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Which of the following factors are normally considered in determining whether to capitalize or to expense an expenditure?
-Whether the purchased item will provide economic benefits to the entity that extend beyond the current year -The potential income tax reduction in the current year that results from expensing the item -Whether the purchased item represents a material expenditure to the company
Which of the following items are capitalized as part of the cost of land acquired?
Cost of razing an old building on the land, net of salvage proceeds Legal fees Purchase price of the land Title fees
Accelerated depreciation methods result in (greater/lower) depreciation expense and (higher/lower) net income than the straight-line depreciation method during the early years of an asset's life.
Blank 1: greater Blank 2: lower
Identify the correct statements about accounting for depletion of natural resources.
Depletion expense is recorded in the income statement for the related natural resources. Depletion expense allowed for federal income tax purposes frequently differs from that recognized for financial accounting purposes.
Over the life of a financing lease, which of the following effects occur on the income statement of the lessee?
Depreciation expense is debited (increased) on an annual basis. Interest expense is debited (increased) on an annual basis.
Under which depreciation method is the estimated salvage value ignored when making the depreciation expense calculation for the first year of an asset's use?
Double-declining-balance
Crosby Co. leases a machine and agrees to make annual lease payments of $11,000 for 5 years. The present value of all of the lease payments is $40,000. The entry to record this transaction is:
Dr. Equipment 40,000 Cr. Lease Liability 40,000
Non current Assets include
Land, Buildings, equipment (less depreciation) and intangible assets
Which of the following accounts are examples of intangible assets?
Leaseholds Copyrights Goodwill Customer lists
Intangible assets include
Leaseholds, patents, trademarks, goodwill and natural resources
Building....................................................$300,000 ___ ________ __________......................... _________ Net book value of building......................... $180,000
Less: Accumulated depreciation.............. (120,000)
Assume that land, buildings, and equipment were acquired for a lump-sum purchase price of $100,000. Appraised values were as follows: land, $40,000; buildings, $100,000; and equipment, $20,000. Land would be recorded for:
Reason: $25,000 = ($40,000 / ($40,000 + $100,000 + $20,000)) = 25% × $100,000
Wiggs Co. purchased Wolves Inc. for $6,000,000 in cash. The fair value of the net acquired assets were as follows: Inventory = $1,500,000; Land = $1,000,000; Buildings = $2,000,000; and Mortgage Payable = $600,000 (Wiggs Co. assumed the mortgage in full). As a result of this transaction, Wiggs Co. would report goodwill for:
Reason: $6.0 million - ($1.5 + $1.0 + $2.0 - $0.6) million = $6.0 - $3.9 million = $2,100,000
\Identify a reason for a firm being ready to pay more for a business than the fair value of its net assets.
The business being purchased has been able to earn a greater than average rate of return on its invested net assets.
Which of the following are true of intangible assets?
The cost of obtaining intangible assets should be capitalized. Intangible assets are amortized over their remaining useful life or their statutory life, whichever is shorter.
One of the effects of a goodwill impairment loss on the financial statements is that:
a loss is recognized, which decreases net income.
One of the effects of periodic amortization of an intangible asset on the financial statements is that:
an expense is recognized each period, which decreases net income.
Leasehold improvements made with respect to leased assets are recorded as:
assets by the lessee for the cost of expenditures properly capitalized.
Depletion is usually recognized:
on a straight-line basis.
The gain or loss on the disposal of a depreciable asset is, in effect, a correction of the missed depreciation estimates because if the salvage value and useful life estimates had been correct, ______.
the net book value of the asset would be equal to the proceeds received from its sale or disposal
Stills Inc. leases a machine and agrees to make annual lease payments of $14,000 for 3 years. The present value of all of the lease payments is $38,000. The entry to record this transaction is:
Dr Equipment 38,000 Cr Lease Liability 38,000
The entry normally made to record the amortization of an intangible asset is:
Dr. Amortization Expense Cr. Intangible Asset
The entry made to record the impairment of goodwill is:
Dr. Goodwill Impairment Loss Cr. Goodwill
At the inception of a financing lease, the financial statements effects are:
Dr. Noncurrent asset Cr. Noncurrent liability
Over the life of a financing lease, which of the following effects occur on the balance sheet of the lessee?
Financing Lease Liability is debited (decreased) as lease payments are made. The net book value of the leased asset is reduced as Accumulated Depreciation is credited (increased). Cash is credited (decreased) as lease payments are made.
Which of the following statements is true about goodwill once it is considered to be partially impaired and has been written down to its partially impaired value?
No subsequent upward adjustments are permitted for recoveries of fair value.
Assume that land, buildings, and equipment were acquired for a lump-sum purchase price of $100,000. Appraised values were as follows: land, $40,000; buildings, $100,000; and equipment, $20,000. Equipment would be recorded for:
Reason: $12,500 = ($20,000 / ($40,000 + $100,000 + $20,000)) = 12.5% × $100,000
Velco purchased a delivery truck at the beginning of Year 1 at a cost of $60,000. The truck is estimated to have a useful life of 5 years to Velco and an estimated salvage value of $10,000. It is estimated that the truck will be driven 100,000 miles during Velco's ownership period. Depreciation expense for Year 3 (the third year of the asset's life) under the units-of-production method would be:
Reason: ($60,000 - $10,000) / 100,000 = $0.50 per mile × total miles driven during Year 3.
Velco purchased a delivery truck at the beginning of Year 1 at a cost of $60,000. The truck is estimated to have a useful life to Velco of 5 years and an estimated salvage value of $10,000. It is estimated that the truck will be driven 100,000 miles during Velco's ownership period. Depreciation expense for Year 1 (the first year of the asset's life) under the straight-line method would be:
Reason: ($60,000 - $10,000) / 5 = $10,000
Velco purchased a delivery truck at the beginning of Year 1 at a cost of $60,000. The truck is estimated to have a useful life to Velco of 5 years and an estimated salvage value of $10,000. It is estimated that the truck will be driven 100,000 miles during Velco's ownership period. The balance of the Accumulated Depreciation account at the end of Year 3 (the third year of the asset's life) under the straight-line method would be:
Reason: ($60,000 - $10,000) / 5 = $10,000 × 3 = $30,000
Velco purchased a delivery truck at the beginning of Year 1 at a cost of $60,000. The truck is estimated to have a useful life of 5 years to Velco and an estimated salvage value of $10,000. The balance of the Accumulated Depreciation account at the end of Year 2 (the second year of the asset's life) under the double-declining-balance method would be:
Reason: 20% × 2 = 40% × $60,000 = $24,000 in Year 1. $60,000 - $24,000 = $36,000 × 40% rate = $14,400 in Year 2 = $38,400 in total
True or false: Because depreciation involves estimates of useful life and salvage value to begin with, revising those estimates without overwhelming evidence that they are significantly in error is an exercise of questionable value.
True
Velco purchased a delivery truck at the beginning of Year 1 at a cost of $60,000. The truck is estimated to have a useful life of 5 years to Velco and an estimated salvage value of $10,000. The balance of the Accumulated Depreciation account at the end of Year 1 (the first year of the asset's life) under the double-declining-balance method would be:
Reason: 5-year life = 20% per year × 2 = 40% rate × $60,000 = $24,000
Towns Co. purchased Timber Inc. for $4,200,000 in cash. The fair value of the net acquired assets were as follows: Inventory = $700,000; Land = $1,000,000; Buildings = $2,000,000; and Notes Payable = $400,000 (Towns Co. assumed the note in full). As a result of this transaction, Towns Co. would:
Reason: debit Goodwill for $900,000. $4.2 million - ($0.7 + $1.0 + $2.0 - $0.4) = $4.2 - $3.3 million = $900,000
Velco purchased a delivery truck at the beginning of Year 1 at a cost of $60,000. The truck is estimated to have a useful life of 5 years to Velco and an estimated salvage value of $10,000. Depreciation expense for Year 2 (the second year of the asset's life) under the double-declining-balance method would be:
Reason: 20% × 2 = 40% × $60,000 = $24,000 in Year 1 $60,000 - $24,000 = $36,000 × 40% rate = $14,400 in Year 2
Regarding the MACRS rules of calculating depreciation for income tax purposes, which of the following statements are true? (Check all that apply).
The MACRS rules provide accelerated deductions relative to the straight-line alternative. The MACRS rules eliminate the need to estimate an asset's salvage value. The MACRS rules simplify the calculation of the useful life of assets relative to the straight-line alternative.
Identify a true statement about goodwill that is considered to be impaired and has been written down to its impaired fair value.
The impaired fair value would become the new book value that would be used as the reference to determine further impairment in future years.
A lease is a financing lease if it has any of the following characteristics:
The lease term is primarily for the remaining economic life of the leased asset. It transfers ownership of the asset to the lessee at the end of the lease term.
A lease is a financing lease if it has any of the following characteristics:
The present value of the lease payments is at least equal substantially all of the fair value of the leased asset. It permits the lessee to purchase the asset for a bargain price at the end of the lease term.
When calculating depreciation expense for the first year of an asset's use, under which of the following methods would the asset's estimated salvage value be subtracted from the cost of the asset?
Units-of-production Sum-of-the-years'-digits Straight-line
When using an accelerated depreciation method during inflationary times, in the later years of an asset's life, depreciation expense will be _____.
less than it would be using the straight-line depreciation method and net income would be higher.
The gain or loss on the sale of a depreciable asset is, in effect, a _____.
correction of the total depreciation expense that has been recorded over the life of the asset.
A machine that cost $7,000 when new and had a net book value of $2,000 was sold for $1,400. The journal entry to record the sale of the machine would include a:
credit to Machine for $7,000.
A truck that cost $14,000 when new and had a net book value of $3,000 was sold for $4,400. The journal entry to record the sale of the truck would include a:
debit to Accumulated Depreciation for $11,000.
Furniture that cost $10,000 when new and had $4,000 of accumulated depreciation was sold at a gain of $1,200. The journal entry to record the sale of the furniture would include all of the following except:
debit to Gain on Sale of Furniture for $1,200.
In practice, most accountants decide in favor of expensing rather than capitalizing for several reasons, including:
expensing an item yields an immediate deduction for income tax purposes. capitalizing requires a revision of estimates for useful life and salvage value. expensing an item avoids the need of keeping depreciation records.
Maintenance expenditures should be capitalized if they:
extend the useful life and/or increase the salvage value of an asset.
Goodwill results from the purchase of one firm by another:
for a price that is greater than the fair value of the net assets acquired.
Taking the following list on an item-by-item basis (i.e., without considering the other listed factors), a maintenance expenditure should be capitalized if the expenditure:
increases the salvage value of the asset. extends the useful life of the asset.
If the book value of goodwill does not exceed its fair value, goodwill _____.
is not considered impaired
The net book value (carrying value) of a noncurrent asset:
is the difference between the cost of the asset and the accumulated depreciation on that asset.
Equipment costing $50,000 when new with accumulated depreciation of $41,000 (updated to the date of sale) was sold for $2,000. As a result of this transaction, the company would have recorded a:
loss on sale of equipment for $7,000.
A machine that cost $32,000 was sold for $24,000 at a time when it's net book value was $29,000. As a result of this transaction, the company would have recorded a:
loss on sale of machine for $5,000.
If a parcel of land that cost $130,000 last year was sold for $110,000 this year, a _____.
loss on the sale of the land of $20,000 would be recognized this year.
Buildings and equipment are recorded at their original cost, which includes the purchase price plus:
material, labor, and overhead costs for equipment made by a firm's own employees. installation and shakedown costs. interest costs incurred during the construction phase of a building.
Under U.S. GAAP, goodwill is:
not amortized, but tested annually for impairment.
Land that is owned and used in the operations of the firm is shown on the balance sheet at its:
original cost.
Intangible assets include:
patents, trademarks, copyrights, and customer lists.
An expenditure should be capitalized if the acquired item will have an economic benefit to the entity that extends beyond the current fiscal year. An example of this is:
purchase of machinery.
Intangible assets are amortized over their:
remaining useful life or their statutory life, whichever is shorter.
For income tax purposes, most firms use the MACRS rates for determining depreciation deductions because:
the MACRS rates provide accelerated deductions relative to the straight-line alternative.
When land is sold, a gain or loss will be reported on the income statement for an amount equal to:
the difference between the selling price and the cost of the land.
Buildings and equipment are recorded at their original cost, which includes the purchase price plus all ordinary and necessary costs incurred:
to get the building or equipment ready for its use in the operations of the firm.
When the tenant of an office building makes modifications to the office space, the cost of these modifications is a capital expenditure to be amortized over their useful life _____.
to the tenant or over the life of the lease, whichever is shorter
