Chapter 8 - Accounting For Long-Term Assets Smartbook

Which of the following situations will result in recognizing a gain on sale of a plant asset?

A fully depreciated asset is sold for $1,000.

Ella Co. owns a mineral deposit and recognizes $15,000 of depletion expense during the period. This entry will be recorded with a credit to:

Accumulated Depletion - Mineral Deposit

Ring Co. owns a delivery van that was purchased two years ago for $25,000. Ring has depreciated the van for two years at a straight-line amount of $4,000 per year. The book value of this van at the end of the second year would be $.

Blank 1: 17000 Reason: 25000 - 4000 = 21000 for Year 1 Subtract 4000 from the Year 1 total to get Year 2

Zion Co. paid cash for an upgrade to an existing machine that would reduce the amount of waste produced by the machine and, therefore, increase efficiency. The journal entry to record this upgrade would include which of the following entries? (Check all that apply.)

Credit to Cash Debit to Machinery

A company sells a machine that cost $7,000 for $500 cash. The machine had $6,500 accumulated depreciation. The entry to record this transaction will include which of the following entries? (Check all that apply.)

Credit to Machinery for $7,000. Debit to Cash for $500. Debit to Accumulated Depreciation - Machinery for $6,500. Reason: Since the company is receiving cash, cash will be debited.

Ion Co. purchased land for $190,000. Ion also paid $5,000 in real estate commissions, $1,000 in legal fees, and $500 in title insurance fees. Ion should record the cost of this land at:

Reason: 190,000+5,000+1,000+500=196,500

Rojo's Roses Co. received an invoice for replacement of the engine on its main delivery van. The replacement will extend the life of the van an additional three years. The entry to record receipt of the invoice would include which of the following entries? (Check all that apply.) Multiple select question.

Debit to Equipment. Credit to Accounts Payable. Since this is a betterment, it will be debited to the Equipment account.

Which of the following items related to depreciating equipment would be found on a company's income statement?

Depreciation Expense - Equipment

Bina Co. purchased a vehicle on January 1st for $15,000 and estimates it will use the vehicle for eight years with a $3,000 salvage value. Using the double declining-balance depreciation method, compute the vehicle's second year depreciation expense. Multiple choice question.

Salvage value is not subtracted up front with the double-declining balance method. (100%/8=.125) x 2 = 25%. 15,000 x 25% =3,750 for first year. Second year =(15,000-3750) x 25% = 2812.50. The question asked for the second year depreciation expense.

Martinez Co. sells a machine that cost $10,000 with accumulated depreciation of $8,000 for $2,000 cash. The entry to record this transaction will recognize a gain or loss of how much?

There is no gain or loss. Reason: Book value is equal to the selling price so there is no gain or loss. Book value = $10,000 minus accumulated depreciation of $8,000 = $2,000.

True or false: The cost of a plant asset consists of all necessary and reasonable expenditures to acquire it and prepare it for its intended use

True

Accumulated depreciation is recorded on which of the following financial statements?

Balance sheet

_____ is the process of allocating the cost of a plant asset to expense while it is in use.

Blank 1: Depreciation

Land _____ are assets that are additions to land and have limited useful lives, such as walkways and fences.

Blank 1: improvements or improvement

Which of the following asset(s) are not considered intangible assets? (Check all that apply.)

Copy machine Mineral deposit

The cost of a plant asset includes the following:

Cost to prepare it for use Purchase price Reason: The cost of a plant asset includes all necessary and reasonable expenditures to acquire it and prepare it for its intended use. Depreciation expense is the allocation of the cost of an asset over its expected useful life.

Trio Co. reported that maintenance and normal repair costs are expensed as incurred. If Trio's current year machinery and equipment repair costs are $8,200, which accounts would be impacted to complete the journal entry? (Check all that apply.)

Debit Repairs expense. Credit Cash.

Niren Co. made modifications to a manufacturing machine that increased its productivity by 40%. Niren would classify this expense as a(n):

betterment.

Depreciation expense is reported as a decrease in which of the following financial statements?

Income statement Reason: Depreciation expense belongs on the Income Statement.

The cost at which a company records purchases of machinery and equipment should include which of the following? (Check all that apply.)

Installation Shipping fees Purchase price Taxes

Privo Co. purchases a machine that cost $15,000. Privo estimates a 5-year life with no salvage value. The first three years of depreciation expense are $6,000; $3,600; and $2,160, respectively. Based on this information, Privo is using the ________ depreciation method.

declining-balance

Daley Co. owns a mineral deposit with an estimated 600,000 tons of available ore. It was purchased for $300,000 and has no salvage value. During the current period, Daley mined and sold 40,000 tons of ore. Depletion expense for the period will be how much?

$20,000 Reason: $300,000/600,000 x 40,000=20,000

Accumulated amortization is reported on which of the following financial statements?

Balance sheet

T. Chung Co. sold a computer for $500 cash. The computer cost $3,000 and had accumulated depreciation of $2,200 at the time of the sale. Chung will record the sale with an entry to the _____ on Disposal of Equipment account in the amount of $ _____

Blank 1: Loss Blank 2: $300 or 300

Seven Co. owns a coal mine with an estimated 1,000,000 tons of available coal. It was purchased for $300,000 and has $50,000 salvage value. During the current period, Seven mined and sold 200,000 tons of coal. Depletion expense for the period will be how much?

$50,000 Reason: (300,000 - 50,000)/1,000,000 x 200,000 = 50,000.

An improvements to a leased asset is called a leasehold _____

Blank 1: improvement

Book value can be calculated by taking an asset's acquisition costs less its _____ _____.

Blank 1: accumulated Blank 2: depreciation

Property rented under a contract is called a _____

Blank 1: lease

Diamond Co. paid cash to overhaul a forklift, which extended the life of the forklift for an additional four years. The entry to record this purchase would include a debit to the _______ account.

Equipment

Quick Catering Co. paid for a refrigeration system to be added to their delivery van to keep the food cooled during deliveries. To record this expense, Quick would debit the ________ account.

Equipment

On January 3, ATA Company purchases a copy machine for $11,500. The machine is expected to last five years and have a salvage value of $1,500. Compute depreciation expense for the first year, assuming the company uses the straight-line method.

Reason: (11,500-1,500)/5 =2,000

A company owns an asset that is fully depreciated. The asset is no longer being used in operations and has no market value. The company has decided to ________ the asset by recording an entry to remove it from the balance sheet.

discard

On December 31, Briar Co. disposed of a piece of equipment that cost $6,000 with accumulated depreciation of $4,500. The entry to record this disposal would include a debit to which account and for how much?

Loss on Disposal of Equipment for $1,500 Reason: The equipment was disposed of, so no cash was received. Loss on disposal of equipment is debited for the difference between cost and accumulated depreciation. The equipment was disposed of, so no cash was received. Accumulated depreciation is debited for $4,500. The equipment was disposed of, so no cash was received. The equipment account is credited for $6,000.

Juno Co. purchased a machine for $10,000 and estimates it will use the machine for three years with a $2,000 salvage value. It expects to produce a total of 8,000 units as follows: 3,000 during year one; 2,500 during year two; and 2,500 during year three. Using the units-of-production depreciation method, compute the machine's first year depreciation expense.

$3,000 Reason: $10,000 - 2,000 = $8,000. $8,000 / 8000 units = $1.00 per unit. Year one 3,000 x $1.00 = $3,000.

Straight-line depreciation can be calculated by taking:

(cost minus salvage value)/useful life

_________ are expenditures that make a plant asset more efficient or productive, but do not always increase an asset's useful life.

Betterment

Modified Accelerated Cost Recovery System is _____ acceptable for financial reporting purposes.

Blank 1: not

Straight-line depreciation is calculated by taking cost minus _____ value divided by useful life.

Blank 1: salvage

The life _____ (also called service life) is the length of time the asset is productively used in a company's operations.

Blank 1: useful

ATZ Co. sells equipment that cost $9,000 with current accumulated depreciation of $8,000 for $2,000 cash. To record this transaction, ATZ will credit which accounts? (Check all that apply.)

Equipment Gain on Disposal of Equipment

Which of the following items are plant assets? (Check all that apply.)

Equipment being used in operations Building being used for operations

___________ are expenditures that extend the asset's useful life beyond its original estimate.

Extraordinary repairs

True or false: Modified Accelerated Cost Recovery System (MACRS) is a depreciation method that allows companies to delay depreciation expense for tax purposes.

False

Sangmoon Co. sells equipment for $1,000 cash. The equipment cost Sangmoon $6,500 and is fully depreciated at the time of sale and has no salvage value. Sangmoon will record the sale with a credit to which account and for how much?

Gain on Sale of Equipment for $1,000. Reason: Cash received is $1,000. Book value of equipment is 0, so there will be a gain of $1,000.

Sanson Co. sells equipment for $1,000 cash. The equipment cost Sanson $6,500 and has accumulated depreciation of $2,000 at the time of sale. Sanson will record the sale with a debit to which account and for how much?

Loss on Sale of Equipment for $3,500. Reason: Equipment will be credited for $6,500. Cash received is $1,000. Book value of equipment is $4,500, so there will be a loss of $3,500. This loss is debited.

Forward Co. discarded a machine that cost $5,000 and was fully depreciated. The entry to record this transaction would include a credit to the _________ account.

Machinery

To calculate depletion expense, first determine the depletion per unit. Depletion per unit can be calculated by taking (cost ______)/total units of capacity.

Minus salvage value

______ are assets that are physically consumed when used, such as mineral deposits and oil and gas fields.

Natural resources

PT Co. purchased land and an existing building for $200,000. In addition, PT paid real estate commissions of $15,000. PT removed the unwanted building and graded the land for a total cost of $35,000. PT should record the cost of the land at:

Reason: 200,000+15,000+35,000=250,000

Arc Co. purchased a piece of equipment for $25,000. At the end of the year, the book value of the equipment is $12,000. The salvage value is 0. How much is accumulated depreciation, using the straight-line method, at the end of the period?

Reason: 25,000-12,000 =13,000

Alin Co. purchases a building for $300,000 and pays an additional $30,000 for title fees and lawyer fees. Alin also pays $20,000 in renovations, including painting, carpet, lighting, etc. Alin should record the cost of the building at:

Reason: 300,000+30,000+20,000=350,000

A delivery van that cost $45,000 with accumulated depreciation of $15,000 is sold for $20,000. How much gain or loss will be recognized on this sale?

Reason: 45,000-15,000 =30,000-20,000 =10,000.

Depreciation Expense is reported on which of the following financial statements?

Reason: Depreciation expense is an expense which is reported on the Income Statement.

Bina Co. purchased a vehicle on January 1st for $15,000 and estimates it will use the vehicle for eight years with a $3,000 salvage value. Using the double declining-balance depreciation method, compute the vehicle's second year depreciation expense.

Reason: Salvage value is not subtracted up front with the double-declining balance method. (100%/8=.125) x 2=25%. 15,000 x 25%=3,750 for first year. Second year=(15,000-3750) x 25% =2812.50. The question asked for the second year depreciation expense.

The asset's acquisition costs less its accumulated depreciation is called:

book value

Sioux Co. replaced the roof on its existing building, therefore increasing the building's life by 10 years. The cost of the roof is considered a(n):

extraordinary repair

The inability of a company's plant assets to meet its demands is called:

inadequacy

Assets that increase the benefits of land, have a limited useful life, such as parking lots and lighting systems, are called:

land improvements

The purchase of a group of plant assets for one price is called a ______ purchase.

lump-sum

Brice Co. purchases land in order to drill oil. This oil field would be classified as a(n) _______ on the balance sheet.

natural resource

The term ______ refers to a plant asset that is in the process of becoming outdated and no longer used.

obsolescence

Copyrights, trademarks, and other intangible assets are expensed over their useful lives through the process of:

amortization

The total asset turnover ratio is computed by taking net sales divided by:

average total assets

Grand Co. owns one copier that was purchased for $10,000 three years ago. The depreciation expense taken on the copier each year has been $2,700; $1,800; and $2,200, based on the number of copies that have been made on the copier. Based on this information, the company uses the ________ depreciation method. Multiple choice question.

units-of-production

The method of depreciation that charges a varying amount to depreciation expense for each period depending on its usage is called the _________ method.

units-of-production

The ______ life of a plant asset is the length of time it is productively used in a company's operations

useful

Wen Co. purchased a building for $200,000. Wen paid $20,000 in lawyer and title fees. Wen also paid an additional $15,000 to modify the building in order to accommodate his business needs. Wen should record the cost of the building at:

$235,000

Bina Co. purchased a machine on January 1st for $15,000 and estimates it will use the machine for three years with a $3,000 salvage value. Bina estimates that they will produce 1,500 units during year one, 1,000 units during year two, and 1,250 units during year three. Using the units-of-production method, compute the machine's second year depreciation expense.

$3,200 Reason: $15,000 - $3,000 = $12,000. Total units = 1,500 + 1,000 + 1,250 = 3,750. $12,000 / 3,750 = $3.20 per unit. Year two 1,000 x $3.20 = $3,200.

Juno Co. purchased a machine for $10,000 and estimates it will use the machine for four years with a $2,000 salvage value. Using the double declining-balance depreciation method, compute the machine's first year depreciation expense.

$5,000 Reason: $10,000 x (.25 x 2) = $5,000.

1. Book value is greater than the selling price 2. Book value is less than the selling price 3. Book value is equal to the selling price

1. Loss on sale of asset 2. Gain on sale of asset 3. No gain or loss recognized

Which depreciation method will compute the most depreciation expense over the life of the asset?

All methods will produce equal depreciation expense over the life of the asset.

A company acquires a patent for $20,000 to manufacture and sell an item. The company intends to hold the patent for 5 years. Amortization for the first year will be recorded with a debit to Amortization Expense for $_____

Blank 1: $4000

Franco Co. reported net sales of $10,000 in year 2 and $8,000 in year 1. Franco reported total assets of $18,000 in year 2 and $22,000 in year 1. Total asset turnover for year 2 would equal _____ (answer should be a decimal number).

Blank 1: 0.5 Reason 10,000/18,000 = 0.5

Geo Co. purchased a building for $400,000. In addition, Geo paid $35,000 for taxes and lawyer fees. Geo also paid $60,000 to modify the building, changing the layout specifically for Geo's needs. Geo should record the building at $

Blank 1: 495000

The process of allocating the cost of a natural resource to a period when it is consumed requires a debit entry to _____ the _____ account.

Blank 1: Depletion Blank 2: Expense

otal asset turnover is computed by dividing net sales by _____ total assets.

Blank 1: average

The exclusive right to publish or sell a musical, literary, or artistic work during the life of the creator plus 70 years is called a

Blank 1: copyright

The factors necessary to compute depreciation include _____, salvage value and useful life.

Blank 1: cost

A plant asset is _____ when it is no longer useful to the company, and it has no market value.

Blank 1: discarded

The amount by which a company's value exceeds the value of its individual assets and liabilities is called _____

Blank 1: goodwill

If an intangible asset has an _____ life, it is recorded as an intangible asset, but is not amortized.

Blank 1: indefinite

Total asset turnover is computed as net _____ /average total assets.

Blank 1: sales

A symbol, name, phrase or jingle identified with a company, product or service is called a _____

Blank 1: trademark

Which of the following assets are amortized? (Check all that apply.)

Copyright Patent Reason: Only intangible assets are amortized. Buildings are depreciated. Coal mines are depleted.

A patent was purchased for $20,000 and expected to be used for the 20-year life with no salvage value. The entry to expense the patent during the second year of life will include which of the following entries? (Check all that apply.)

Debit to Amortization Expense $1,000. Credit to Accumulated Amortization $1,000.

A patent was purchased for $15,000 and expected to be used for the 10-year life with no salvage value. The entry to expense the patent during the second year of life will include which of the following entries? (Check all that apply.)

Debit to Amortization Expense $1,500. Credit to Accumulated Amortization $1,500.

_______ is the process of allocating the cost of a natural resource to the period when it is consumed.

Depletion

Sangmoon Co. sells equipment for $1,000 cash. The equipment cost Sangmoon $6,500 and has accumulated depreciation of $2,000 at the time of sale. Sangmoon will record the sale with a credit to which account and for how much?

Equipment for $6,500. Reason: Equipment will be credited for $6,500. Cash received is $1,000. Book value of equipment is $4,500, so there will be a loss of $3,500. The loss will be debited.

_____ is measured as the excess of the cost of an acquired entity over the value of the individual assets and liabilities.

Goodwill

Amortization expense is recorded on which financial statement?

Income statement

_______ are nonphysical assets used in operations that give companies long-term rights, or competitive advantages.

Intangible assets

In a leasehold improvement, the lessee debits the costs to _____

Leasehold Improvements

_____ are expenditures that keep an asset in good operating condition. They are necessary if an asset is to perform to expectations over its useful life.

Ordinary repairs

Tops Co. purchases equipment for $12,000 and has been using straight-line depreciation, estimating a 5-year life and $500 salvage value. At the beginning of the third year, Tops decides to use the equipment for a total of 6-years with no salvage value. Compute the revised depreciation for the third year.

Reason: (12,000-500) / 5 = 2,300 per year. $2,300 x 2 years = $4,600 depreciation taken. Book value at beginning of year 3 = $12,000-4,600= $7,400 / 4 = $1,850.

Determine which of the following expenses related to a building would be classified as a capital expenditure. (Check all that apply.)

Room addition New air conditioning system

True or false: The book value of an asset when using straight-line depreciation is always greater than the book value from using double-declining-balance, except at the beginning and end of the asset's useful life, when it is the same.

True

When a company revises an estimate used to record depreciation expense, the company should revise depreciation by using the formula (_______ - revised salvage value)/revised remaining useful life.

book value

The factors necessary to compute depreciation include all of the following, except:

book value.

Accumulated depletion is considered to be a ________ and is recorded on the _________. Multiple choice question.

contra-asset; balance sheet

The depreciation method that determines the depreciation for the period by multiplying a depreciation rate (often twice the straight-line rate) by the asset's beginning-period book value is known as the __________ method.

declining-balance

Intangible assets that continue indefinitely into the future and are not amortized. The values of these assets are tested annually for ________.

impairment Note: if necessary, an impairment loss is recorded.Note: Goodwill is not amortized; instead, it is annually tested for impairment.

If an intangible asset has a(n)___ is not amortized.

indefinite life

Advantages of leasing versus buying an asset include all of the following:

lease terms often allow exchanges to trade up on leased assets little or no up-front payment

Bilos Co. purchased a patent on a newly developed technology. They will recognize the cost of this patent:

over the asset's life using amortization expense

A _______ is an exclusive right granted to its owner to manufacture and sell an item or use a process for 20 years.

patent

Wyatt Co. purchased a popular symbol that doubled its sales in the first year. The cost of this symbol is an asset called a:

trademark

To calculate depletion expense in a period, a company should multiply the depletion per unit by:

units extracted and sold in the period

An oil company recognizes the cost of discovering and operating oil wells by recording ______ expense for each unit of oil used.

depletion

True or false: The cost of plant assets should include all of the normal and reasonable expenditures necessary to get the asset in place and ready for its intended use, including repairs to damages incurred after installation

False

On January 2, Dice Co. purchases a mixing machine for $25,500. The machine is expected to last four years and have a salvage value of $5,500. Assuming the company uses the straight-line method, depreciation expense should be $_____ per year.

Blank 1: 5000 Cost - Salvage Value/Useful life in periods

_____ assets are assets used in a company's operations that have a useful life of more than one accounting period.

Blank 1: Plant or Fixed

_____ expenditures are additional costs of plant assets that do not materially increase the asset's life or capabilities.

Blank 1: Revenue

Accumulated depletion is a contra asset account, and is therefore reported on the _____ _____

Blank 1: balance Blank 2: sheet

Accumulated depreciation is a ______ asset account (one that is linked with the plant asset account, but has an opposite normal balance) and is reported on the balance sheet.

Blank 1: contra

Determine which of the following expenses are considered revenue expenditures related to a company vehicle. (Check all that apply.)

Car wash Dent repair Oil change

_____(Capital/Revenue) expenditures are additional costs of plant assets that provide benefits extending beyond the current period, such as a plant expansion, or major machine overhaul.

Capital

_____ assets purchased as a group in a single transaction for a lump-sum price are allocated the purchase price based on their relative market values.

Plant

On June 1, Harding Co. purchased a machine for $14,000 and estimates it will use the machine for five-years with a $2,000 salvage value. Using the straight-line depreciation method, compute the machine's first year (partial) depreciation expense for June 1st through December 31st.

Reason: (14,000-2000)/5 x 7/12=1,400 for a partial year depreciation The partial year depreciation should be recorded for seven months (June 1- December 31).

Teshin Co. purchases a piece of land with several land improvements for $180,000. The land appraises at $120,000 and the land improvements appraise at $80,000. The land should be recorded at what cost?

Reason: [120,000/(120,000+80,000)] x 180,000= 108,000

Plant assets should be recorded at cost, including all normal and reasonable expenditures necessary to get the asset in place and ready for its intended use. This would include which of the following costs? (Check all that apply.)

Testing Shipping charges Assembling

On October 30, Cleo Co. purchased a machine for $26,000 and estimates it will use the machine for four-years with a $2,000 salvage value. Using the straight-line depreciation method, compute the machine's first year partial depreciation expense for October 30 through December 31. Multiple choice question.

Reason: This is a partial year depreciation. $26,000 - 2,000 = $24,000/4 = $6000 per year. $6000 x 2/12 = $1,000.

Cen Co. purchases land and a building for $130,000. The land is appraised at $100,000 and the building at $150,000. Allocating the cost based on market values, the land should be recorded at what amount?

Reason: [100,000/(100,000+150,000)] x 130,000

Ordinary repairs, such as normal repairs and maintenance to a vehicle, would be recorded with a debit to which of the following accounts?

Repairs expense

Which of the following expenses would not be considered an ordinary repair?

Replacing an engine

_____ value, also called residual value or scrap value, is an estimate of the asset's value at the end of its useful life.

Salvage