ch 7- act 210

The most frequently used depreciation method for financial reporting is the ______ method.

straight-line

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. What is the depreciation expense for year 2?

$4,500 Reason: The depreciation rate per unit is ($160,000 - $10,000)/100,000 hours = $1.50 per machine hour. Year 2 depreciation is 3,000 hours x $1.50 = $4,500.

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 Reason: The depreciation rate is 2 x 1/5 = 40%. $100,000 x 40% = $40,000 depreciation expense in year 1.

On October 1, year 1, Kirby Corp. purchased equipment for $100,000. The equipment has an expected service life of 5 years with no residual value. Kirby uses the straight-line method of depreciation. The partial year depreciation for year 1 is

$5,000 Reason: $100,000/5 years = $20,000 per year x 1/4 year = $5,000 depreciation expense in year 1. October 1 - December 31 is 3 months so 1/4 year.

The journal entry to record the amortization for a patent would include a debit to and credit to .

Blank 1: amortization Blank 2: expense Blank 3: patent or patents

The asset turnover ratio provides an indication of how efficiently a company uses all of its assets to generate . (Enter one word per blank)

Blank 1: revenue or sales

Which items are considered changes in estimates that would be treated on a prospective basis in the current period and future periods?

Change in service life of an asset Change in residual value of an asset

Sarah purchases land to be used for a new storage facility. Which of the following items are capitalized in the cost of land?

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

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 equipment $90,000 Debit accumulated depreciation $70,000 Credit gain on exchange of asset $30,000 Debit equipment $50,000

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

On December 30, 20X1, Glaze Corp. disposed of equipment with a historical cost of $50,000 and accumulated depreciation of $30,000. The equipment was sold for $45,000 cash. The journal entry to record the sale will include which of the following entries?

Debit to cash $45,000 Credit to equipment $50,000 Debit to accumulated depreciation $30,000 Credit to gain on sale of asset $25,000

Gosling Corporation had a return on asset ratio of 4% in 2017 and 9% in 2018. This change in return on assets can be interpreted as

Gosling is using its assets more effectively to earn income.

Larry purchases land to be used for a new corporate headquarters. Which of the following items are capitalized in the cost of land?

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

What is the formula for the profit margin ratio?

Net income divided by net sales.

Which of the following are classified as natural resources?

Timber tracts Mineral deposits

Which of the following does not differ among the different depreciation methods?

Total depreciation recognized over the asset's service life.

The journal entry to record the amortization of an intangible asset includes

credit to the intangible asset. debit to amortization expense.

The key factor in classifying items as repairs and maintenance is that

future benefits are not provided beyond those originally anticipated from the asset.

Using the declining balance method, depreciation will be

higher in earlier years, but lower in later years.

Select all that apply Self-constructed buildings include which of the following costs?

interest costs incurred during construction labor costs incurred for construction of building material costs incurred for construction of building

The method of amortization used for intangible assets

is most commonly straight-line.

Gerhard Inc. recognizes goodwill related to the acquisition of another company. Gerhard should:

periodically test goodwill for impairment capitalize the goodwill when company is acquired

In a basket or lump-sum purchase of assets, the total acquisition cost is allocated to the individual assets by multiplying the lump-sum purchase price times

the relative fair value percentages of each asset.

Amortization refers to the allocation of the cost of assets to expense.

Blank 1: intangible

True or false: Repairs and maintenance expenditures that do not increase the future benefit of the asset are expensed.

True Reason: Repairs and maintenance keep the asset in working order.

Which of the following items are expensed?

Costs related to maintaining equipment

Select all that apply Which of the following are tangible assets?

Land improvements Building

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.

An intangible asset that is measured as the purchase price less the fair value of the net identifiable assets is called

goodwill.

Which of the following costs should be capitalized in the costs of acquiring a building?

purchase price realtor commissions legal fees to obtain title

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

A change in accounting estimate requires a company to account for the change

in the current and future years

A basket purchase or lump-sum acquisition of assets requires that an allocation is made to each individual asset based on the asset's ______.

relative fair value

The cost of land improvements are capitalized separately from land because land improvements tend to have a useful life.

Blank 1: limited, finite, shorter, short, or definite

The profit margin ratio is defined as divided by net sales.(Enter one word per blank)

Blank 1: net Blank 2: income or profit

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

Blank 1: retirement or retire

The accumulated depreciation account is classified as a(n)

contra asset.

The formula for straight-line depreciation is

(cost - residual value)/service life.

Which of the following are expenditures for assets subsequent to acquisition?

Additions Repairs and maintenance Improvements

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 .

Blank 1: time Blank 2: use, usage, or activity

What is the accounting treatment for goodwill acquired in a business acquisition?

Capitalize the goodwill Test for impairment Do not amortize

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 Reason: 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.

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

False Reason: Depreciation is a process of cost allocation, not valuation.

Which of the following costs should be capitalized in the costs of acquiring a building?

Remodeling building Realtor commissions Legal fees to obtain title

The types of expenditures that can occur subsequent to an asset's acquisition are

additions. repairs and maintenance. improvements.

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

capitalized; expensed

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

declining-balance straight-line

Self-constructed buildings include which of the following costs?

material costs incurred for construction of building interest costs incurred during construction labor costs incurred for construction of building

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.

The depreciation method that is easiest to apply and results in higher net income in earlier years is

straight-line

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

the estimated service life of the asset.

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 Credit equipment $100,000 Debit equipment $80,000

On December 30, 20X1, Rocket Corp. disposed of equipment with a historical cost of $100,000 and accumulated depreciation of $70,000. The equipment was sold for $80,000 cash. The journal entry to record the sale will include which of the following entries?

Debit cash $80,000 Credit gain on sale of equipment $50,000 Credit equipment $100,000 Debit accumulated depreciation $70,000

Intangible assets that are acquired from other entities are referred to as purchased intangibles, whereas intangibles that are created by a company are referred to as

internally developed intangibles.

Margot Company constructs a new building that will replace its current office building. In addition to construction materials and labor, which of following costs incurred during the construction period should be included in the cost of the new building?

Architect fees Construction related overhead costs Interest costs

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

As a contra account to equipment on the balance sheet

Costs incurred to acquire equipment are recognized as a(n) , while cost providing a benefit in the current period only are recognized as a(n) .

Blank 1: asset, assets, or equipment Blank 2: expense or expenses

Costs incurred to acquire equipment are recognized as a(n) , while cost providing a benefit in the current period only are recognized as a(n) . Listen to the complete question

Blank 1: asset, assets, or equipment Blank 2: expense or expenses

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 .

Blank 1: capitalized Blank 2: expensed

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 .

Blank 1: depreciation Blank 2: amortization

What are the financial statement effects of using the declining balance method of depreciation as compared to the straight-line method in the first year of an asset's life?

Net income is lower. Total assets are lower.

Which of the following are classified as natural resources?

Oil deposits Timber forests

A higher return on assets typically indicates the company

is using its assets effectively.

The FASB requires research and development costs to be expensed because

it is difficult to determine whether costs will result in future benefits.

The distinction between land and land improvements is that:

land has an indefinite life

The ratio that measures the sales per dollar of assets invested is referred to as the asset _____ ratio.

turnover

The issues that are important for tangible and intangible assets, include determining:

what amounts to include in the cost how to record the disposal of the asset how to expense the cost of the asset over its life

Land, land improvements, buildings, equipment, and natural resources are examples of assets.

Blank 1: tangible

On January 1, year 1, Roark Corp. purchased equipment for $120,000. The equipment has a residual value of $20,000, and has a life of 1,000,000 hours. Roark uses the activity-based method of depreciation. In year 1, Roark used the machine 30,000 hours, and in year 2, Roark used the machine 50,000 hours. What is the depreciation expense for year 2?

$5,000 Reason: The depreciation rate per unit is ($120,000 - $20,000)/1,000,000 hours = $0.10 per machine hour. Year 2 depreciation is 50,000 hours x $0.10 = $5,000.

Smith Corporation acquired West Company by paying $5 million in cash. The total fair value of West's identifiable assets is $8 million and the total fair value of its liabilities is $4 million. The amount of goodwill reported by Smith Corporation relating to its acquisition of West is:

$1 million Reason: $5 mill - ($8 mill - $4 mill)

On July 1, year 1, Smith Corp. purchased equipment for $200,000. The equipment has an expected service life of 10 years with no residual value. Smith uses the straight-line method of depreciation. The partial year depreciation for year 1 is

$10,000 Reason: $200,000/10 years = $20,000 per year x 1/2 year = $10,000 depreciation expense in year 1.

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 Reason: 2 x 1/10 x $300,000 = $60,000 depreciation expense in year 1. Under the double declining balance method, residual value is not included in computing the annual depreciation. However, the asset's book value cannot be depreciated below residual value.

Most companies use - amortization for intangible assets.

Blank 1: straight Blank 2: line

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

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

Blank 1: allocation

Allocating the cost of intangible assets to expense is referred to as .

Blank 1: amortization

When a company acquires a business in a business acquisition and the purchase price is greater than the fair value of the net assets acquired, the excess is reported as .

Blank 1: goodwill

Kuhn Corporation acquired Salz Company by paying $65 million in cash. The total fair value of Salz's identifiable assets is $90 million and the total fair value of its liabilities is $40 million. The amount of goodwill reported by Kuhn Corporation relating to its acquisition of Salz is:

$15 million Reason: $65 mill - ($90 mill - $40 mill)

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 items are capitalized?

Replacing a major component Successful legal defense of a patent Major repair that increases future benefits

Total depreciation recorded over an asset's service life is:

the same regardless of the depreciation method used