Accounting Chapter 7 Textbook

What is an example of a trademark name?

Apple

If we dispose of an asset for more than its book value, we record a _____________.

Gain

What is a patent?

an exclusive right to manufacture a product or to use a process

How do we record purchased intangible assets?

Record them at their original cost plus all other costs, such as legal fees, necessary to get the asset ready for use.

What is book value?

Referred to also as "carrying value" equals the original cost of the asset minus the current balance in Accumulated Depreciation

Straight-line, declining balance, and activity-based depreciation all are

acceptable depreciation methods for financial reporting

We normally record a long-term asset at the a. cost of the asset only b. cost of the asset plus all costs necessary to get the asset ready for use c. appraised value d. cost of the asset, but subsequently adjust it up or down to appraised value

b. cost of the asset plus all costs necessary to get the asset ready for use

A loss occurs when we sell an asset for less than its

book value

Equipment originally costing $95,000 has accumulated depreciation of $30,000. If the equipment is sold for $55,000, the company should record: a. no gain or loss b. a gain of $10,000 c. a loss of $10,000 d. a loss of $40,000

c. a loss of $10,000

Many popular retail businesses such as restaurants, auto dealerships, and hotels are set up as....

franchises

What is an improvement?

the cost of replacing a major component of an asset

Recording depreciation requires accountants to establish three factors at the time the asset is put into use:

1. Service life 2. residual value 3. depreciated method

We classify long-term assets into two major categories:

1. Tangible assets 2. Intangible assets

Companies acquire intangible assets in what 2 ways?

1. They PURCHASE intangible assets like patents, copyrights, trademarks, or franchise rights from other companies. 2.They DEVELOP intangible assets internally, for instance by developing a new product or process and obtaining a protective patent

Over the life of a long-term asset, the owners often incur additional expenditures associated with the asset.- what account do we debit?

Choice is to debit wither an asset or an expense

T or F: Intangible assets can only be subject to amortization?

FALSE; can also be NOT subject to amortization

What is often the largest (and most unique) intangible asset in the balance sheet?

Goodwill; it is recorded ONLY when one company acquires another company

How do we expense repairs and maintenance expenditures (like engine tune-up, oil change, or repair of a minor engine part for a delivery truck)?

In the period incurred because they maintain a given level of benefits

If we dispose of an asset for less than its book value, we record a ______________.

Loss

Losses _______________ net income.

Losses decrease net income

Most companies use straight-line depreciation for financial reporting and an accelerated method called

MACRS for tax reporting

Do intangible assets have physical substance?

NO

How is profit margin calculated?

Net income/net sales

Is the residual value ever depreciated?

No it is never depreciated

Return on assets can be separated to examine 2 important business strategies:

Profit margin and asset turnover

What is the two-step impairment process?

Step 1: Test for impairment Step 2: If impaired, record the loss.

What are the world's largest franchises?

Subway, McDonald's, & Starbucks

T or F: Most capitalized expenditures are expensed over time as the asset is used in company operations.

TRUE

How do we expense repairs and maintenance expenditures (like new transmission or an engine overhaul) that increase the future benefits of the car/truck?

These would be capitalized as assets

What is one of the most valuable intangible assets for many companies?

Trademark or brand

In an activity-based method, we instead allocate an asset's cost based on its

USE

How much should we record in the separate accounts for land, building, and equipment?

We allocate the total purchase price of $900,000 based on the estimated fair values of each of the individual assets

How do we report intangible assets that are developed internally?

We expense in the income statement most of the costs for internally developed intangible assets in the period we incur those costs

What is the general rule for recording all such long-term assets?

We record a long-term asset at its cost plus all expenditures necessary to get asset ready for use.

When does an addition occur?

When we add a new major component to an existing asset

Equipment was purchased for $50,000. The equipment is expected to be used 15,000 hours over its useful life and then have a residual value of $10,000. In the first two years of operation, the equipment was used 2,700 hours and 3,300 hours, respectively. What is the equipment's accumulated depreciation at the end of the second year using the activity-based method? a. $16,000 b. $7,200 c. $8,800 d. $20,000

a. $16,000

Equipment was purchased for $50,000, At that time, the equipment was expected to be used eight years and have a residual value of $10,000. The company uses straight-line depreciation. At the beginning of the third year, the company charged its estimated useful life to a total of six years (four years remaining) and the residual value to $8,000/ What is depreciation expense in the third year? a. $8,000 b. $5,000 c. $7,000 d. $5,500

a. $8,000

Which of the following expenditures should be recorded as an expense? a. repairs and maintenance that maintain current benefits b. adding a major new component to an existing asset c. replacing a major component of an existing asset d. successful legal defense of an intangible asset

a. repairs and maintenance that maintain current benefits

buildings include

administrative offices, retail stores, manufacturing facilities, and storage warehouses

Depreciation in accounting is

allocating the cost of an expense over its service life

Allocating the cost of intangible assets too expense is called

amortization

Intangible assets with an indefinite useful life (goodwill and most trademarks) are NOT..

amortized

What is a copyright?

an exclusive right of protection given by the U.S. Copyright Office to the creator of a published work such as a song, film, painting, photo, book, or computer software.

How are research and development costs expensed?

as incurred

Tangible assets

assets in this category include land, land improvements, buildings, equipment, and natural resources

Intangible assets

assets in this category include patents, trademarks, copyrights, franchises, and goodwill.

A company has a profit margin of 10% and reports net sales of $4,000,000 and average total assets of $5,000,000. Calculate the company's return on assets a. 12.5% b. 8.0% c. 4.5% d. 5.0%

b. 8.0%

The book value of an asset is equal to the a. replacement cost b. asset's cost less accumulated depreciation c. asset's fair value less its historical cost d. historical cost plus accumulated depreciation

b. asset's cost less accumulated depreciation

Which of the following will maximize net income by minimizing depreciation expense in the first year of the asset's life? a. shirt service life, high residual value, and straight-line depreciation b. long service life, high residual value, and straight-line depreciation c. short service life, low residual value, and double-declining-balance depreciation d. long service life, high residual value, and double-declining-balance depreciation

b. long service life, high residual value, and straight-line depreciation

Bryer Co. purchases all of the assets and liabilities of Stellar Co. for $1,500,000. The fair value of Stellar's assets is $2,000,000, and its liabilities have a fair value of $1,200,000. The book value of Stellar's assets and liabilities are not known. For what amount would Bryer record goodwilll associated with the purchase? a. $800,000 b. $500,000 c. $700,000 d. $0

c. $700,000

The company's profitability on each dollar invested in assets is represented by which of the following ratios: a. profit margin b. asset turnover c. return on assets d. return on equity

c. return on assets

Which of the following statements is true regarding the amortization of intangible assets? a. intangible assets with a limited useful life are not amortized b. the service life of an intangible asset is always equal to its legal life c. the expected residual value of most intangible assets is zero d. in recording amortization, Accumulated Amortization is always credited

c. the expected residual value of most intangible assets is zero

Tangible assets such as land, land improvements, buildings, equipment, and natural resources are recorded at ...

cost plus all costs necessary to get the asset ready for its intended use.

We expense an expenditure if it benefits only the

current period

We expense items that benefit only the

current period

Sandwich Express incurred the following costs related to its purchase of a bread machine. SEE PAGE 376 for table) At what amount should Sandwich Express record the bread machine? a. $20,000 b. $21,000 c. $23,800 d. $25,200

d. $25,200

A company has the following three assets with the information provided: (SEE TABLE ON PAGE 377). Determine the amount of the impairment loss, if any. a. $0 b. $5 million c. $10 million d. 3 million

d. 3 million

Research and development costs a. are recorded as research and development assets b. are capitalized and then amortized c. should be included in the cost of the patent they relate to d. should be expensed

d. should be expensed

The balance in the Accumulated Depreciation account represents a. the amount charged to expense in the current period b. a contra expense account c. a cash fund to be used to replace plant assets d. the amount charged to depreciation expense since the acquisition of the plant asset

d. the amount charged to depreciation expense since the acquisition of the plant asset

Amortization is a process, similar to _____________, in which we allocate the cost of intangible assets over their estimates service loves.

depreciation

Impairment occurs when

expected future cash flows (expected future benefits) generated for a long-term asset fall below its book value (original cost minus accumulated depreciation)

We capitalize (record as an asset) expenditures that benefit

future periods

The difference between the cash received and the book value of he asset given up is reported as a

gain or loss in the income statement

use guideline cost plus all expenditures necessary to...

get the asset ready for use

Do gains increase or decrease net income?

increase net income

We capitalize an expenditure as an asset if it...

increased future benefits

Other than tangible assets, what is the other main category of long-term assets?

intangible assets

For intangible assets, the cost allocation process

is called amortization

The question to ask yourself when deciding whether to add a cost to the asset account or record it as an expense of the current period is

is this a cost of acquiring the asset and getting it ready for use, or is it a recurring cost that benefits the company in the current period

An item is said to be material if...

it is large enough to influence a decision

When a firm purchases a patent...

it records the patent as an intangible asset at its purchase price plus other costs such as legal and filing fees to secure the patent

Management must review long-term assets for a potential write-down when events or changes in circumstances indicate the asset's "recoverable amount" is less than...

its "recorded amount" in the accounting records

The land account represents a

land company is using in its operations

The property, plant, and equipment category consists of

land, land improvements, buildings, equipment, and natural resources

equipment is a broad term that includes:

machinery used in manufacturing, computers and other office equipment, vehicles, furniture, and fixtures

Most companies depend heavily on

natural resources

Return on assets=

net income/ average total assets

How is the Asset Turnover calculated?

net sales/average total assets

What is a gain?

occurs when we sell an asset for more than its book value

Natural resources include

oil, natural gas, timber, and even salt

Review: Intangible assets include...

patents, copyrights, trademarks, franchises, and goodwill

Intangible assets include:

patents, trademarks, copyrights, franchises, and goodwill

We use the term depreciation to describe that process when it applies to

property, plant, and equipment

The cost of acquiring a building usually includes...

realtor commissions and legal fees in addition to the purchase fee.

Goodwill is...

recorded by the acquiring company for the amount that the purchase price exceeds the fair value of the acquired company's identifiable net assets.

What does capitalize mean?

recording an expenditure as an asset

Accumulated Depreciation is a contra asset account meaning that it

reduces an asset account

Conflicting with the desire to report the higher net income is the desire to reduce taxes by

reducing taxable income

List some different types of expenditures:

repaies and maintenance, additions, improvements, and litigation costs.

A more comparable measure of profitability than net income is

return on assets

Return on assets indicates

the amount of net income generated for each dollar invested in assets

Residual value

the amount the company expects to receive from selling the asset at the end of its service life

What is an example of an intangible asset that require expenditures after their acquisition (the most frequent one)

the cost of legally defending the right that gives the asset its value

Service life

the estimated use the company expects to receive from the asset before disposing of it

Depreciation method

the pattern in which the asset's depreciable cost (original cost minus residual value) is allocated over time

With the straight-line method

we allocate an equal amount of the depreciable cost to each year of the asset's service life

What is a basket purchase?

when companies purchase more than one asset at the time for one purchase price

What is a trademark?

word, slogan, or symbol that distinctively identifies a company, product, or service.