Ch. 7 Long term assets
Otto Inc. retires old equipment with a book value of $2,400. Otto should
recognize a loss of $2,400
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.
Other terms used for an activity-based depreciation method are:
units of output method units of production method
The formula to calculate the depreciation for the units-of-production method or activity-based depreciation, is ((cost - residual value)/total estimated production) x ______.
current-year activity or production
The journal entry to retire old equipment that is not fully depreciated includes a:
debit to accumulated depreciation debit to loss credit to equipment
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
Long-term tangible assets include
buildings, land, equipment
An asset that has no physical substance is called a(n) ______asset.
intangible
The formula to calculate an activity-based depreciation rate is:
(cost - residual value)/estimated total production.
The formula for straight-line depreciation is
(cost-residual value)/service life
Depreciation
Allocation of the cost of a tangible fixed asset
Amortization
Allocation of the cost of an intangible asset
depletion
Allocation of the cost of natural resources
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?
Credit equipment $100,000 Debit equipment $80,000 Debit accumulated depreciation $60,000 Credit gain on exchange of asset $40,000
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 accumulated depreciation $40,000 Debit loss on exchange $30,000 Credit equipment $120,000 Debit equipment $50,000
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 loss on exchange $10,000 Credit equipment $90,000 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 long-term tangible assets?
Property Equipment
Allocating the cost of intangible assets to expense is referred to as ________.
amortization
The gain or loss on disposal of an asset is calculated as:
amount received less the book value of asset sold
The purchase price and all costs to bring an asset to its desired condition and location for use should be ______.
capitalized
Which depreciation methods allocate the cost of long-term assets based on time?
declining-balance straight-line
Straight-line, declining-balance, and activity-based refer to methods commonly used to _____ property, plant, and equipment.
depreciate
When an asset has a significant decline in value and is written down, this is called _______.
impairment
Amortization refers to the allocation of the cost of ________ assets to expense.
intangible
The profit margin ratio is defined as ______ ______ divided by net sales.
net income
Straight-line deprecation is calculated as the depreciable cost divided by
the estimated service life of the asset.
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.
Which of the following are commonly used depreciation methods?
Activity-based Declining-balance Straight-line
Which of the following are expenditures for assets subsequent to acquisition?
Repairs and maintenance Improvements Additions
Which of the following does not differ among the different depreciation methods?
Total depreciation recognized over the asset's service life.
Units of production or units of output are alternative terms for the ________ - _______ depreciation method.
activity-based
The types of expenditures that can occur subsequent to an asset's acquisition are
additions. repairs and maintenance. improvements.
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 formula for calculating the double-declining-balance method is
book value at beginning of year x 2/estimated service life
The allocation of the cost of a tangible asset over its service life is referred to as _______.
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
An asset that has no physical substance is referred to as a(n)
intangible asset
The depreciable cost of an asset is the asset's cost minus its estimated _______ value.
residual
________ value is the amount the company expects to receive for the asset at the end of its service life.
residual
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.
The formula for calculating declining balance depreciation is the depreciation rate per year times
the book value at the beginning of the year.
The depreciable cost is
the cost of the asset minus the residual value.
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
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
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
For accounting purposes, depreciation is
an allocation of a cost of an asset.
In accounting, the term impairment refers to
an asset's significant decline in value.
What is the formula for the profit margin ratio?
net income divided by net sales
The estimated use the company expects to obtain from an asset before disposing of it is referred to as the ________ life of the asset.
service
An asset ______ occurs when an asset is no longer useful, but cannot be sold.
retires