Accounting Ch 7 Quiz
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?
$60,000
The formula to calculate an activity-based depreciation rate is:
(cost - residual value)/estimated total production.
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?
Credit equipment $120,000 Debit loss on exchange $30,000 Debit equipment $50,000 Debit accumulated depreciation $40,000
Which statement is true about the straight-line method of depreciation?
It allocates an equal amount of depreciation to each year the asset is used.
Which of the following are commonly used depreciation methods?
Straight-line Declining-balance Activity-based
Which of the following items are capitalized?
Successful legal defense of a patent Replacing a major component Major repair that increases future benefits
The purchase price and all costs to bring an asset to its desired condition and location for use should be ______.
capitalized
The key factor in classifying items as repairs and maintenance is that
future benefits are not provided beyond those originally anticipated from the asset.
An asset that has no physical substance is referred to as a(n)
intangible asset.
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.
Costs of periodically servicing equipment is an example of:
repair and maintenance
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 formula for calculating declining balance depreciation is the depreciation rate per year times
the book value at the beginning of the year.
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.
Which of the following items are intangible assets?
patents. trademarks. goodwill.
The formula for calculating the double-declining-balance method is
book value at beginning of year x 2/estimated service life
Long-term tangible assets include
buildings. land. equipment.
A retirement or abandonment of an asset is different from a sale of an asset because
no cash is received. a loss must be recognized for the remaining book value.
Total depreciation recorded over an asset's service life is:
the same regardless of the depreciation method used
The formula to calculate the depreciation for the units-of-production method (activity-based depreciation) is ((cost - residual value)/total estimated production) x ______.
current-year activity or production
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
The original cost of an asset minus accumulated depreciation is
book value
The original cost of an asset minus accumulated depreciation is
book value.
An asset that has no physical substance is called a(n) __________ asset.
intangible
On January 1, year 1, Paisley Corp. purchases equipment for $200,000. Paisley uses the double-declining-balance method of depreciation. The asset has a 10-year service life and a $10,000 residual value. What is the book value at the end of year 1?
$160,000
On January 1, year 1, London Corp. purchases equipment for $400,000. The equipment has a 5-year service life and a $50,000 residual value. London uses the double-declining-balance method of depreciation. What is the book value at the end of year 1?
$240,000
The formula for straight-line depreciation is
(cost - residual value)/service life.
Which of the following items are expensed?
Costs related to maintaining equipment
Krasel 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 $70,000. The new asset received had a fair value of $50,000 and a book value of $45,000. The journal entry to record this exchange will include which of the following entries?
Credit gain on exchange of asset $30,000 Credit equipment $90,000 Debit equipment $50,000 Debit accumulated depreciation $70,000
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?
Debit accumulated depreciation $60,000 Credit gain on exchange of asset $40,000 Debit equipment $80,000 Credit equipment $100,000
What is the first issue that needs to be addressed in order to properly report tangible and intangible assets?
Determining the amounts to be included in the assets' initial cost
Which of the following expenditures are classified as repairs and maintenance for a vehicle owned by the company? (Select all that apply.)
Engine tune-up Routine oil change
Which of the following are long-term tangible assets?
Equipment Property
Under what circumstances are accelerated depreciation methods most appropriate?
For an asset that will provide greater benefits in earlier years of its life. For an asset that will be used less in the later years of its life.
The journal entry to retire old equipment that is not fully depreciated includes a:
debit to loss debit to accumulated depreciation credit to equipment
Straight-line, declining-balance, and activity-based refer to methods commonly used to __________ property, plant, and equipment.
depreciate
An accelerated depreciation method is appropriate when the asset will provide
greater benefits in the earlier years of the asset's life.
The issues that are important for tangible and intangible assets, include determining:
how to record the disposal of the asset what amounts to include in the cost how to expense the cost of the asset over its life
The FASB requires research and development costs to be expensed because
it is difficult to determine whether costs will result in future benefits.
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.
Use of MACRS for tax purposes usually results in __________ ___________income tax in the earlier years of an asset's life.
less
Straight-line deprecation is calculated as the depreciable cost divided by
the estimated service life of the asset.
Which of the following does not differ among the different depreciation methods?
Total depreciation recognized over the asset's service life.
Which of the following are expenditures for assets subsequent to acquisition?
Repairs and maintenance Improvements Additions
____ value is the amount the company expects to receive for the asset at the end of its service life. (Enter one word per blank)
Residual or Salvage
Which of the following items are intangible assets?
Trademarks Goodwill
The gain or loss on disposal of an asset is calculated as:
amount received less the book value of asset sold
For accounting purposes, depreciation is
an allocation of a cost of an asset.
Because the future benefits of research and development costs are uncertain, FASB requires that research and development costs be treated as
an expense on the income statement.
Recording depreciation results in the allocation of the cost of a long-term asset to the years during which the asset provides _________ .
benefits or revenues
Recording depreciation results in the allocation of the cost of a long-term asset to the years during which the asset provides __________ .
benefits or revenues
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 the asset less the accumulated depreciation is the ________ ________ of the asset.
book value
The allocation of the cost of a tangible asset over its service life is referred to as ________ . (Enter one word per blank)
depreciation
The allocation of the cost of a tangible fixed asset is referred to as _________ , whereas the allocation of the cost of an intangible asset is referred to as _________.
depreciation, amortization
Otto Inc. retires old equipment with a book value of $2,400. Otto should
recognize a loss of $2,400
The types of expenditures that can occur subsequent to an asset's acquisition are
repairs and maintenance. additions. improvements.
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.
When an asset is no longer useful, but cannot be sold, we have a ________.
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
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?
$40,000
True or false: Repairs and maintenance expenditures related to an asset do not increase future benefits.
True
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 equipment $90,000 Debit loss on exchange $10,000 Debit accumulated depreciation $40,000 Debit equipment $40,000
