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The CEO, as head of the company, is ultimately responsible for the firm's accounting.
We record a long-term asset at its cost less all expenditures necessary to get the asset ready for use.
We use the term capitalize to describe recording an expenditure as an expense.
Cash received from the sale of salvaged materials increases the total cost of land.
Land improvements are recorded separately from the land itself because, unlike land, these assets are subject to depreciation.
Capitalized interest refers to interest costs we add to the asset account rather than recording as interest expense.
Many intangible assets are not recorded on the balance sheet at their estimated market values.
We record purchased intangible assets at their original cost plus all other costs necessary to get the asset ready for use.
Most of the costs associated with internally developed intangible assets are recorded as intangible assets on the balance sheet.
Research and development costs incurred in developing a patent internally are not recorded as an intangible asset in the balance sheet, but rather are expensed directly in the income statement.
International accounting standards allow firms to record development costs that benefit future periods as an intangible asset.
Advertising costs that increase the value of trademarks are recorded to the asset account entitled Trademarks.
We expense internally generated intangible assets, such as research and development and advertising costs, as we incur them.
A patent is an exclusive right to a published work such as a song, film, or painting.
A copyright is an exclusive right of protection given to the creator of a published work such as a song, film, painting, photograph, book, or computer software.
A trademark is a word, slogan, or symbol that distinctively identifies a company, product, or service.
When a firm develops a trademark internally through advertising, it does not record the advertising costs as an intangible asset, but rather expenses them in the income statement.
The franchisee's initial fee is recorded as an expense on the income statement.
We record goodwill as an intangible asset in the balance sheet only when we purchase it as part of the acquisition of another company.
The acquiring company records goodwill equal to the purchase price less the book value of the net assets acquired.
We capitalize repairs and maintenance expenditures because they maintain a given level of benefits.
If a firm successfully defends an intangible right, it should expense the litigation costs as incurred.
If the defense of an intangible right is unsuccessful, then the firm should expense the litigation costs as incurred because they provide no future benefit.
Depreciation in accounting is the process of allocating to expense the cost of an asset over its service life.
Depreciation in accounting records the decrease in value of an asset.
Accumulated Depreciation is a liability account that is increased by credits.
Book value is equal to the original cost of the asset minus the current balance in Accumulated Depreciation.
The Accumulated Depreciation account allows us to reduce the carrying value of assets through depreciation, while maintaining the original cost of each asset in the accounting records.
The service life of an asset is always equal to the full life of the asset.
Residual value, also referred to as salvage value, is the amount the company expects to receive from selling the asset at the end of its service life.
With the straight-line depreciation method, we allocate an equal amount of the depreciable cost to each year of the asset's service life.
When a change in estimate is required, the company changes depreciation in prior, current and future years.
Straight-line depreciation assumes that the benefits we derive from the use of an asset are the same each year.
Declining-balance depreciation will be lower than straight-line depreciation in earlier years, but higher in later years.
In an activity-based depreciation method, we allocate an asset's cost based on its use.
We allocate natural resources to expense through a process known as "depletion."
Straight-line produces a lower net income than accelerated methods in the earlier years of an asset's life.
Straight-line, declining-balance, and activity-based depreciation all are acceptable depreciation methods for both financial reporting and tax reporting.
Most companies use straight-line amortization for intangibles and credit the amount of amortization to the intangible asset account itself rather than to Accumulated Amortization.
Goodwill is amortized over its estimated useful life.
Intangible assets with an indefinite useful life (goodwill and most trademarks) are not amortized.
We record a gain if we sell an asset for less than book value.
We record a loss if we sell an asset for less than book value.
A more comparable measure of profitability than income is return on assets, which equals net income divided by average total assets.
Profit margin is net income divided by net sales.
Asset turnover is net sales divided by ending total assets.
Management must review long-term assets for impairment when events or changes in circumstances indicate that book value might not be recoverable.
Impairment occurs when the future cash flows generated for a long-term asset fall below its fair value.
An impairment loss is equal to the amount by which book value exceeds the fair value of a long-term asset.
Taking a "big bath" is recording all losses in one year to make a bad year even worse.
Real Angus Steakhouse purchased land for $75,000 cash. They also incurred commissions of $4,500, property taxes of $5,000, and title insurance of $800. The $5,000 in property taxes includes $4,000 in back taxes paid by Real Angus on behalf of the seller and $1,000 due for the current year after the purchase date. For what amount should Real Angus Steakhouse record the land?
Which of the following would be recorded as land improvements?
Bad Brads BBQ purchased a piece of equipment by paying $5,000 cash. They also incurred a shipping cost of $400 to get the equipment to its factory. The fair value of this equipment is $7,000. For what amount should Bad Brads BBQ record the equipment?
Wiley Company purchased new equipment for $60,000. Wiley paid cash for the equipment. Other costs associated with the equipment were: transportation costs, $1,000; sales tax paid $3,000; and installation cost, $2,500. The cost recorded for the equipment was:
Cowboy Development incurred the following costs associated with the purchase of a piece of land that it will use to re-build an office building:
Bahama Catering purchased a commercial dishwasher by paying cash of $5,000. The dishwasher's fair value on the date of the purchase was $5,600. The company incurred $400 in transportation costs, $300 installation fees, and paid a $200 fine for illegal parking while the dishwasher was being delivered. For what amount will Bahama record the dishwasher?
The following financial information is from Cook Company:
Capital Construction purchased a 3-acre tract of land for a building site for $350,000. The company demolished the old building at a cost of $12,000, but was able to sell scrap from the building for $1,500. The cost of title insurance was $900 and attorney fees for reviewing the contract was $500. Property taxes paid were $3,000, of which $250 covered the period after the purchase date. The capitalized cost of the land is:
On July 1, 2012, Landon Co. purchased a $500,000 tract of land that is intended to be the site of a new office complex. Landon incurred additional costs and realized salvage proceeds during 2012 as follows:
Fruitasia purchased land, a building, and equipment for $800,000. The estimated fair values of the land, building, and equipment are $100,000, $700,000, and $200,000, respectively. At what amount would the company record the land?
Productive assets that are physically used up, or depleted are:
An exclusive 20-year right to manufacture a product or to use a process is a:
The exclusive right to benefit from a creative work, such as a film, is a:
A word, slogan, or symbol that distinctively identifies a company, product, or service is a:
Research and development costs should be:
Morgan Pharmaceutical spends $50,000 this year in research and development for a new drug to cure liver damage. By the end of the year, management feels confident that the new drug will gain FDA approval and lead to higher future sales. What impact will the $50,000 spending have on this year's financial statements?
Aspen, Inc. developed a new horse transport device and incurred research and development costs of $250,000. Rather than continue with their own research, Aspen decided to purchase a patent for a similar design from Vail, Inc. for $350,000. What are the total assets and expenses for these developments?
Research and development costs should be capitalized when the:
Bio-Lab Pharmaceuticals carried on a project to develop a new drug that dramatically shortened the recovery period for flu infection. The project cost the company $150,000 before Bio-Lab abandoned the project due to the slim possibility to gain FDA approval. Bio-Lab then spent $300,000 on another project developing a kind of shot that achieves the same goal for flu recovery, and the company is confident in gaining FDA approval for the new shot and in making profits out of the shot. What amount would be expensed?
Goodwill is: a. Amortized over the greater of its estimated life or forty years. b. Only recorded by the seller of a business. c. The excess of the fair value of a business as a whole over the fair value of all net identifiable assets. d. Recorded when created internally through advertising expense.
The balance sheet of Cattleman's Steakhouse shows assets of $86,400 and liabilities of $15,000. The fair value of the assets is $90,000 and the fair value of its liabilities is $15,000. Longhorn paid Cattleman's $95,000 to acquire it. Longhorn should record goodwill on this purchase of:
Northern purchased the entire business of Southern including all its assets and liabilities for $600,000. Below is information related to the two companies:
Lake Incorporated purchased all of the outstanding stock of Huron Company paying $850,000 cash. Lake assumed all of the liabilities. Book values and fair values of acquired assets and liabilities were:
Which of the following subsequent expenditures would be capitalized?
The purchase of a new cooling system for $150,000 to upgrade an office building owned by the company would be accounted for as:
Woods Company made an ordinary repair to a delivery truck at a cost of $500. Woods' accountant debited the asset account, Equipment. Was this treatment an error, and if so, what will be the effect on the financial statements of Woods?
The replacement of a major component increased the productive capacity of equipment from 10 units per hour to 18 units per hour. The expenditure for the replacement component should be debited to:
Which one of the following regarding the book value of an asset is correct?
Which of the following is considered a "contra" account?
The factors used to compute depreciation expense are an asset's:
The depreciable cost used in calculating depreciation expense is:
Using the straight-line method, depreciation expense for 2012 would be:
Using the straight-line method, the book value at December 31, 2012 would be:
Using the straight-line method, depreciation expense for 2013 and the book value at December 31, 2013 would be:
Using the double-declining balance method, depreciation expense for 2012 would be:
Using the double-declining balance method, depreciation expense for 2013 would be:
Using the double-declining balance method, the book value at December 31, 2013 would be:
A machine has a cost of $15,000, an estimated residual value of $3,000, and an estimated useful life of four years. The machine is being depreciated on a straight-line basis. At the end of the second year, what amount will be reported for accumulated depreciation?
A building was purchased for $50,000. The asset has an expected useful life of 6 years and depreciation expense each year is $8,000 using the straight-line method. What is the residual value of the building?
Bricker Enterprises purchased a machine for $100,000 on October 1, 2012. The estimated service life is ten years with a $10,000 residual value. Bricker records partial-year depreciation based on the number of months in service. Depreciation expense for 2012, using straight-line, is:
Schager Company purchased a computer system on January 1, 2012, at a cost of $40,000. The estimated useful life is 10 years, and the estimated residual value is $5,000. Assuming the company will use the double-declining-balance method, what is the depreciation expense for the second year?
Shasta Exploring purchases a piece of equipment on January 1, 2012, for $50,000 and the equipment has an expected useful life of five years. Its residual value is estimated to be $4,000. Assuming Shasta uses the double-declining balance depreciation method, what is the depreciation expense for the equipment for 2013?
During 2012 and 2013, Supplies, Inc. drove the truck 15,000 and 22,000 miles, respectively, to deliver merchandise to its customers. The company originally purchased the truck at the beginning of 2012 for $175,000. If the truck has an estimated life of 10 years and 300,000 miles, with an estimated residual value of $25,000, what amount of deprecation expense should Supplies, Inc. record in 2013 using the activity method?
Crestview Estates purchased a tractor on January 1, 2012, for $65,000. The tractor's useful life is estimated to be 30,000 miles and has a residual value of $5,000. If Crestview used the tractor 5,000 miles in 2012 and 3,000 miles in 2013, what is the balance for accumulated depreciation at the end of 2013 using the activity method?
Nanki Corporation purchased equipment at the beginning of 2012 for $650,000. In 2012 and 2013, Nanki depreciated the asset on a straight-line basis with an estimated useful life of 8 years and a $10,000 residual value. In 2014, due to changes in technology, Nanki revised the useful life to a total of six years (four more years) with zero residual value. What depreciation expense would Nanki record for the year 2014 on this equipment?
Which of the following intangible assets is not amortized?
Which of the following statements is true regarding the amortization of intangible assets?
Bricktown Exchange purchases a copyright on January 1, 2012, for $50,000. The copyright has a remaining legal life of 25 years, but only an expected useful life of five years with no residual value. Assuming the company uses the straight-line method, what is the amortization expense for the year ended December 31, 2012?
Berry Co. purchases a patent on January 1, 2012, for $40,000 and the patent has an expected useful life of five years with no residual value. Assuming Berry Co. uses the straight-line method, what is the amortization expense for the year ended December 31, 2013?
Berry Co. purchases a patent on January 1, 2012, for $40,000 and the patent has an expected useful life of five years with no residual value. Assuming Berry Co. uses the straight-line method, what is the carrying value of the patent on December 31, 2013?
Gains on the sale of fixed assets for cash:
Abbott Company purchased a computer that cost $10,000. It had an estimated useful life of 5 years and no residual value. The computer was depreciated by the straight-line method and was sold at the end of the fourth year of use for $3,000 cash. Abbott should record:
On January 1, 2010, Jacob Inc. purchased a commercial truck for $48,000 and uses the straight-line depreciation method. The truck has a useful life of eight years and an estimated residual value of $8,000. On December 31, 2012, Jacob Inc. sold the truck for $30,000. What amount of gain or loss should Jacob Inc. record on December 31, 2012?
Alliance Products purchased equipment that cost $120,000. It had an estimated useful life of four years and no residual value. The equipment was depreciated by the straight-line method and was sold at the end of the third year of use for $25,000 cash. Abbott should record:
Career Services, Incorporated sold some office equipment for $52,000 on December 31, 2012. The journal entry to record the sale would include which of the following if the original cost of the equipment was $80,000 with a residual value of $5,000 and a useful life of 10 years? Assume the machine was purchased on January 1, 2009 and depreciated using the straight-line method.
ABO purchased a truck at the beginning of 2012 for $140,000. They sold the truck at the end of 2013 for $95,000. If the expected life of the truck was six years with a residual value of $20,000 and ABO uses straight-line depreciation, which of the following is true regarding the entry to record the sale of the truck?
Oregon Adventures purchased equipment at the beginning of 2012 for $80,000. They sold the equipment at the end of 2014 for $45,000. If the expected life of the equipment was seven years with a residual value of $10,000, and they use straight-line depreciation, which of the following is true regarding the entry to record the sale of the equipment?
The return on assets is calculated as:
The return on assets is equal to the:
The balance sheet of Hidden Valley Farms reports total assets of $450,000 and $550,000 at the beginning and end of the year, respectively. Net income and sales for the year are $100,000 and $800,000, respectively. What is Hidden Valley's return on assets?
The balance sheet of Hidden Valley Farms reports total assets of $450,000 and $550,000 at the beginning and end of the year, respectively. Net income and sales for the year are $100,000 and $800,000, respectively. What is Hidden Valley's profit margin?
The balance sheet of Hidden Valley Farms reports total assets of $450,000 and $550,000 at the beginning and end of the year, respectively. Net income and sales for the year are $100,000 and $800,000, respectively. What is Hidden Valley's asset turnover?
The balance sheet of Hidden Valley Farms reports total assets of $450,000 and $550,000 at the beginning and end of the year, respectively. The return on assets for the year is 10%. What is Hidden Valley's net income for the year?
Recognition of impairment for long-term assets is required if book value exceeds:
The amount of impairment loss is the excess of book value over:
In testing for recoverability of an operational asset, an impairment loss is required if the:
Wilson Inc. owns equipment for which it paid $70 million. At the end of 2012, it had accumulated depreciation on the equipment of $12 million. Due to adverse economic conditions, Wilson's management determined that it should assess whether an impairment should be recognized for the equipment. The estimated future cash flows to be provided by the equipment total $60 million, and its fair value at that point totals $50 million. Under these circumstances, Wilson:
Leonard's Jewelry owns a patent with a carrying value of $50 million at the end of 2012. Due to adverse economic conditions, Leonard's management determined that it should assess whether an impairment should be recognized for the patent. The estimated future cash flows to be provided by the patent total $43 million, and its fair value at that point totals $35 million. Under these circumstances, Leonard:
C-Stop reports the following information at year-end:
Maple Inc. has the following information regarding its assets:
Soccer Wholesale purchased land and a warehouse for $800,000. In addition to the purchase price, Soccer Wholesale makes the following expenditures related to the acquisition: broker's commission, $48,000; title insurance, $3,000; and miscellaneous closing costs, $8,000. The warehouse is immediately demolished at a cost of $80,000 in anticipation of building a new warehouse. Determine the amount Soccer Wholesale should record as the cost of the land.
Holiday Laboratories purchased a high speed industrial centrifuge at a cost of $420,000. Shipping costs totaled $15,000. Foundation work to house the centrifuge cost $8,000. An additional water line had to be run to the equipment at a cost of $3,000. Labor and testing costs totaled $6,000. Materials used up in testing cost $3,000. What is the total cost of the equipment? How much of this amount should be expensed immediately?
In 2012, Sam's Salads had the following expenditures related to developing its trademark.
On March 31, 2012, the New Harvest Bakery acquired all the outstanding common stock of Red Rock Bakery for $68,000 in cash. The book values and market values of Red Rock's assets and liabilities were as follows:
Western Wholesale Foods incurs the following expenditures during the current fiscal year: (1) Salaries for the repair technicians, $155,000; (2) remodeling of the executive offices, $84,000; (3) annual maintenance costs related to its machinery, $72,900; (4) improvement of the production line resulting in an increase in productivity, $38,000; and (5) addition of a sprinkler system to the manufacturing facility to reduce the risk of fire damage, $35,000. How should Western account for each of these expenditures?
Little King Sandwiches made the following expenditures related to its restaurant: 1. Replaced the heating and air conditioning system at a cost of $15,000. 2. Remodeled the restaurant building. The total cost of the project was $150,000. 3. Performed annual building maintenance at a cost of $47,000. 4. Paid annual insurance premium on the property for the coming year, $7,700. 5. Purchased a new delivery truck, $22,500. 6. Landscaped the property and added outdoor lights, $9,000. Little King credits cash for each of these expenditures. Indicate the account to be debited for each expenditure.
Taco Hut purchased equipment on May 1, 2012, for $15,000. Residual value at the end of an estimated 8 year service life is expected to be $3,000. Calculate depreciation expense using the straight-line method for 2012 and 2013, assuming a December 31 year-end.
China Dragon purchased new restaurant equipment on September 1, 2012, for $8,000. Residual value at the end of an estimated 5 year service life is expected to be $2,000. Calculate depreciation expense using the straight-line method for 2012 and 2013, assuming a December 31 year-end.
Stephan's Resorts purchased equipment for $40,000. Residual value at the end of an estimated four- year service life is expected to be $8,000. The machine operated for 2,200 hours in the first year and the company expects the machine to operate for a total of 10,000 hours over its four year life. Calculate depreciation expense for the first year using each of the following depreciation methods: (1) straight-line, (2) double-declining-balance, and (3) activity-based.
Chubbyville purchases a delivery van for $23,500. Chubbyville estimates that at the end of its four-year service life, the van will be worth $2,500. During the four-year period, the company expects to drive the van 105,000 miles. Calculate annual depreciation for the four-year life of the van using each of the following methods. Round all amounts to the nearest dollar. 1. Straight line. 2. Double-declining-balance. 3. Activity-based. Actual miles driven each year were 24,000 miles in Year 1; 26,000 miles in Year 2; 22,000 miles in Year 3; and 25,000 miles in Year 4. Note that actual total miles of 97,000 fall short of expectations by 8,000 miles.
Burger Chef acquired a delivery truck on March 1, 2012 for $26,000. The company estimates a residual value of $2,000 and a 6-year service life. It expects to drive the truck 80,000 miles. Actual mileage was 12,000 miles in 2012 and 16,000 miles in 2013. Calculate depreciation expense using the activity-based method for 2012 and 2013, assuming a December 31 year-end.
At the beginning of the year, Big Time Tires acquired 100% of the common stock of Discount Tires. The purchase price allocation included the following items: $800,000, patent; $300,000, trademark considered to have an indefinite useful life; and $2 million, goodwill. Big Time Tire's policy is to amortize intangible assets with finite useful lives using the straight-line method, no residual value, and a five-year service life. What is the total amount of amortization expense that would appear in Big Time Tire's income statement for the first year related to these items?
On January 1, 2012, The Donut Stop purchased a patent for $80,000. The remaining legal life is 20 years, but the company estimates the patent will be useful for only five more years. In January 2013, the company incurred legal fees of $25,000 in successfully defending a patent infringement suit. The successful defense did not change the company's estimate of useful life. The Donut Stop's year end is December 31st. Record the purchase and amortization in 2012 and the legal fees and amortization in 2013. What is the balance in the Patents account at the end of 2013?
The Bomb Pop Corporation sold ice cream equipment for $16,000. They originally purchased the equipment for $40,000, and depreciation through the date of sale totaled $25,000. What was the gain or loss on the sale of the equipment? Record the sale of the equipment.
Strawberry Fields purchased a tractor at a cost of $38,000 and sold it two years later for $25,000. Strawberry Fields recorded depreciation using the straight-line method, a five-year service life, and an $8,000 residual value. What was the gain or loss on the sale? Record the sale.
Nate's Hot Dogs exchanges long-term assets with Lizzy's Lemonade. Nate receives a delivery truck and gives up a piece of machinery. The fair value and book value of the machinery were $27,000 and $25,000 (original cost of $35,000 less accumulated depreciation of $10,000), respectively. Since the delivery truck was worth $32,000, Nate paid an additional $5,000 in cash to Lizzy. Record the exchange for Nate's Hot Dogs.
New World Deli exchanged land for a more suitable parcel of land to be used for a new restaurant. New World Deli reported the old land at its original cost of $85,000. According to an independent appraisal, the old land currently is worth $110,000. New World Deli paid $15,000 in cash to complete the transaction. Record the exchange.
Allied Construction and Axis Construction reported the following information in their annual financial statements ($ in millions):
ACME Drilling is evaluating an off-shore oil drilling platform for possible impairment. They estimate the following: book value, $18.5 million; fair value, $12 million; sum of estimated future cash flows generated from the oil drilling platform, $16 million. What amount of impairment loss, if any, should they record?
Northwest Catering owns and operates several restaurant services in Oregon, Washington, and Idaho. One restaurant chain has experienced sharply declining profits. The company's management has decided to test the operational assets of the restaurants for possible impairment. The relevant information for these assets is presented below:
If a company initially records an expense incorrectly as an asset, explain how this mistake affects the income statement and the balance sheet.
Why don't we depreciate land? What are land improvements? Why do we record land and land improvements separately?
Explain how the accounting treatment differs between purchased and internally developed intangible assets.
Contrast the effects of the straight-line, declining-balance, and activity-based depreciation methods on annual depreciation expense.
Which depreciation method is most common for financial reporting? Which depreciation method is most common for tax reporting? Why do companies choose these methods?
Listed below are five terms followed by a list of phrases that describe or characterize the terms. Match each phrase with the best term placing the letter designating the term in the space provided. 1. Fran chise An exclusive right of protection given to the creator of a published work such as a song, film, painting, photograph, book, or computer software. __ __ 2. Trade mark Payment for the exclusive right to use the company's name and to sell its products within a specified geographical area. __ __ 3. Patent The purchase price of a company less the fair value of the net assets acquired. __ __ 4. Goo dwill An exclusive right to manufacture a product or to use a process. __ __ 5. Copy right A word, slogan, or symbol that distinctively identifies a company, product, or service. __ __
Listed below are five terms followed by a list of phrases that describe or characterize the terms. Match each phrase with the best term placing the letter designating the term in the space provided. 1. Capitalize Occurs when we add a new major component to an existing asset. __ __ 2. Improvement The cost of replacing a major component of an asset. __ __ 3. Addition Large enough to influence an investor or creditor's decision. __ __ 4. Repairs and maintenance Recording an expenditure as an asset. __ __ 5. Materiality Expenses after acquisition that maintain a given level of benefits. __ __
Listed below are five terms followed by a list of phrases that describe or characterize the terms. Match each phrase with the best term placing the letter designating the term in the space provided.
Listed below are five terms followed by a list of phrases that describe or characterize the terms. Match each phrase with the best term placing the letter designating the term in the space provided. 1. Declining- balance method The process of recording expense for natural resources. __ __ 2. Amortization Allocates an asset's cost based on its use. __ __ 3. Activity- based method An accelerated depreciation method that records more depreciation in earlier years and less depreciation in later years. __ __ 4. Straight- line method Allocating the cost of an intangible asset over its service life. __ __ 5. Depletion Allocates an equal amount of depreciation to each year of the asset's service life. __ __
Listed below are five terms followed by a list of phrases that describe or characterize the terms. Match each phrase with the best term placing the letter designating the term in the space provided. 1. Asset turnover Net sales divided by average total assets; which measures the sales per dollar of assets invested. __ __ 2. Return on assets Net income divided by net sales; indicates the earnings per dollar of sales. __ __ 3. Profit margin Net income divided by average total assets; measures the amount of net income generated for each dollar invested in assets. __ __ 4. Big bath Recording all losses in one year to make a bad year even worse. __ __ 5. Impai rment Occurs when the future cash flows (future benefits) generated for a long-term asset fall below its book value (cost minus accumulated depreciation). __ __