Financial Accounting | Chapter 8

True or false: Except for the amounts, the financial statement effects are the same regardless of the depreciation method used.

True

True or false: Land has an infinite life.

True

True or false: Regardless of whether a company uses straight-line, double-declining-balance or units-of-production depreciation, the total amount of depreciation expense recognized over the useful life of an asset is the same. The methods simply assign different amounts to accounting periods.

True

The Black Limo Company (BLC) sold a limo that had been used in it operations. The limo cost $48,000, had accumulated depreciation of $20,000, and was sold for $26,000. As a result of the disposal the statement of cash flow would report a cash inflow from ___ activities of $___.

investing; $26,000

Gains and loss from asset disposals are reported ______ on the statement of cash flows.

separately on the income statement but not reported

The depreciation method that produces equal amounts of depreciation expense each accounting period is the ______ method.

straight-line

When an asset is used evenly over its useful life to generate the same amount of revenue each period, the method used to depreciate the asset to best match revenues and expenses is ______ depreciation.

straight-line

An asset that has a physical presence is known as a(n) ______ asset.

tangible

An asset that has a physical presence is known as a(n) _________ asset.

tangible

Units-of-production depreciation results in ______.

varying amounts of depreciation expense dependent on the use of the asset each accounting period

Barton Enterprises purchased a delivery truck for $32,000. The estimated salvage value of the truck at the end of its 5 year estimated useful life is $4,000. Based on this information, the double-declining-balance rate is ___%

40% Formula: Straight-line rate (1/5=0.2) * 2 = 0.4 = 40%

Lopez Company purchased land and a building for $460,000 cash. A real estate appraiser determined the fair market value of land to be $100,000 and that of the building to be $400,000. Based on this information, the cost of the land should be recorded as ___ and the cost of the building should be recorded as ___.

92000; 368000 FORMULA: appraisal cost of land (100,000) / total appraisal cost (100,000 + 400,000 = 500,000) = 0.2 * total cash paid (460,000) = 92,000 appraisal cost of building (400,000) / total appraisal cost (500,000) = 0.8 * total cash paid (460,000) = 368,000

The Black Limo Company (BLC) purchased a limo on January 1 of Year 1. The limo cost $48,000. It had an expected useful life of 4 years and a $8,000 salvage value. Assuming BLC uses straight-line depreciation, cash flow from operating activities for this transaction shown on the Year 2 statement of cash flows is ______.

$0 Reason: The cash paid for the limo would have been shown on the Year 1 cash statement as an investing activity. There is no cash flow associated with the recognition of depreciation.

Able Company purchased a computer for $3,470. The estimated salvage value is $170. The computer was expected to be used for 6,000 hours over its useful life. The computer was actually used for 2,800 hours in Yr. 1, 2,500 hours in Yr. 2 and 2,000 hours in Yr. 3. Depreciation expense in Yr. 1, using the units-of-production depreciation method was ______.

$1,540 Reason: $3,470 - $170 = $3,300 ÷ 6,000 hrs = $0.55/hr × 2,800 hrs. = $1,540

The Black Limo Company (BLC) purchased a limo on January 1 of Year 1. The limo cost $48,000. It had an expected useful life of 4 years and a $8,000 salvage value. Assuming BLC uses straight-line depreciation, depreciation expense for Year 2 is ______.

$10,000 Reason: ($48,000 cost - $8,000) ÷ 4 = $10,000 per year.

The Black Limo Company (BLC) purchased a limo on January 1 of Year 1. The limo cost $48,000. It had an expected useful life of 4 years and an $8,000 salvage value. BLC uses the straight-line depreciation method. At the beginning of Year 3, BLC changed the estimated salvage value from $8,000 to $4,000. Based on this information, the amount of depreciation expense shown on the Year 3 income statement will be ______.

$12,000 Reason: At the beginning of Year 3, the book value of the limo is $28,000 ($48,000 - $20,000 accumulated depreciation). The remaining useful life is 2 years. Depreciation expense for each of the 2 years, including Year 3, is $12,000 per year ($28,000 book value - $4,000 salvage value) ÷ 2 years = $12,000.

The Black Limo Company (BLC) purchased a limo on January 1 of Year 1. The limo cost $48,000. It had an expected useful life of 4 years and a $8,000 salvage value. Assuming BLC uses double-declining-balance depreciation, depreciation expense for Year 2 is ______.

$12,000.

The Black Limo Company (BLC) purchased a limo on January 1 of Year 1. The limo cost $48,000 and has an $8,000 salvage value. BLC expected to drive it for 100,000 miles before disposing of it. Actual miles driven per year: 30,000 in Year 1; 40,000 in Year 2; 20,000 in Year 3; and 25,000 in Year 4. Depreciation expense for Year 2 using units-of-production depreciation was ______.

$16,000 Reason: ($48,000 cost - $8,000 salvage) ÷ 100,000 miles = $0.40 per mile; 40,000 miles × $0.40 = $16,000

Barton Enterprises purchased a delivery truck for $32,000 that has an estimated salvage value of $6,000. Using the straight-line method, depreciation expense is $5,200 per year. Based on this information, the book value of the truck at the end of year 3 equals ______.

$16,400 Reason: $5,200 per yr × 3 yrs = $15,600 accumulated depreciation; Book value = $32,000 - $15,600 or $16,400.

Able Company purchased a computer for $7,700. The estimated salvage value was $200 and it was expected to last 6 years. After 2 years of recording straight-line depreciation, it was determined that the remaining life was only 2 more years. Assuming the company continues to use straight-line depreciation, how much depreciation expense will be recorded in each year of the remaining life?

$2,500 Reason: ($7,700 - $200) ÷ 6 x 2 = $1,250 x 2 = $2,500 accumulated depreciation. ($7,500 - $2,500) ÷ 2 = $2,500 per year

Barton Enterprises purchased a delivery truck for $32,000 with an estimated salvage value of $6,000. The truck was sold for $28,000. Assuming accumulated depreciation of $6,500 at the time of disposal, Barton recognized a(n) ______.

$2,500 gain Reason: $32,000 - $6,500 = $25,500 book value. Sales price $28,000 - $25,500 book value = $2,500 gain.

Able Company purchased a computer for $5,000. The estimated useful life is 4 years and the estimated salvage value is $200. Assuming Able uses the straight-line method for depreciation expense, the book value of the computer at the end of Yr. 2 equals ______.

$2,600

Buck Company purchased a computer and a desk for $9,000 cash. An appraiser determined the fair market values to be $3,000 for the computer and $7,000 for the desk. Using the relative market value, the computer should be allocated a cost of $___ and the desk should be allocated a cost of $___.

$2700; $6300

Able Company purchased a computer for $5,000. The estimated useful life is 4 years and the estimated salvage value is $200. Assuming Able uses the straight-line method for depreciation expense, the book value of the computer at the end of Yr. 1 equals ______.

$3,800 Reason: $5,000 - $1,200 accumulated depreciation = $3,800 book value

Able Company purchased a computer for $6,000. The estimated salvage value was $200. When accumulated depreciation totaled $4,500, the computer was sold for $1,200. As a result of the asset disposal, Able recognized a ______.

$300 loss

The Black Limo Company (BLC) purchased a limo on January 1 of Year 1. The limo cost $48,000. It had an expected useful life of 4 years and an $8,000 salvage value. BLC uses the straight-line depreciation method. At the beginning of Year 3, BLC changed the estimated useful life from 4 years to 7 years. Based on this information, the amount of depreciation expense shown on the Year 3 income statement will be ______.

$4,000 Reason: At the beginning of Year 3, the book value of the limo is $28,000 ($48,000 cost - $20,000 accumulated depreciation). The remaining useful life is 5 years (2 years from the original estimate + 3 additional years due to change in estimate). Revised depreciation expense is: ($28,000 book value - $8,000 salvage value) ÷ 5 years = $4,000.

The Black Limo Company (BLC) purchased a limo on January 1 of Year 1. The limo cost $48,000. It had an expected useful life of 4 years and a $8,000 salvage value. Assuming BLC uses double-declining-balance depreciation, depreciation expense for Year 3 is ______.

$4,000. Reason: ($48,000 cost - $36,000 accumulated depreciation) x 50% = $6,000 Year 3 Depreciation Expense per formula. However, total depreciable cost is $40,000 ($48,000 - $8,000). Since accumulated depreciation from Year 1 + Year 2 is $36,000, only an additional $4,000 of depreciation expense can be recognized.

Barton Enterprises purchased a delivery truck for $32,000. It had an expected useful life of 5 years and a $4,000 salvage value. Assuming Barton uses straight-line depreciation, depreciation expense for Year 2 is ______.

$5,600 Reason: $32,000 - $4,000 = $28,000 ÷ 5 years = $5,600 per year

Barton Enterprises purchased a delivery truck for $32,000. The estimated useful life was 4 years and the salvage value was set at $6,000. The company uses straight-line depreciation. At the end of year 1, the salvage value estimate was revised to $8,000. The revised depreciation expense for each of the remaining years is ______.

$5,833 Reason: ($32,000 - $6,000) ÷ 4 = $6,500 original depreciation. ($32,000 - $6,500) = $25,500 book value at the end of Year 1. ($25,500 - $8,000) ÷ 3 remaining years = $5,833.

The Black Limo Company (BLC) purchased a limo on January 1 of Year 1. The limo cost $48,000. It had an expected useful life of 4 years and a $8,000 salvage value. BLC uses straight-line depreciation. At the beginning of Year 3, BLC spent $6,000 to remodel the interior of the limo, thereby improving its quality. After the improvement, the cost of the asset shown on the Year 3 balance sheet was ______.

$54,000 Reason: The amount of the capital expenditure is added to the historical cost of the asset ($48,000 + $6,000 = $54,000).

Recognition of cash paid for a capital expenditure that improves the quality of an existing asset impacts the ______.

- Balance Sheet - Statement of Cash Flows

The recognition of depreciation expense affects the ______,

- Income statement - Balance sheet

Recognition of cash paid for a capital expenditure that increases the useful life of an existing asset impacts the ______.

- Statement of cash flows - Balance sheet

If a company deems it appropriate to change the estimated useful life or salvage value of a long-term asset, changes will be made to ______,

- future financial statements - current period financial statements

A capital expenditure that improves the quality of a building will ______

- increase the amount of the balance in the building account - increase depreciation expense over the remaining life of the building - be shown on the statement of cash flows as an outflow for investing activities.

A capital expenditure that extends the useful life of a building will ______.

- increase the book value of the building - decrease the amount of the balance in the accumulated depreciation account

Land ______.

- is a component of property, plant and equipment - has an infinite life

Property, plant, and equipment includes ______.

- land - buildings - computers

The cost of a building includes ______.

- purchase price - realtor commissions - renovation costs

Costs incurred ______ are capitalized in an asset account.

- that improve the quality of a long-term asset - that extend the life of a long-term asset

Which of the following statements is true regarding the units-of-production depreciation method?

A measure of the asset's productive capacity must be identified in order to use the units-of-production depreciation method.

True or false: Once the book value of an asset equals its salvage value, additional depreciation expense can only be recorded if the double-declining balance method is being used.

False

Which depreciation methods always recognizes more depreciation in the early years of an asset's useful life and less depreciation in the later years of its useful life?

Double-declining-balance

Which of the following depreciation methods produces the same amount of depreciation expense each accounting period?

Straight-line

Double-declining-balance depreciation results in ______.

a large amount of depreciation in the first year of an asset's life and progressively smaller levels of expense in each succeeding year

Costs that are incurred to keep an asset in good working order are ______.

always revenue expenditures

Depreciation expense is the ______.

amount of an asset's cost that is allocated to expense during an accounting period

When a company incurs costs for routine maintenance, the costs ______.

are expensed in the period incurred

Acquiring a group of assets in a single transaction is known as a(n) ___________.

basket purchase

Costs incurred which improve the quality of an asset are described as _____ expenditures.

capital

Another term for book value is ______.

carrying value

The term used to recognize expense for natural resources is ______.

depletion

The amount of an asset's cost that is allocated to expense during an accounting period is called ______ expense.

depreciation

Book value is the ______.

difference between an asset's cost as shown on the balance sheet and its accumulated depreciation

Assuming that an asset is used more in the early years and less in the later years of its estimated useful life, the amount of net income will be smoothed over the asset's useful life if the ______ method of deprecation expense is used.

double-declining balance

An accelerated depreciation method is called ______ depreciation.

double-declining-balance

The number of years a company expects to use a long-term asset is referred to as the __________ __________ __________.

estimated useful life

The salvage value of an asset is the ______.

expected market value of a fully depreciated asset

Property, plant and equipment is sometimes called plant assets or _____________ assets.

fixed

For tax purposes, the most desirable depreciation method is the one that produces the ______ amount of depreciation expense.

highest

An asset be recorded at the amount paid plus any costs necessary to get the asset in the location and condition for its intended use under the __________ _________ concept.

historical cost

An asset that has no physical form is known as a(n) ______ asset.

intangible

An asset that has no physical presence, but is evidenced by rights or privileges is know as a(n) _________ asset.

intangible

Natural resources are normally classified as ______.

long-term assets

The objective of tax reporting is to

minimize tax expense

Revisions of estimated life or salvage value frequently occur when ______.

new information surfaces

When assets are acquired in a basket purchase, accountants commonly allocate the purchase price using the __________ ________ _________ method.

relative market value

The method of deprecation chosen affects ______.

the timing, but not the total amount of expense recognized