Ch 8

Question 0

2 possible classifications for operating assets?

Answer 0

Tangible or intangible

Question 1

Operating assets? What must investors be able to do?

Answer 1

Operating assets are major productive assets of many companies

Investors must be able to evaluate if these assets will
Generate return on their investments

Question 2

Tangible assets

Answer 2

Property, plant, equipment, fixed assets

Question 3

Intangible assets

Answer 3

Goodwill, patents, copyrights, intellectual property

Question 4

Acquisition cost AKA historical cost or original cost

Answer 4

Amount that includes all cost normally necessary to

Acquire an asset and prepare for its intended use

Question 5

4 normal costs associated with acquiring an asset?

Answer 5

Purchase price
Taxes paid at time of purchase
Transportation charges
Installation costs

Question 6

How do you record more than one asset bought for a lump some of money?

Answer 6

Acquisition costs must be allocated btw assets

Question 7

Fair market value, how is it used in an acquisition?

Answer 7

Purchase price should be allocated btw assets acquired
based on proportion of fair market value each
asset represents of total purchase price

Question 8

Capitalization of interest

Answer 8

Interest on constructed assets is added

To asset account

Question 9

Land improvements

Answer 9

Costs related to land but have limited life

Represent a Depreciable asset with a limited life

Question 10

How should interest on borrowed money used to acquire assets be treated?

Answer 10

Treated as expense of period

Question 11

How should interest incurred from money borrowed to constructed assets be treated?

Answer 11

Interest must be capitalized as part of acquisition cost of asset

Question 12

The amount of interest capitalized should be based on?

Answer 12

Average accumulated expenditures

Question 13

Depreciation

Answer 13

Allocation of original cost of asset to periods benefited

By its use

Question 14

3 factors the cause an assets decline in usefulness?

Answer 14

Physical deterioration from usage or passage of time
Obsolescence factors such as changes in technology
Company’s repair and maintenance policy

Question 15

3 methods of depreciation?

Answer 15

Straight line, units of production, double declining balance

Question 16

Straight Line method depreciation

Answer 16

Method by which same dollar amount of depreciation
Is recorded in each year of asset use

SL depreciation = (acquisition cost - residual value)/ life

Question 17

Book value

Answer 17

Book value = original cost of asset - accumulated depreciation

Question 18

Units of production method depreciation

Answer 18

Depreciation is determined as a function of
units the asset produces

Depreciation per unit =
(acquisition cost - residual value)/total # of units in asset’s life

Question 19

Annual depreciation (depreciation per unit method)

Answer 19

Annual depreciation =

depreciation per unit) X (units produced in current year

Question 20

Accelerated depreciation

Answer 20

Higher amount of depreciation is recorded in

Early years and lower amount in later years

Question 21

Double declining balance method

Answer 21

Depreciation is recorded at twice the straight line rate

But the balance is reduced each period

Question 22

4 Reasons companies use the straight line method of depreciation?

Answer 22

1 Simplicity,
2 reporting to stock holders
3 Comparability
4 Management bonus plans (higher net income = higher compensation)

Question 23

2 reasons firms use accelerated depreciation?

Answer 23

Technological competitiveness

Lower taxes

Question 24

Change in estimate

Answer 24

Change in life of asset or in its residual value

Question 25

Capital expenditure AKA item treated as asset

When should an expenditure be treated as a capital expenditure?

Answer 25

Cost that improves the asset and is added to asset account

When expenditure increases the life of asset or it’s productivity
It should be treated as a capital expenditure and
added to asset acct.

Question 26

Revenue expenditure AKA item treated as an expense of the period

Answer 26

Cost that keeps an asset in its normal operating condition
And is treated as an expense

When expenditure simply maintains an asset in its normal
Operating condition, it should be treated as an expense

Question 27

Gain on asset sale

Answer 27

Excess of selling price over asset’s book value

Question 28

How do you record a journal entry where the
asset cost was 20,000
Acc. Depr. 9,000
Selling price 12,400?

Answer 28

Acc. Depreciation machine. 9000
Cash. 12400
Machine. 20000
Gain on sale of asset. 1400. (revenue)

Question 29

Loss on sale of asset

Answer 29

Amount by which selling price is less than book value

Question 30

How do you record a journal entry for a asset that:
Asset cost 20,000
Acc. Depreciation. 9000
Sales price 10000?

Answer 30

Accu. Depr. Machine. 9000
Cash. 10000
Loss on sale of asset. 1000. (expense)
Machine. 20000