Chapters 9-11
Investor Corporation owns 30% of Investee Corporation. Investee had net earnings of $100,000 during the year and paid dividends of $30,000. Investor's Investment in Investee account contained a $70,000 balance at the beginning of the year. How much dividend income will Investor record?
$0
Omni Corporation purchased a new vehicle on January 1, 20X1. The vehicle cost $100,000, has a five-year life, and a $20,000 residual value. Omni has a December 31 year-end. If Omni depreciates the truck by the double-declining balance method, how much should be recorded as depreciation expense during 20X4?
$1,600
On January 1, 20X2, Lynn Corporation purchased a machine for $100,000. Lynn paid shipping expenses of $1,000 as well as installation costs of $2,400. The machine was estimated to have a useful life of ten years and an estimated salvage value of $6,000. In January 20X3, additions costing $7,200 were made to the machine. These additions significantly improved the quality of output, but did not change the life or salvage value of the machine. If Lynn records depreciation under the straight-line method, depreciation expense for 20X3 is:
$10,540
Lancer Corporation purchased a parcel of land as a factory site for $150,000. Construction began immediately on a new building. Costs incurred are as follows: Architect's fees25,000Legal fees for land purchase contract2,000Construction costs250,000 Lancer should record the cost of the new land and building, respectively, at:
$152,000 and $275,000
On April 1, 20X1, Collinge Corporation purchased $100,000 of 7%, 5-year bonds dated April 1, 20X1, at 101. Interest is paid on March 31 and September 30. Assuming use of the straight-line amortization method, the proper amount of income to record on September 30, 20X1 is:
$3,400
Mega Corporation owns 100% of Wolf Corporation's stock. Mega paid $1,000,000 for its investment. At the time of the initial investment, Wolf had total stockholders' equity of $600,000. All of Wolf's assets and liabilities were carried at amounts that equaled their fair value, except for a building that was undervalued by $100,000. How much goodwill would you anticipate finding in the consolidated balance sheet?
$300,000
Reno Acquisitions Company recently bought a furnished hotel for a lump-sum purchase price of $15,000,000. Separately, the land was valued at $6,000,000, the building at $12,000,000, and the furniture and equipment at $2,000,000. How much cost should Reno assign to the land?
$4,500,000
On July 1, 20X1, Robinson Company purchased a new machine for $200,000. The machine is estimated to have a service-life of 10 years with an estimated residual value of $5,000. Robinson uses straight-line depreciation. During 20X5, it became apparent that the machine would not be efficient to operate after December 31, 20X7. Furthermore, the machine would have no scrap value. How much should be charged to depreciation expense in 20X5 under generally accepted accounting principles? (round computations to the nearest dollar)
$43,917
Deep Gold Mining Company recognizes $4 of depletion for each ton of ore mined. This year, 300,000 tons of ore were mined but only 180,000 were sold. The amount of depletion which should be deducted from revenue this year is:
$720,000
Realistic Company purchased a new truck on January 1, 20X1. The truck cost $20,000, has a four-year life, and a $4,000 residual value. The company has a December 31 year-end. If Realistic Company depreciates the truck by the straight-line method, how much should Realistic report as the book value of the truck at the end of 20X3?
$8,000
On July 1, 20X1, Clem Company purchased factory equipment for $50,000. Residual value was estimated to be $2,000. The equipment will be depreciated over ten years using the double-declining-balance depreciation method. Clem has a December 31 year-end, and during 20X1, one-half of a year's depreciation expense was recorded. How much depreciation expense should be recorded for 20X2? (round computations to the nearest dollar)
$9,000
Investor Corporation owns 30% of Investee Corporation. Investee had net earnings of $100,000 during the year and paid dividends of $30,000. Investor's Investment in Investee account contained a $70,000 balance at the beginning of the year. What would be the correct balance of this account at the end of the year?
$91,000
On January 1, 20X2, Miller Corporation purchased $100,000 of 5%, 10-year bonds dated January 1, 20X2, at 98. Interest is paid on June 30 and December 31 of each year. Assuming use of the straight-line amortization method, the proper amount to report for Investment in Bonds at December 31, 20X3 is:
$98,400
The equity method is appropriate for accounting for investments where the investor has acquired over _____________ percent of the voting stock of another company.
20
The equity method of accounting for an investment occurs when the investor has the ability to exercise significant influence over the investee, which is presumed to be the case when the investment level reaches:
20%
Consolidated financial statements are normally required when the investor's ownership level exceeds the:
50% level
What is the distinction between the accounting for a replacement and a betterment?
A betterment is debited directly to the asset account.
All-inclusive approach
A concept of income by which virtually all nonequity-based transactions and events are captured and reported in the income statement; the preferred approach for income theory.
Current operating approach
A concept of income where income is limited to transactions related to central ongoing operations; not an acceptable approach for income theory.
Ace Corporation has a long-term investment in the common stock of another entity. The investment does not render the investor with the ability to exercise significant influence or control over the investee. A journal entry to record a $10,000 decline in market value below cost would necessarily involve:
A debit to Unrealized Gain/Loss
Units-of-output depreciation
A depreciation approach where the depreciable base is allocated to the expected total units of output; mileage, hours, etc.
Define Modified Accelerated Cost Recovery System (MACRS).
A general depreciation system and an alternative system.
What is the modified accelerated cost recovery system?
A general depreciation system and an alternative system.
Financing lease
A lease that effectively transfers the risks and rewards of ownership to the lessee
Operating lease
A lease where the lessee makes periodic payments for periodic use of an asset, but does not assume the ultimate risks and rewards of owning the asset
Define impairment.
A long-lived asset is not recoverable from expected future cash flows.
Equipment costing $3,000 with accumulated depreciation of $2,125 is exchanged for another asset with a fair value of $625. The exchange has commercial substance. How much is the gain or loss on this transaction?
A loss of $250 should be recognized.
Materiality
A matter of accounting judgment; when amounts involved are slight, expediency may dictate waiving the technically correct alternative in lieu of a simpler approach
Straight-line amortization
A method for amortizing premiums and discounts on bonds; the premium or discount is spread uniformly over the life of the bond as an adjustment of interest.
Replacement
A restoration of an asset, at least partially, to its original condition; such costs may be capitalized by reducing accumulated depreciation.
Change in accounting estimate
A revision of assumptions used in a related accounting calculation (e.g., change in estimated useful life of an asset); handled prospectively by revising current and future periods
Straight-line depreciation
A simple depreciation method by which the depreciable base is spread uniformly over the service life.
Lump-sum purchase
A single price paid for a package of assets; the purchase price must be allocated to each of the components
A premium on an investment in bonds would likely result when the contract rate is "what" in relation to the going market rate?
Above
A machine that cost $18,000, with a book value of $4,000, is sold for $3,400. Which of the following is true concerning the journal entry to record the sale?
Accumulated Depreciation is debited for $14,000.
What is the meaning and general effect of "boot" in an exchange transaction?
Additional money consideration that may accompany a transaction
Describe general principles for a lease?
After 1-year the lessee account for a leased asset is treated as though it has been purchased, liability must be recorded, rent is recorded as rent expense, not reported to books of the lessee,
Presently, the accounting profession purports to use which conceptual approach to measuring income:
All inclusive
Describe income reporting principles, as comprehended by the "all inclusive" approach.
All transactions and events make their way through Net Income.
Depreciation is a process of:
Allocation
The _____________ _____________ method is used to account for held-to-maturity investments.
Amortized Cost
On January 5, 20X1, a corporation was granted a patent on a product. On January 2, 20X9, to protect its patent, the corporation purchased a patent on a competing idea that was originally issued on January 10, 20X5. Because of its unique nature, the corporation does not feel the competing patent can be used in producing a product. The cost of the competing patent should be:
Amortized over a maximum period of 12 years.
Residual value
Amount expected be realized at the end of an asset's service life; "salvage value"
Double-declining balance depreciation
An accelerated depreciation method by which a constant rate (that is 200% of the straight-line rate) is multiplied by each period's beginning (constantly declining) book value.
Declining balance depreciation method
An accelerated depreciation method by which a constant rate (that is a multiple of the straight-line rate) is multiplied by each period's beginning (constantly declining) book value.
What is Other Comprehensive Income?
An account for changes in the value of available-for-sale securities; not part of net income is included in the total comprehensive income.
Other comprehensive income (OCI)
An account for changes in value of available for sale securities; not part of net income but is included in the broader concept of total comprehensive income.
Cross Country Trucking Company recently replaced the oil filter on one of its cross country rigs. How should one account for this cost?
As a repair and maintenance expense.
Why is the excess of the fair value of an acquired entity, over its recorded equity, known as "acquisition differential"?
Assets and liabilities are not necessarily reported at fair value.
Investments in Bonds that the investor intends to hold to maturity should be disclosed on the balance sheet:
At their value plus any unamortized premiums.
The _____________ _____________ _____________ securities category is used to account for securities that are neither trading nor held to maturity.
Available for sale
In evaluating the correct accounting choice (e.g., held-to--maturity, etc.) for a particular investment, which of the following is most apt to be regarded as the "default" choice?
Available for sale securities
Describe the method of accounting for available-for-sale securities, and be able to provide a comprehensive illustration.
Available-for sale: https://www.principlesofaccounting.com/wp-content/gallery/chapter-9/available1.png The attempt of selling the securities that were gained during Trading Securities.
Illustrate the property, plant, and equipment section of a balance sheet.
Balance sheet: https://www.principlesofaccounting.com/wp-content/gallery/chapter-10/ppe.png
What items are properly included in an asset's cost, and which items should be expensed as incurred?
Based on expenditures that are ordinary and necessary to get the item in place and in condition for its intended use. (purchase price, permits, freight, ordinary installation, initial setup/calibration/programming, and other normal costs)
Why might the purchase price for a subsidiary may differ from the subsidiaries recorded equity?
Because the purchase price may be lower then the equity received
Which of the following expenditures meet at least one of the criteria for capitalization?
Betterments
_____________ , also known as improvements or extraordinary repairs, generally improve or increase future service potential of an asset.
Betterments
Describe how the recorded bond investment account includes the amount of premium or discount (a separate account is not used).
Bond Investment Account (par): https://www.principlesofaccounting.com/wp-content/gallery/chapter-9/bondspar1.png Bond Investment Account (premium): https://www.principlesofaccounting.com/wp-content/gallery/chapter-9/bondspremium1.png Bond Investment Account (discount): principlesofaccounting.com/wp-content/gallery/chapter-9/bondsdiscount1.png
Illustrate the accounting for the full life cycle of a bond investment, including situations involving premiums and discounts.
Bond Investment Cycle (par): 1: https://www.principlesofaccounting.com/wp-content/gallery/chapter-9/bondspar1.png 2: https://www.principlesofaccounting.com/wp-content/gallery/chapter-9/bondspar2.png 3: https://www.principlesofaccounting.com/wp-content/gallery/chapter-9/bondspar3.png Bond Investment Cycle (premium): 1: https://www.principlesofaccounting.com/wp-content/gallery/chapter-9/bondspremium1.png 2: https://www.principlesofaccounting.com/wp-content/gallery/chapter-9/bondspremium2.png 3: https://www.principlesofaccounting.com/wp-content/gallery/chapter-9/bondspremium3.png Bond Investment Cycle (discount): 1: https://www.principlesofaccounting.com/wp-content/gallery/chapter-9/bondsdiscount1.png 2: https://www.principlesofaccounting.com/wp-content/gallery/chapter-9/bondsdiscount2.png 3: https://www.principlesofaccounting.com/wp-content/gallery/chapter-9/bondsdiscount3.png
Cost minus residual value is known as depreciable base, whereas cost minus accumulated depreciation is known as _____________ _____________ .
Book value
How should an initial investment in a bond be recorded?
By the issue price.
Define capital expenditure and revenue expenditure.
Capital expenditure has future economic benefits that prolong, increase, or improve the quality of service. If only 1 or 2 of these are met it is a revenue expenditure.
In addition to a change in estimated service life, what other type of change would likely result in a revision of depreciation amounts?
Change in useful life
Intangible assets should be carried in the accounting records at their:
Cost less amortization
Depreciable base
Cost minus salvage value; the amount of cost that will be allocated to the service life
Define cost, service life, salvage value, depreciable base, and book value.
Cost: The dollar amount assigned to a particular asset, usually the ordinary and necessary amount expended to get an asset in place and in condition for its intended use. Service life: The useful life of an asset to an enterprise, usually relating to the anticipated period of productive use of the item. Salvage value: Also called residual value. This is the amount expected to be realized at the end of an asset's service life. Depreciable base: The cost minus the salvage value. The amount of cost that will be allocated to the service life. Book value: Also called net book value. This refers to the balance sheet amount at a point in time that reveals the cost minus the amount of accumulated depreciation.
The appropriate journal entry to record machinery depreciation of $1,000 is:
Debit Depreciation Expense for 1,000, and Credit Accumulated Depreciation for 1,000
On June 1, Pennell Corporation purchased $100,000 of 9%, 5-year bonds. The bonds are dated June 1, 20X1. The bonds were issued at 96, and pay interest on December 1 and June 1. The entry to record the investment in bonds is:
Debit Investment in Bonds for 96,000, and Credit Cash for 96,000
What are the general rules for deciding which method is used to account for an investment in the stock of another company?
Debit: intent to buy/sell for short-term profits default debt category intent to buy and hold until fixed maturity date Equity: stock investments generally ranging from 20-50% stock investments generally exceeding 50% default equity category
Demonstrate the declining-balance method of depreciation, including situations involving partial periods.
Declining-balance: https://www.principlesofaccounting.com/wp-content/gallery/chapter-10/ddbexample.png
Premium amortization causes interest income to _____________ .
Decrease
The amortization of the premium on an investment in bonds will cause the investment in bonds account to _____________ .
Decrease
Which of the following terms best relates to natural resources?
Depletion
_____________ is the allocation of natural resource cost to the resources extracted during an accounting period.
Depletion
Distinguish between depletion that is charged to expense versus reported as an asset on the balance sheet.
Depletion charged to expense is how much it cost to get the resource. depletion reported as an asset is how much money you gain from the selling of the product or how much is left over after the cost of gaining the product
Illustrate depletion calculations and the related journal entries.
Depletion: https://www.principlesofaccounting.com/wp-content/gallery/chapter-11/depletionje.png
Asset cost minus residual value is termed:
Depreciable base
The process used to allocate the cost of long-lived assets to the accounting periods benefited is known as:
Depreciation
What is the difference between the accounting for an intangible with a determinable life versus an indefinite life?
Determinable life is amortized, indefinite life is not
How does intent influence the accounting technique for a particular investment?
Determines what way it will be approached/reported
Bond investment _____________ amortization causes investment income to be increased beyond the amount of cash received.
Discount
With the equity method, _____________ and losses cause a decrease in the Investment account.
Dividends
The equity method involves journal entries at the time the investee's earnings are announced, as well as when:
Dividends are paid
The term "service life" is synonymous with:
Economic life
The equity method focuses principally on changes in the investee's _____________ , rather than on changes in the market value of the investee's stock.
Equity
Under the equity method, the investor's investment account goes up and down with the investees:
Equity
Betterment
Expenditures that improve or increase the service potential of an asset even beyond its original new condition; such costs may be capitalized by increasing the asset's cost.
The available-for-sale securities are reported on the balance sheet at _____________ _____________ _____________ .
Fair market value
Goodwill is the excess of the investment cost over "book value" or over "fair value" of the subsidiaries identifiable assets?
Fair value
A company must utilize the same depreciation methods for financial reporting and taxes purposes.
False
For costs incurred after asset acquisition, capitalization will occur only if the service life of an asset is prolonged.
False
The amortization period for intangible assets is generally considered to be the economic life of the property, not to exceed 40 years.
False
The specific accounting treatment for a long-term investment depends on the type of security purchased, not the intent of the investment.
False
The straight-line method (as compared to accelerated depreciation methods) generally results in the highest possible depreciation expense during an asset's early years of usage.
False
The total amount of depletion for a given period is necessarily charged to expense in the income statement.
False
Briefly stated, which of the following should not be recognized on exchanges that lack commercial substance?
Gains
When a subsidiary is acquired at a premium over the fair value of the identifiable assets, _____________ will appear in the consolidated statements.
Goodwill
_____________ occurs when the value of a company as an operating entity exceeds the value of its individual tangible assets and liabilities.
Goodwill
Which of the following statements regarding goodwill is false?
Goodwill may be recorded for a company whether it is internally generated or purchased.
A graph is set up with "depreciation expense" on the vertical axis and "time" on the horizontal axis. Assuming linear relationships, how would the lines for straight-line and double-declining-balance depreciation expense, respectively, be drawn on this graph?
Horizontally and sloping down to the right.
Under the units-of-output depreciation method, the depreciable base is divided by the service life:
In output
Assume that the modified accelerated cost recovery system is used to account for a depreciable asset for tax purposes. In general, which of the following observations is correct?
In the early years of an asset's life, depreciation will be greater for tax than for financial reporting purposes.
Business growth may cause certain items of depreciable property, plant, and equipment to become deficient in their service capabilities. Such action is termed:
Inadequacy
Land imporvements
Includes the cost of parking lots, sidewalks, landscaping, irrigation systems, and similar expenditures that are incurred to better land
An asset impairment is normally accompanied by a direct charge to:
Income
The excess of the cash received on a bond investment over the initial investment cost is recognized as:
Income
The amortization of a discount on a bond investment causes interest income to be:
Increased
The correct classification of an investment is based upon the _____________ for which it was acquired.
Intent
If the parent and sub have done business with one another, adjustments will be needed to avoid reporting _____________ transactions.
Intercompany
Show how to record bond interest income.
Interest Income (par): https://www.principlesofaccounting.com/wp-content/gallery/chapter-9/bondspar2.png Interest Income (premium): https://www.principlesofaccounting.com/wp-content/gallery/chapter-9/bondspremium2.png Interest Income (discount): https://www.principlesofaccounting.com/wp-content/gallery/chapter-9/bondsdiscount2.png
What are the general principles for asset exchanges that lack commercial substance?
Inventory swaps when neither expects a significant exchange in cash, gains are not recorded on exchanges lacking commercial substance
A company whose shares were acquired by an investor is known as the _____________ .
Investee
The _____________ account will appear in the parent's separate balance sheet, but not the consolidated balance sheet.
Investment
When consolidating, which of the following accounts would be eliminated from the consolidated presentation:
Investment in Subsidiary
Trading Securities
Investments in debt acquired with the intent of generating profits by reselling the investment in the very near future; classified as current assets.
Available-for-sale securities
Investments in debt that are neither "held-to-maturity" or "trading;" a default category that is accounted for at fair value with changes in value recognized in other comprehensive income.
Held-to-maturity investments
Investments purchased with intent to hold to maturity; usually investment in debt; accounted for by amortized cost method.
Describe the consolidating worksheet.
Is what tracks the financial reports for a parent company as an economic unit.
What is the meaning of bond terminology, including "issue price," "face (or par)," "premium," and "discount"?
Issue price: amount the company receives in exchange for the initial issue of debt. Face (or par): contract amount of bond; paid with interest at maturity. Premium: issue price is more; effective yield is lower than stated. Discount: issue price is less; effective yield is higher than stated.
How is acquisition differential handled in the consolidation framework?
It is the difference excess from the reported equity.
Describe global variations in approaches to depreciating and valuing assets.
Item is changed back to fair value, offset with the change in the entity's capital accounts.
Distinguish between land and land improvement costs.
Land: costs of land, title fees, legal fees, survey costs, zoning fees Land improvements: parking lots, sidewalks, landscaping, irrigation systems
Cite some possible advantages of a lease.
Less money on fixing things, no ownership rights that have to be updated,
The sale of a depreciable asset resulting in a loss indicates that the proceeds from the sale were:
Less than book value.
Which party pays the other for the use of property?
Lessee
Who is a lessee, and who is a lessor?
Lessee: pays money to get the right Lessor: gets the money to give the right
Intangible asset
Long-term asset that lacks physical existence; contract rights, copyrights, patents, trademarks, etc.
For tax purposes, the exchange of similar assets will normally result in no gain or _____________ .
Loss
If a cash sale of an item of depreciable property occurs, and the journal entry to record the sale is balanced by the recording of a debit, then a _____________ should be recognized.
Loss
Illustrate journal entries for recording asset exchange transactions.
Loss implied: https://www.principlesofaccounting.com/wp-content/gallery/chapter-11/lossimplied.png Gain implied: https://www.principlesofaccounting.com/wp-content/gallery/chapter-11/gainimplied.png Boot: https://www.principlesofaccounting.com/wp-content/gallery/chapter-11/bootgiven.png
Demonstrate how to record the sale of a depreciable asset, including situations involving either a gain or loss.
Loss: https://www.principlesofaccounting.com/wp-content/gallery/chapter-11/saleequip.png Gain: https://www.principlesofaccounting.com/wp-content/gallery/chapter-11/saleequip2.png
A _____________ - _____________ purchase occurs when a package of assets are acquired for a single purchase price amount.
Lump sum
In an apportionment of the amount paid to acquire a package of assets, the amount assigned to a specific asset is based on its relative appraised value. The approach described relates to a:
Lump-sum purchase
State why some long-lived assets may be expensed in the period acquired.
Materiality because the life of the item is not known and it is not fair or reasonable to keep recording it forever.
What is the fair value option for measuring and reporting investments?
Measuring financial assets and liabilities at fair value. Allows them to bypass other guidelines and approaches.
Equity method
Method to account for stock investment when significant influence is present; changes in equity of the investee are recognized by the investor on a pro rata basis
Tax laws permit asset cost to be charged against specific years via use of the _____________ _____________ _____________ _____________ _____________ .
Modified Accelerated Cost Recovery System
Define the term "depletion."
Moving the money from cost to periods benefited
Must you use the same depreciation method for tax and financial reporting purposes?
No
Revenue expenditure
Not a capital expenditure; to be expensed as incurred.
What are the fundamental accounting issues pertaining to asset impairments.
Not expected to generate returns of cash, a loss is recognized for the amount needed to reduce the asset to its fair value
Natural resources
Oil and gas reserves, mineral deposits, thermal energy sources, and standing timber are just a few examples of such assets that a firm may own
What types of assets are considered to be natural resources?
Oil and gas reserves, mineral deposits, thermal energy sources, standing timber, etc
Under which type of lease does the lessee obtain the rights to use leased property for a limited period of time and treat amounts paid as expense?
Operating lease
Capital expenditures
Ordinary and necessary costs incurred to place an item of property, plant, or equipment in its condition for intended use; such amounts are included in the asset account
Changes in the value of available for sale securities are reported in _____________ _____________ _____________ .
Other comprehensive income
Lessor
Owner of a leased asset
The equity of a consolidated entity will tend to mirror the equity of the _____________ .
Parent
What types of assets are considered to be intangible?
Patents, trademarks, brands, copyrights,
Name several specific types of intangibles, and state how their lives would be assessed.
Patents: over useful life not to exceed 20 years Copyrights: legal life equal to creator plus 70 years Franchises: estimated useful life Trademarks/brands/internet domains: indefinite lives, determined by how often they are renewed
Lease
Periodic payment from the user (lessee) of an asset to an owner (lessor) of the asset
What key factors affect the determination of service life?
Physical deterioration, obsolescence, inadequacy
When bonds are sold at more than face value, the difference between the issue price and the face value is commonly referred to as a _____________ .
Premium
Describe the accounting for depreciable assets used in conjunction with natural resource extraction.
Property, plant, and equipment used to extract the natural resource must be depreciated over its useful life. Depending on if the equipment, property, or plant are useful outside of the use of gaining the natural resource dictates how you account for the depreciation
State the fundamental accounting rules relating to exchanges having commercial substance.
Recognize whether a gain or loss is implied, it must be recorded at fair value, recognize whether boot was given,
What are the basic principles for calculating, recording, and presenting amortization in the financial statements?
Record once it is purchased by another company when it has an identifiable life, how much was paid for the asset is how much is recorded, tracked each year by estimated life divided by cost paid
The amortization of a premium on a bond investment causes interest income to be:
Reduced
What is the nature of amounts reported in a consolidated income statement?
Reflect revenues and expenses of both parent and sub together.
Demonstrate how to record the removal of a depreciable asset from the accounts.
Removal: https://www.principlesofaccounting.com/wp-content/gallery/chapter-11/abandoned.png
Which of the following items should be expensed as incurred?
Repair of damage occurring during installation of new equipment.
Describe how available-for-sale securities impact the financial statements, especially with changes in value.
Reported in Unrealized Gain/Loss - Other Comprehensive Income. It is reflected at fair value.
What is the rationale for the equity method?
Satisfies GAAP, immediately recognizes investee income
Describe the accounting for trading securities from an earlier chapter.
Securities bought to realize the short-term profit. Only kept for a short-term because of the huge risks.
Distinguish between service life and physical life.
Service life: the accounting periods benefited Physical life: how long the item truly lasts
Accelerated depreciation methods
Several alternative depreciation approaches that result in relatively more depreciation in early years of use, and smaller amounts during later years
Changes in market value of available-for-sale securities will directly impact:
Stockholder's equity
The amortization method that results in a level amount of interest income each period was illustrated in this chapter. An alternative amortization method will be illustrated in subsequent chapters. The method shown is this chapter was the:
Straight-line method
Demonstrate the straight-line method of depreciation, including situations involving partial periods.
Straight-line method: https://www.principlesofaccounting.com/wp-content/gallery/chapter-10/straightlinemethod.png
Show how to apply the straight-line method of amortization.
Straight-line method: https://www.principlesofaccounting.com/wp-content/gallery/chapter-9/bondspremium2.png
Consolidation is required for greater than 50% owned _____________ .
Subsidiaries
What are key differences, generally, between tax and financial reporting of depreciation-related amounts?
Tax codes, systems used, only account for the useful life of an item
The Modified Accelerated Cost Recovery System is primarily used for:
Tax purposes
Boot
Term used to describe additional monetary consideration that may accompany an exchange transaction.
Significant influence
The ability to sway management and decision making of another entity, but generally not enough to assert absolute control
Carefully define depreciation.
The allocation of an asset's cost to the accounting periods benefited.
Issue price
The amount a company receives in exchange for the initial issue of debt or other financial instrument.
Define service life.
The amount of time that an item is considered able to be accounted for in accounting periods.
Amortized cost method
The approach mandated for held-to-maturity securities; investments are reported at their cost with any premium or discount amortized over the life of the investment.
What is meant by the amortized cost method?
The approach that mandates held-for-securities; investments recorded at cost and premiums or discounts are recorded over the investment life.
When the contract interest rate for a bond exceeds the effective interest rate of the bond, then:
The bond will be issued at a premium.
Investee
The company in which another has an investment
What is the meaning of the term "capital expenditure"?
The costs spent on an asset and assigned to an asset account.
Discount on bonds
The difference between face value and issue price of a bond, where the issue price is less; causes the effective yield to be higher than that stated.
Premium on bonds
The difference between face value and issue price of a bond, where the issue price is more; causes the effective yield to be lower than that stated.
Goodwill
The excess of the purchase price of an acquired company over the fair value of the identifiable net assets acquired.
Par value on bonds
The face or contract amount of a bond; the amount to be repaid at maturity along with any interest.
Identify the appropriate treatment of interest and training costs on purchased and constructed assets.
The period of time during which active construction/training is ongoing.
How are changes in estimates (e.g., useful life) dealt with in the basic depreciation computations?
The prior period financial statements do not need to be restated, revisions are made over the future to make it spread out throughout the rest of the items life.
Depletion
The process used to allocate the cost of a natural resource asset to the accounting periods benefited.
Amortization
The process used to allocate the cost of an intangible asset to the accounting periods benefited
Commercial substance
The quality of an exchange transaction such that it changes the future cash flow potential of the entity.
What three conditions help an item qualify as a capital expenditure?
The quantity of services expected is increased, prolonged, or improved.
Lessee
The user of an asset who makes periodic payments for a lease
Describe declining-balance alternatives, such as 200%, 150%, and 125% rates.
They are just the percentage of the straight-line rate
How are costs to be apportioned to the specific assets acquired in a lump-sum purchase?
They must be assigned to each individual asset as a separate asset rather than a whole.
Explain why multiple depreciation methods exist.
To accommodate for all of the variables that go into how much an item will depreciate.
Why is it necessary to amortize a premium or discount on a bond investment?
To make sure that money is accounted for correctly and the correct amount is received in the end.
Consolidation
To prepare financial reports for a parent and subsidiary company as a single economic unit.
Exchange transaction
Trading one asset for another; to be booked at fair value if the transaction has commercial substance.
Which of the following categories/methods would be used to account for an investment in debt securities, where the intent of the investment was primarily for short-term profits?
Trading securities
Bond investments are initially entered into the accounts at cost; that is, the purchase price plus brokerage fees and other related acquisition costs.
True
Dividends received on investments are reported as income.
True
If an asset with a book value of $1,000 is abandoned, a $1,000 loss will be recognized in the income statement.
True
The difference between the book value of an asset and the proceeds received from its sale should be reported as a gain or loss.
True
The process to adjust depreciation for a change in service life entails spreading the remaining depreciable base over the remaining useful life.
True
Under double-declining balance depreciation, salvage value is ignored in the preliminary depreciation calculation.
True
When accounting for available-for-sale securities, the amount of investee earnings has no direct effect on the investor's Investment account.
True
Demonstrate the units-of-output method of depreciation.
Units-of-output: https://www.principlesofaccounting.com/wp-content/gallery/chapter-10/unitsofoutputex.png
Explain goodwill.
What a company pays over the fair price of the net assets acquired.
Describe the equity method of accounting for an investment in stock, and be able to provide a comprehensive illustration.
When someone owns more of the company than a company does the equity of the investee are recognized and recorded. Investment in Stock: https://www.principlesofaccounting.com/wp-content/gallery/chapter-9/equitymethod1.png
When and why is consolidation necessary?
Whenever a company that is affiliated with another owes money to that company.
Do electronic spreadsheets usually have built-in functions supporting depreciation calculations?
Yes
Explain the significance of judgment and materiality in accounting for property, plant, and equipment.
You only record things when there are new things added or more cost spent on an item.
If an asset is impaired, and future cash flows will not allow recovery of the recorded amount, then the firm should reduce the asset in the accounts. In addition,
a loss should be recognized.
The process of charging the cost of an intangible to expense is known as _____________ .
amortization
Additional monetary consideration in an exchange transaction is known as _____________ .
boot
Briefly stated, gains and losses are to be recognized on exchanges that have _____________ _____________ .
commercial substance
What accounts appear in a consolidated balance sheet, and how is the reported amount for each account determined?
current assets (cash, trading securities, accounts receivable, inventories) property, plant, and equipment (land, buildings and equipment (net)) intangible assets (patent, goodwill)
An accelerated depreciation method which involves applying a fixed depreciation rate to the remaining book value of an asset is known as the _____________ _____________ method.
declining balance
Many lease agreements provide a period of use nearly equal to the entire service life of the leased assets. Such agreements frequently contain a provision for the lessee to acquire the property at a bargain purchase price, and are called _____________ _____________ .
financing leases
Describe the basic accounting approaches and guidelines for assessment relating to different types of investments.
https://www.principlesofaccounting.com/wp-content/gallery/chapter-9/investmenttable.png
Incidental expenditures incurred when purchasing equipment (like freight, installation, and brokerage fees) that are ordinary and necessary for the acquisition should be:
included in an asset's cost
Patents, copyrights, and franchises are examples of _____________ assets.
intangible
A lease is an arrangement that allows one party, the _____________ , to use the assets of another party, the _____________ , for a stated period of time.
lessee lessor
The cost/benefit theme is consistent with the concept of _____________ , which refers to the significance of a particular item or transaction.
materiality
In determining an asset's useful life, consideration must be given to three factors: _____________ _____________ , obsolescence, and inadequacy .
physical deterioration
Another name for economic or useful life is _____________ _____________ .
service life
One of the most popular depreciation methods is the _____________ - _____________ method.
straight line
Define the term "amortization."
when you take an intangible asset and you account for the cost towards the company