ACC SB 7

The depreciable cost is

the cost of the asset minus the residual value.

Which of the following are long-term tangible assets? a. accounts receivable b. copyright c. property d. trademark e. equipment

property equipment

The depreciation method that allocates an equal amount of the depreciable base to each year of the asset's service life is the

straight-line method.

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

capitalized

The cost of a major improvement that extends the service life of an asset would be ___, whereas the cost of maintenance that does not increase the future benefits would be ___.

capitalized expensed

Where is the account accumulated depreciation on equipment found on the financial statements?

As a contra account to equipment on the balance sheet

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

Fale (Depreciation is a process of cost allocation, not valuation.)

What is the formula for the profit margin ratio?

Net income divided by net sales.

Goodwill is recognized only when one company ___ another company.

aquires/buys

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

benefits

When selling a fixed asset, the seller recognizes a gain or loss for the difference between the amount received and the ______ value of the asset sold.

book

The original cost of an asset minus accumulated depreciation is

book value

The original cost of the asset less the accumulated depreciation is the ___ ___ of the asset.

book value

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 ______.

goodwill

Goodwill may only be recognized

in a business acquisition

An asset that has no physical substance is called a(n) ___ asset.

intangible

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

intangible asset

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

less

When we recognize depreciation, we allocate a portion of the asset's cost to each year in which the asset

provides benefits to the company

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

reduces

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

residual

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

retirement

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

An exclusive right to display a word, slogan, symbol, or emblem that distinctively identifies a company, product, or service is referred to as a

trademark

On January 1, 2018, 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, 2021?

$70,000 (Reason: $100,000/10 years = $10,000 depreciation per year. Historical cost of $100,000 less $30,000 depreciation (for 2018, 2019, and 2020) = $70,000.)

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

activity based

Straight-line method of depreciation...

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

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

allocation

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

capitalize

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

capitalized

Purchase price plus costs necessary to get asset ready for use are...

capitalized

Costs that produce future benefits are ______, but costs that produce benefits only in the current period are ______.

capitalized; expensed

The accumulated depreciation account is classified as a(n)

contra asset

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(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

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

depreciate

Allocation of the cost of tangible fixed asset

depreciation

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

depreciation

Research and development costs are...

expensed

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

net income

The exclusive legal right to manufacture a product or to use a process is called a(n)

patent

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

patent 20

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

the estimated service life of the asset

The service life or useful life of an asset is

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:

the same regardless of the depreciation method used

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

(cost - residual value)/estimated total production.

Which of these are parts of the journal entry to record depreciation? - Credit Accumulated Depreciation - Credit Depreciation Expense - Debit Accumulated Depreciation - Debit Depreciation Expense

- Credit Accumulated Depreciation - Debit Depreciation Expense

For accounting purposes, depreciation is

an allocation of a cost of an asset

Other terms used for an activity-based depreciation method are:

- units of production method - units of output method

On January 1, 2018, 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, 2021?

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

The formula for straight-line depreciation is

(cost - residual value)/service life.

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

- Advertising costs - Research and development costs

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

- Declining-balance - Activity-based - Straight-line

Which account is credited in a journal entry to record depreciation on machinery?

Accumulated Depreciation

Allocation of the cost of an intangible asset

Amortization

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

Allocation of the cost of natural resources

Depletion

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 (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.)

Match: Straight-Line and MARCS - commonly used for financial statement purposes - commonly used for tax reprorting

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

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

Total depreciation recognized over the asset's service life.

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 (All costs should be capitalized to bring the asset to its intended and useful state.)

The formula to calculate the depreciation for the units-of-production method or activity-based depreciation, is ((cost - residual value)/total estimated production) x ______. Multiple choice question.

current-year activity or production

Companies use accelerated depreciation for tax purposes because

it reduces taxable income in the early years of the asset's life and provides better cash flows.

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

residual value

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

residual/salvage

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

the book value at the beginning of the year.

Which of the following are expenditures for assets subsequent to acquisition? - Improvements - Additions - Freight charges - Repairs and maintenance

- Improvements - Additions - Repairs and maintenance

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

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

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

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

The gain or loss on disposal of an asset is calculated as:

amount received less the book value of asset sold

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

service

Larry purchases land to be used for a new corporate headquarters. Which of the following items are capitalized in the cost of land? - costs to remove an old building - legal fees to secure title - title insurance - grading the land - current year's property taxes

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

Cheng Corporation exchanges old equipment for new equipment. The original cost of the old equipment was $90,000, and its accumulated depreciation at the date of exchange was $40,000. The new equipment received had a fair value of $40,000 and a book value of $35,000. The journal entry to record this exchange will include which of the following entries? - Debit equipment $40,000 - Debit accumulated depreciation $40,000 - Credit accumulated depreciation $40,000 - Debit equipment $35,000 - Debit loss on exchange $10,000 - Credit equipment $90,000 - Debit loss on equipment $15,000

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

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

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

A retirement or abandonment of an asset is different from a sale of an asset because

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

The types of expenditures that can occur subsequent to an asset's acquisition are - additions. - goodwill. - repairs and maintenance. - improvements.

- additions. - repairs and maintenance. - improvements.

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

- equipment - buildings - land

Which depreciation methods allocate the cost of long-term assets based on time?

- straight-line - declining-balance