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  • Accelerated depreciation method

    Allocates a higher depreciation in the earlier years of the asset's life and lower depreciation in later years

    Accumulated depreciation

    A contra asset account representing the total depreciation taken to date

    Activity-based method

    Allocates an asset's cost based on its use

    Addition

    Occurs when a new major component is added to an existing asset

    Amortization

    Allocation of the cost of an intangible asset over its service life

    Asset turnover

    Net sales divided by average total assets. Measures the sales per dollar of assets invested

    Basket purchase

    Purchase of more than one asset at the same time for one purchase price

    Big bath

    Recording all losses in one year to make a bad year even worse

    Book value

    Equal to the original cost of the asset minus the current balance in Accumulated Depreciation

    We record a long-term asset at what to get the asset ready for use?

    its cost plus all expenditures necessary to get the asset ready for use

    Capitalize

    Record an expenditure as an asset

    Capitalized interest

    Interest costs recorded as assets rather than interest expense

    Why do we use capitalized interest?

    Because of the matching principle. expenses are to be matched with the revenues they help to create.

    Copyright

    An exclusive right of protection given to the creator of a published work such as a song, film, book, or computer software

    Declining-balance method

    An accelerated depreciation method that records more depreciation in earlier years and less depreciation in later years

    Depletion

    Allocation of the cost of a natural asset over its service life

    Depreciation

    Allocation of the cost of a tangible asset over its service life

    We do not depreciate land because its life is indefinite. However, we do depreciate

    Land Improvements

    Franchise

    Local outlets that pay for the exclusive right to use the franchisor company's name and to sell its products within a specified geographical area

    Goodwill

    The value of a company as a whole, over and above the value of its identifiable net assets. Goodwill equals the purchase price less the fair value of the net assets acquired.

    Impairment

    Occurs when the future cash flows (future benefits) generated for a long-term asset fall below its book value (cost minus accumulated depreciation)

    Improvement

    The cost of replacing a major component of an asset

    Tangible Assets Include what?

    land, land improvements, buildings, equipment, and natural resources

    Intangible assets

    Long-term assets that lack physical substance, and whose existence is often based on a legal contract

    Land improvements

    Improvements to land such as paving, lighting, and landscaping that, unlike land itself, are subject to depreciation

    Material

    Large enough to influence a decision

    Natural resources

    Assets like oil, natural gas, and timber that we can physically use up or deplete

    Patent

    An exclusive right to manufacture a product or to use a process

    Profit margin

    Net income divided by net sales. Indicates the earnings per dollar of sales

    Repairs and maintenance

    Expenses that maintain a given level of benefits in the period incurred

    Residual value

    The amount the company expects to receive from selling the asset at the end of its service life. Also referred to as salvage value.

    Return on assets

    Net income divided by average total assets. Measures the amount of net income generated for each dollar invested in assets

    Service life

    How long the company expects to receive benefits from the asset before disposing of it. Also referred to as useful life.

    Straight-line method

    Allocates an equal amount of depreciation to each year of the asset's service life

    Trademark

    A word, slogan, or symbol that distinctively identifies a company, product, or service

    the cost of equipment is

    the actual purchase price plus all other costs necessary to prepare the asset for use.

    What are recurring costs?

    Cost that re-occur such as annual property insurance and annual property taxes

    Rather than including recurring costs as part of the cost of the equipment, we..

    expense them as we incur them, in order to properly match them with revenues generated during the same period. (matching Principle)

    In a basket purchase, you need to find out what information first?

    The estimated fair value of each asset.

    After you find the efv of each asset, you need to..

    Calculate total estimated fair value, find the allocation percentage by dividing each efv asset by the total estimated fair value, and use that percentage to multiply by the amount of basket purchase.

    The cost of ordinary repairs to equipment during the first year of service is added to the equipment account.

    True
    False

    False , Rather than including recurring costs as part of the asset, we expense them as we incur them, in order to properly match them with revenues generated during the same period.

    Industrial Metals purchases land, building, and equipment together for $1.2 million. The estimated fair values of the land, buildings, and equipment are $500,000, $800,000, and $200,000. What amount should be recorded in the separate account for the land?

    400,000

    This is calculated as [$500,000 / ($500,000 + $800,000 + $200,000)] x $1.2 million.

    Which of the following assets is not depreciated?

    Building
    Equipment
    Land
    Land Improvements

    Land

    Capitalized interest refers to interest costs that _____.

    are recorded as interest expense for a period
    are unlikely to be paid
    are added to the asset account
    help finance working capital requirements

    are added to the asset account

    Capitalized interest refers to interest costs we add to the asset account rather than recording them as interest expense.

    Which of the following is an example of an intangible asset?

    Natural gas deposits of an energy company
    Computer inventory of a software company
    Patents of a drug manufacturer
    Forest land owned by a furniture company

    Patents of a drug manufacturer

    Intangible assets include patents, trademarks, copyrights, franchises, and goodwill.

    What two ways do companies obtain intangable assets?

    (1) They purchase intangible assets from other entities, or (2) they create intangible assets internally, for instance, by developing a new product or process and obtaining a protective patent

    We record purchased intangible assets at..

    their original cost plus all other costs, such as legal and filing fees, necessary to get the asset ready for use.

    Filing fees include items such as

    the fee to record a copyright with the U.S. Copyright Office or the various fees to record a patent with the U.S. Patent and Trademark Office

    How do we record intangible assets that are developed internally ?

    Rather than recording these on the balance sheet as intangible assets, we expense to the income statement most of the costs for internally developed intangible assets as we incur these costs.

    when a firm develops a patent internally, it..

    expenses the research and development costs as it incurs them

    What is the exception to recording patents developed internally?

    legal fees. The firm will record in the Patent asset account the legal and filing fees to secure the patent, even if it developed the patented item or process internally.

    when a firm develops a trademark internally through advertising..

    it doesn't record the advertising costs as part of the cost of the intangible asset. Instead, it expenses the advertising costs in the income statement.

    A firm can only record what as an intangible asset in the Trademark asset account?

    attorney fees, registration fees, design costs, successful legal defense, and other costs directly related to securing the trademark

    To record the cost of a franchise, the franchisee records..

    the initial fee paid as an intangible asset and then expenses that cost over the life of the franchise agreement.

    we record goodwill as an intangible asset in the what only when we purchase it as part of the acquisition of another company?

    balance sheet as an asset

    Raider Company acquires Target Company by paying $60 million in cash. The fair values of all identifiable assets acquired are $90 million. In the purchase, Raider also assumes all of Target's long-term debt, which has a fair value of $35 million at the date of acquisition. Raider would report how much as goodwill? Why?

    5 million, which is the difference between the purchase price of $60 million and the $55 million fair value of net assets.

    a company must expense the costs generated internally. So, we record goodwill only when..

    it is acquired as part of the purchase of another business.

    The research and development (R&D) team at a pharmaceutical company is developing a drug for prostate cancer. Which of the following is true of the R&D costs incurred in developing this drug during the current year?

    They are recorded as an intangible asset in the balance sheet.
    They are treated in the same manner as intangible assets that are purchased.
    They are expensed directly in the income statement.
    They are expensed in the period in which benefits from R&D accrue.

    They are expensed directly in the income statement.
    (Think about the reporting rules for intangible assets that are developed internally.)

    We record goodwill as an intangible asset in the balance sheet only when _____.

    we purchase it as part of an acquisition
    it is internally generated
    it is more than 50 percent of assets
    we make an acquisition at a price below the fair value of net assets

    we purchase it as part of an acquisition
    (Imagine how difficult it would be to estimate the amount and future benefits of internally generated goodwill.)

    We record purchased intangible assets at their original cost plus all other costs, such as legal and filing fees, necessary to get the asset ready for use.

    True
    False

    True, Note that reporting purchased intangibles is similar to reporting purchased property, plant, and equipment.

    Light Company acquires Photon Company by paying $25 million in cash. The fair value of all identifiable assets acquired is $30 million. The fair value of all identifiable liabilities assumed is $8 million. What will be the amount of goodwill that Light Company would record as part of this acquisition?

    $0$
    5 million
    $3 million
    $2 million

    3 million

    Goodwill = $3 million ($25 million purchase price - $22 million fair value of net assets)

    When a firm develops a trademark internally through advertising, it records the advertising costs as part of the cost of the intangible asset.

    True
    False

    False, When a firm develops a trademark internally through advertising, it doesn't record the advertising costs as part of the cost of the intangible asset.

    After acquiring a long-term asset, the owners often incur additional expenditures for

    repairs and maintenance,

    We credit and debit repairs and maintenance costs to ..

    Credit Cash or perhaps to Accounts Payable or Notes Payable
    Debit either an asset or an expense.

    We __________ the costs of adding a new major component to an existing asset.

    Expense
    Capitalize

    Capitalize
    We should capitalize because they increase rather than maintain the futire benefits from the expedenture.

    If the defense of an intangible right is unsuccessful, then the firm should __________ the litigation costs.

    Expense
    Capitalize

    Expense
    There are no furture benefits because the defense in unsuccessful

    An __________ is the cost of replacing a major component of an asset.

    Addition
    improvement

    Improvement

    A company expenses the costs associated with purchasing a $100 bookcase in the current period, even though the bookcase has a useful life of 15 years. The company is using the __________ principle.

    Materiality
    Matching

    Materiality
    It relates to the size of an item that is likely to influence a decision.

    Windsor Hospital purchases $90,000 in surgical equipment on October 1, 2012. The useful life is estimated to be 5 years, and the residual value is estimated to be $10,000. What will be the depreciation expense reported for this equipment in 2012 if the hospital uses the straight-line method?

    $16,000
    $8,000
    $4,000
    $2,667

    4000

    Think of the number of months for which depreciation expense has to be calculated in 2012.

    Prime, Inc., purchases $100,000 in construction machinery on January 1, 2012. The useful life is estimated to be 8 years, and the residual value is estimated to be $20,000. What will be the depreciation rate if the company uses the double-declining method?

    25%
    40%
    20%
    12.5%

    25%

    Note that the double-declining-balance depreciation rate is double the straight-line rate.

    Sonic Corporation purchases a delivery truck for $24,000. The company expects the truck to be in service for 100,000 miles, and the residual value is estimated to be $4,000. What is the depreciation rate using activity-based depreciation?

    $0.20
    $0.24
    $0.40
    $0.10

    .20

    Use depreciable cost in your calculation.

    When a change in depreciation estimate is required, the company adjusts depreciation in prior periods.

    True
    False

    False

    When a change in estimate is required, the company changes depreciation in current and future years, but not in prior periods.

    Prime, Inc., purchases $100,000 in construction machinery on January 1, 2012. The useful life is estimated to be 8 years, and the residual value is estimated to be $20,000. If the company uses the double-declining method, the asset will reach its residual value in the ____ year.

    seventh
    eighth
    sixth
    fifth

    Sixth

    Note that if the estimated residual value is high enough, the asset will reach its residual value in fewer years than its expected service life.

    Double-declining method produces a higher net income than straight-line method in the earlier years of an asset's life.

    True
    False

    False

    Straight-line produces a higher net income than accelerated methods in the earlier years of an asset's life.

    Pic for next problems

    Answers for next problems

    1. debit accumulated depreciation for 5000
    debit loss 5000
    credit equipment 10000

    2. credit equipment 10000
    debit cash 6000
    debit accumulated depreciation 5000
    credit gain 1000

    3. Debit cash 20,000
    credit equipment 100000
    debit loss 10000
    debit accumulated depreciation 70,000

    4.Assets increase by 10,000
    Total Stockholders equity increases by 10,000

    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?

    $5,600.
    $5,700.
    $5,900.
    $6,300.

    5700

    Add all the costs except the ticket as it is not a cost necessarty to get the asset ready for use.

    $5,000 + $400 + $300 = $5,700.

    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?

    $80,000.
    $90,000.
    $100,000.
    $800,000.

    80000

    $800,000 x ($100,000/$100,000 + $700,000 + $200,000) = $80,000.

    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?

    $8,000.
    $7,000.
    $5,600.
    $6,400.

    $6,400

    $40,000 x 20% = $8,000 depreciation in the first year.
    ($40,000 - 8,000) x 20% = $6,400 depreciation in the second year.
    Depreciation rate = 2/10 = 20%.

    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?

    Gain, $22,000.
    Loss, $18,000.
    Gain, $5,000.
    Loss, $3,000.

    3000

    ($48,000 - $8,000)/8 = depreciation of $5,000 per year. After three years, the book value would be [$48,000 - ($5,000 x 3 years)] = $33,000. The truck was sold for $30,000 or a $3,000 loss below book value.

    Fresh Veggies, Inc. (FVI), purchases land and a warehouse for $500,000. In addition to the purchase price, FVI makes the following expenditures related to the acquisition: broker's commission, $30,000; title insurance, $2,000; and miscellaneous closing costs, $5,000. The warehouse is immediately demolished at a cost of $30,000 in anticipation of building a new warehouse.


    Determine the amount FVI should record as the cost of the land

    Purchase price of land(+ warehouse to be removed) 500000
    Broker's commission 30,000
    Title insurance 2,000
    Closing costs 5,000
    Cost of removing the warehouse 30,000

    --------------------------------------------------------------------------------

    Total cost of the land $567,000

    Whole Grain Bakery purchases an industrial bread machine for $25,000. In addition to the purchase price, the company makes the following expenditures: freight, $1,500; installation, $3,000; testing, $1,000; and property tax on the machine for the first year, $500.

    Purchase price $25,000
    Freight 1,500
    Installation 3,000
    Testing 1,000

    Total cost of the bread machine $30,500

    The $500 property tax is a recurring cost that benefits the company in the current year. The Whole Grain Bakery will report the $500 as property tax expense over the first year.

    Kosher Pickle Company acquires all the outstanding stock of Midwest Produce for $14 million. The fair value of Midwest's assets is $11.3 million. The fair value of Midwest's liabilities is $1.5 million.

    Purchase price $14.0
    Less: Fair value of assets acquired 11.3
    Less: fair value of liabilities assumed (1.5)
    (11.3-1.5)=9.8
    Fair value of identifiable net assets 9.8
    (14-9.8)=4.2
    Amount paid for goodwill $ 4.2

    El Tapitio purchased restaurant furniture on September 1, 2012, for $35,000. Residual value at the end of an estimated 10-year service life is expected to be $5,000.


    Calculate depreciation expense for 2012 and 2013, using the straight-line method, and assuming a December 31 year-end

    Depreciation expense 2012 $1000 2013 $3000

    Explanation:
    Year
    2012 ($35,000 - $5,000)/10 = 3,000 × 4/12 = $1,000

    2013 ($35,000 - $5,000)/10 = $3,000

    Hawaiian Specialty Foods purchased equipment for $20,000. Residual value at the end of an estimated four-year service life is expected to be $2,000. 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.


    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.

    (1) Straight-line
    Depreciation expense = ($20,000 - $2,000)/4 = $4,500

    (2) Double-declining-balance
    Depreciation expense = $20,000 × 2/4 = $10,000

    (3) Activity-based
    Depreciation expense = ($20,000 - $2,000)/10,000 hours
    = $1.80 per hour × 2,200 hours
    = $3,960

    in activity based you divide total depreciation expense by total hours used to find the depreciation rate. then multiply that rate by the total number of hours for the year you are looking for. In this case it is year one.

    Orion Flour Mills purchased a new machine and made the following expenditures:


    Purchase price $65,000
    Sales tax 5,500
    Shipment of machine 900
    Insurance on the machine for the first year 600
    Installation of machine 1,800

    The machine, including sales tax, was purchased on account, with payment due in 30 days. The other expenditures listed above were paid in cash.


    Required:
    Record the above expenditures for the new machine.

    General Journal Debit Credit
    Equipment 73200
    Prepaid insurance 600
    Cash 3300
    Accounts payable 70500

    Explanation:
    Purchase price $ 65,000
    Sales tax 5,500
    Shipping 900
    Installation 1,800


    Total cost $ 73,200


    With the exception of the $600 annual insurance, each of the expenditures described is necessary to bring the machine to its condition and location for use. Orion will initially report the $600 insurance amount as prepaid insurance and expense over the first year of coverage.

    Which balance method do you not substract the residual value from?

    Double-Declining

    Abbott Landscaping purchased a tractor at a cost of $32,000 and sold it three years later for $16,000. Abbott recorded depreciation using the straight-line method, a five-year service life, and a $2,000 residual value. Tractors are included in the Equipment account.

    Record the sale..

    Debit Credit
    Cash 16000
    Accumulated depreciation 18000
    Equipment 32000
    Gain 2000

    Explanation:
    Accumulated depreciation: ($32,000 - $2,000) / 5 = $6,000 year × 3 years = $18,000

    since you first purchased it for 32000 and when you sell it, accumulated depreciation was 18000.... 32000-18000=14000.
    so its now worth 14000. you sold it for 16000 this is a 2000 dollar gain. Gains are always Credit.

    Abbott Landscaping purchased a tractor at a cost of $32,000 and sold it three years later for $16,000. Abbott recorded depreciation using the straight-line method, a five-year service life, and a $2,000 residual value. Tractors are included in the Equipment account.


    Assume the tractor was sold for $10,000 instead of $16,000. Record the sale.

    Debit Credit
    Cash 10000
    Accumulated depreciation 18000
    Equipment 32000
    loss 4000

    It was worth 14000, if you sold it for 10000 this is a loss of 4000. losses are always debit

    Salad Express exchanged land it had been holding for future plant expansion for a more suitable parcel of land along distribution routes. Salad Express reported the old land on the previously issued balance sheet at its original cost of $60,000. According to an independent appraisal, the old land currently is worth $112,000. Salad Express paid $14,000 in cash to complete the transaction.

    What is the fair value of the new parcel of land received by Salad Express?

    Find the fair value of the new land


    Fair value of the old land $ 112,000
    Cash paid to complete the purchase 14,000

    112000+14000

    Fair value of the new land $ 126,000

    Salad Express exchanged land it had been holding for future plant expansion for a more suitable parcel of land along distribution routes. Salad Express reported the old land on the previously issued balance sheet at its original cost of $60,000. According to an independent appraisal, the old land currently is worth $112,000. Salad Express paid $14,000 in cash to complete the transaction.


    Record the exchange

    Journal entry to record exchange Debit Credit
    Land, new 126000
    Land, old 60000
    Cash 14000
    Gain 52000

    Your Gain is the new land minus the price you paid for it previously(old land) and the cash you spent on the transfer.

    Several years ago, Health Services acquired a helicopter for use in emergency situations.

    Required:
    Indicate whether Health Services should capitalize or expense each of the following expenditures related to the helicopter delivery operations in 2012:

    1. Overhauled the engine at a cost of $7,500. Health Services estimated the work would increase the service life for an additional five years.
    2. Painted the Health Services company logo on the helicopter at a cost of $6,000.
    3. Added new emergency health equipment to the helicopter for $25,000.
    4. Modified the helicopter to reduce cabin noise by installing new sound barrier technology at a cost of $15,000.
    5. Paid insurance on the helicopter for 2012, which increased 15% over the prior year to $9,000.
    6. Performed annual maintenance and repairs at a cost of $39,000.

    1. capitalize
    2. capitalize
    3. capitalize
    4. capitalize
    5. expense
    6. expense

    We capitalize an expenditure as an asset if it benefits future periods. We expense an expenditure if it benefits only the current period

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