Financial Accounting Chapter 7

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. -is owned by the company. -decreases in value.

provides benefits to the company.

The depreciable cost of an asset is the asset's cost minus its estimated ___ value.

residual

An asset ____ occurs when an asset is no longer useful, but cannot be sold.

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.

service

Which depreciation methods allocate the cost of long-term assets based on time? -straight-line -activity methods -declining-balance -valuation method

straight-line declining-balance

Long-term assets are classified as -current. -intangible. -tangible. -acquired.

intangible. tangible.

Which account is credited in a journal entry to record depreciation on machinery? -Cash -Machinery -Accumulated Depreciation -Depreciation Expense

Accumulated Depreciation

Which of these are parts of the journal entry to record depreciation? -Credit Depreciation Expense -Credit Accumulated Depreciation -Debit Depreciation Expense -Debit Accumulated Depreciation

Credit Accumulated Depreciation Debit Depreciation Expense

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? -Debit equipment $45,000 -Credit equipment $70,000 -Credit equipment $90,000 -Debit accumulated depreciation $70,000 -Debit equipment $50,000 -Credit gain on exchange of asset $30,000 -Credit accumulated depreciation $70,000

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

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

False

Which statement is true about the straight-line method of depreciation? -It is an accelerated method of depreciation. -It recognizes expense proportionately with the amount of use of the asset. -It is the preferred method for companies expecting to use the asset more in its early years of life. -It allocates an equal amount of depreciation to each year the asset is used.

It allocates an equal amount of depreciation to each year the asset is used.

What is the formula for the profit margin ratio? -Gross profit divided by sales. -Net income divided by average shareholders' equity. -Net income divided by net sales. -Net income divided by average total assets.

Net income divided by net sales.

Which of the following are expenditures for assets subsequent to acquisition? -Freight charges -Repairs and maintenance -Additions -Improvements

Repairs and maintenance Additions Improvements

Which of the following items are initially recorded as an expense on the income statement? -Purchased intangibles -Research and development costs -Advertising costs

Research and development costs Advertising costs

Which of the following does not differ among the different depreciation methods? -Depreciation recognized during the last year of the asset's service life. -Total depreciation recognized over the asset's service life. -Depreciation recognized during the earlier years.

Total depreciation recognized over the asset's service life.

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 formula for calculating the double-declining-balance method is -book value at beginning of the year less residual value x 2/ estimated service life. -book value at beginning of year x 2/estimated service life -historical cost less residual value x 2/estimated service life. -historical cost x 1/service life.

book value at beginning of year x 2/estimated service life

The original cost of an asset minus accumulated depreciation is -residual value. -book value. -goodwill. -disposal value.

book value.

The purchase price and all costs to bring an asset to its desired condition and location for use should be ______. -capitalized -accrued -expensed

capitalized

A(n) ____ is protected by law and gives the creator of a published work the exclusive rights to reproduce and sell the work for the life of the creator plus 70 years.

copyright

The formula to calculate the depreciation for the units-of-production method or activity-based depreciation, is ((cost - residual value)/total estimated production) x ______. -total activity or production -current-year activity or production -gross profit percentage -historical cost

current-year activity or production

The profit margin ratio is defined as ____ _____divided by net sales.

net income

The exclusive legal right to manufacture a product or to use a process is called a(n) ____.

patent

A retirement or abandonment of an asset is different from a sale of an asset because -a gain is recognized for the undepreciated portion of the equipment. -the residual value is included as a gain. -a loss must be recognized for the remaining book value. -no cash is received.

a loss must be recognized for the remaining book value. no cash is received.

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

___ value is the amount the company expects to receive for the asset at the end of its service life.

Residual

Which of the following are commonly used depreciation methods? -Straight-line -Increasing-balance -Activity-based -Declining-balance -Value-based

Straight-line Activity-based Declining-balance

The gain or loss on disposal of an asset is calculated as: -consideration received less the fair value of the asset sold -the fair value of the asset less the accumulated depreciation -the cost of the asset less the accumulated depreciation -amount received less the book value of asset sold

amount received less the book value of asset sold

For accounting purposes, depreciation is -the selling price of an asset. -an allocation of a cost of an asset. -a decline in value of an asset.

an allocation of a cost of an asset.

Recording depreciation results in the allocation of the cost of a long-term asset to the years during which the asset provides ____.

benefits

The original cost of the asset less the accumulated depreciation is the _____ _____ of the asset.

book value

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. -improvements. -goodwill. -repairs and maintenance.

additions. improvements. repairs and maintenance.

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

allocation

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

amortization

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

intangible

An asset that has no physical substance is referred to as a(n) -intangible asset. -depreciable asset. -current asset. -finite asset.

intangible asset.

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. -it does a better job of matching expenses to revenues of the period. -it is required by the IRS.

it reduces taxable income in the early years of the asset's life and provides better cash flows.

A(n) _____ is the exclusive right to manufacture a product or use a process granted for a period of ____ years.

patent, 20

Otto Inc. retires old equipment with a book value of $2,400. Otto should. -recognize a gain of $2,400 -debit cash for $2,400 -not make a journal entry -recognize a loss of $2,400

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 -units-of-output method. -straight-line method. -double-declining-balance method. -MACRS

straight-line method.

Long-lived assets are typically classified in two categories: ____ and ____.

tangible, intangible

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

Other terms used for an activity-based depreciation method are: -base depreciation method -units of output method -units of production method -productivity method

units of output method units of production method

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 -Debit equipment $32,000 -Credit equipment $120,000 -Debit equipment $50,000 -Credit accumulated depreciation $40,000

Debit accumulated depreciation $40,000 Debit loss on exchange $30,000 Credit equipment $120,000 Debit equipment $50,000

The depreciable cost is -the cost of the asset minus the residual value. -cost of the asset minus depreciation expense. -historical cost less accumulated depreciation. -cost of the asset plus the residual value.

the cost of the asset minus the residual value.

Straight-line deprecation is calculated as the depreciable cost divided by -the estimated service life of the asset. -the cost of the asset. -the residual value of the asset.

the estimated service life of the asset.

The service life or useful life of an asset is -the time period from the purchase of the asset until it becomes impaired. -the estimated use that the company expects to obtain from the asset before disposing of it. -determined by MACRS tables.

the estimated use that the company expects to obtain from the asset before disposing of it.

The formula for calculating declining balance depreciation is the depreciation rate per year times -the book value at the beginning of the year. -the cost less the residual value less the accumulated depreciation. -the cost less the residual value.

the book value at the beginning of the year.

The formula to calculate an activity-based depreciation rate is: -(cost - residual value)/estimated total production. -(cost - residual value)/actual production during the year. -cost/estimated total production. -cost/actual production during the year.

(cost - residual value)/estimated total production.

The formula for straight-line depreciation is -cost/service life. -(cost + residual value)/service life. -service life/(cost + residual value). -(cost - residual value)/service life.

(cost - residual value)/service life.

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 equipment $80,000 -Credit gain on exchange of asset $40,000 -Credit equipment $80,000 -Credit equipment $100,000 -Debit accumulated depreciation $60,000 -Debit equipment $65,000 -Credit accumulated depreciation $60,000

Debit equipment $80,000 Credit gain on exchange of asset $40,000 Credit equipment $100,000 Debit accumulated depreciation $60,000

Total depreciation recorded over an asset's service life is: -highest when the double-declining balance method is used -lowest when the activity-based method is used -the same regardless of the depreciation method used -lowest when the straight-line method is used

the same regardless of the depreciation method used