets, the cost must be allocated to the individual assets because Multiple choice question. intangible assets must be identified and expensed. goodwill must be expensed immediately. the assets have different useful lives. some assets must be expensed upon acquisition.

the assets have different useful lives.

For accounting purposes, depreciation is Multiple choice question. an allocation of a cost of an asset. a decline in value of an asset. the selling price of an asset.

an allocation of a cost of an asset.

Goodwill is recognized only when one company _______ another company.

purchases

Where is the account accumulated depreciation on equipment found on the financial statements? Multiple choice question. As an asset account on the balance sheet As a contra account to equipment on the balance sheet As an expense account on the income statement As a liability account on the balance sheet

As a contra account to equipment on the balance sheet

Wall Corporation exchanges old equipment for new equipment. The original cost of the old equipment was $100,000, and its accumulated depreciation at the date of exchange was $60,000. The new asset received had a fair value of $80,000 and a book value of $65,000. The journal entry to record this exchange will include which of the following entries? Multiple select question. Credit accumulated depreciation $60,000 Debit accumulated depreciation $60,000 Debit equipment $80,000 Debit equipment $65,000 Credit equipment $100,000 Credit equipment $80,000 Credit gain on exchange of asset $40,000

Debit accumulated depreciation $60,000 Credit gain on exchange of asset $40,000 Debit equipment $80,000 Credit equipment $100,000

Krasel

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

True or false: Goodwill is the intangible value of a company's employees, management team, and business location that is recorded by the company.

False Reason: Goodwill is an intangible asset that can only be recognized if a company acquires another company. It is valued at the purchase price less the fair value of net assets acquired.

Select all that apply Which of the following items should be capitalized in the cost of equipment? Multiple select question. Insurance on equipment during shipping Freight to deliver the equipment to its location Purchase price Installation and testing of equipment Repair costs for first year of operations

Insurance on equipment during shipping Freight to deliver the equipment to its location Purchase price Installation and testing of equipment

Which statement is true about the straight-line method of depreciation? Multiple choice question. It allocates an equal amount of depreciation to each year the asset is used. It is an accelerated method of depreciation. It is the preferred method for companies expecting to use the asset more in its early years of life. It recognizes expense proportionately with the amount of use of the asset.

It allocates an equal amount of depreciation to each year the asset is used.

The key factor in classifying items as repairs and maintenance is that Multiple choice question. the invoice must be less than $1,000 for productive assets. the asset must be a current asset used in the normal course of business. future benefits are not provided beyond those originally anticipated from the asse

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

The initial valuation of purchased intangible assets requires that the intangible asset is recorded at Multiple choice question. net realizable value. net present value. original cost. lower-of-cost-or-market.

original cost

The gain or loss on disposal of an asset is calculated as: Multiple choice question. the fair value of the asset less the accumulated depreciation the cost of the asset less the accumulated depreciation amount received less the book value of asset sold consideration received less the fair value of the asset sold

amount received less the book value of asset sold

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

benefits (revenue)

The first step in determining whether an impairment loss should be recorded is to determine if the sum of estimated future cash flows from an asset is less than the asset's Multiple choice question. net present value. fair value. book value. net realizable value.

book value.

Select all that apply Which of the following items should be capitalized as land improvements? Cost of sidewalks Cost of fences Cost of parking lots Cost of land

Cost of sidewalks Cost of fences Cost of parking lots

Select all that apply Which of the following are classified as natural resources? Multiple select question. Building Equipment Patents Oil deposits Timber forests

Oil deposits Timber forests

In accounting, expenditures recorded as assets are said to be _____. Multiple choice question. accrued recognized capitalized expensed

capitalized

The formula to calculate the depreciation for the units-of-production method or activity-based depreciation, is ((cost - residual value)/total estimated production) x ______. total activity or production current-year activity or production historical cost gross profit percentage

current-year activity or production

Select all that apply Which of the following items should be capitalized in the cost of equipment? Multiple select question. Insurance on equipment during shipping Repair costs for first year of operations Freight to deliver the equipment to its location Installation and testing of equipment Purchase price

Insurance on equipment during shipping Freight to deliver the equipment to its location Installation and testing of equipment Purchase price

Purchased intangible asset Internally developed intangible asset

Patents, copyrights, trademarks, or franchise rights acquired from other companies. Product or process created internally for which patent may be obtained.

Select all that apply What are the two steps in the two-step process of measuring impairments? Multiple select question. Timing test on when the cash flows are received. Test for impairment using the future cash flows. Measurement of the impairment and record the loss. Percentage of assets test for total impaired assets.

Test for impairment using the future cash flows. Measurement of the impairment and record the loss.

Intangible assets that are acquired from other entities are referred to as purchased intangibles, whereas intangibles that are created by a company are referred to as Multiple choice question. goodwill. internally developed intangibles. indefinite intangibles. finite intangibles.

internally developed intangibles.

An estimated residual value ________ the total amount of depreciation recorded over an asset's service life.

lowers

When an asset's fair value falls below its book value, the difference between fair value and book value is Multiple choice question. recorded in a revaluation account in OCI. recognized as a gain. recognized as an impairment loss. recognized as an extraordinary loss.

recognized as an impairment loss.

The term used to describe the amount the company expects to receive for an asset at the end of its service life is Multiple choice question. historical cost. residual value. impairment value. lower of cost or market value.

residual value.

The depreciation method that allocates an equal amount of the depreciable base to each year of the asset's service life is the Multiple choice question. MACRS double-declining-balance method. straight-line method. units-of-output method.

straight-line method.

A contractual arrangement in which one entity grants the purchaser the exclusive right to use the trade name, formulas, and product rights within a specific geographic area for a specific period of time is called a ________. Multiple choice question. patent. franchise. trademark. copyright.

franchise

An exclusive right to display a word, slogan, symbol, or emblem that distinctively identifies a company, product, or service is referred to as a Multiple choice question. trademark. franchise. patent. copyright.

trademark.