Assets and Related Topics

Question 1

How is double-declining-balance depreciation expense calculated?

How is salvage value treated?

Answer 1

Depreciation expense = 2 * (1 / N) * (Cost - Accumulated depreciation)

Under declining balance depreciation, the salvage value is not included in the computation of depreciation expense.

Question 2

Which of the following costs should be charged to land?

I. Title and recording fees.
II. Clearing of trees and grading. 
III. Interest on loan to purchase land. 
IV. Architect's fees.
V. Installation of sewage system.

Answer 2

Items I and II should be charged to Land. Any usual and necessary costs to clear and grade the land is properly included in the Land account. Interest should only be capitalized in connection with a “discrete manufacturing activity,” so interest incurred to acquire land should be expensed when incurred. Architect’s fees should be charged to Buildings. A sewage system is a Land Improvement.

Question 3

How are computer software costs treated?

1) When are these costs expensed?
2) When are these costs capitalized?
3) When are these costs amortized?
4) At what amount $ are they reported?

Answer 3

The costs are expensed until the point of technological feasibility, after which they are capitalized.

Amortization begins once the product is released for sale (to be licensed).

Capitalized software costs are reported at the lower of cost or market (net realizable value).

Question 4

Which of the following costs should be charged to land and land improvements?

I. Razing the old building
II. Sale of old building materials
III. Site development

Answer 4

All are included in land and land improvement. Not building.

Note: Digging the hole for the new building is included in Building.