Chapter 11

Question 1

Capital expenditures

Answer 1

PP&E costs to keep them in good order

IF

Future economic benefits result from expenditure

• asset life is prolonged
• quantity of services expected is increased
• quality of service is improved

Question 2

Revenue Expenditure

Answer 2

does not meet criteria for capital expenditure

expensed as incurred

Question 3

Replacement

Answer 3

meets condition of capitalization because it enhances service life/quality

Question 4

How to record capital expenditure

Answer 4

debit: accumulated depreciation
credit: cash

why: increase the net book value by reducing it’s accumulated depreciation

Question 5

Betterment

Answer 5

improve asset beyond original condition

capitalize by debiting the assault account directly

Question 6

Betterment

Answer 6

improve asset beyond original condition

meets conditions for capitalization

debit: equipment/building
credit: cash

Question 7

Ways for disposal

Answer 7

abandonment
sale
exchange

Question 8

steps to record disposal

Answer 8

update depreciation calculations first

Question 9

Asset is being scraped/abandoned

Answer 9

includes:
- elimination of the cost of the asset from the books
- removal of related accumulated depreciations
- potentially recording a loss to balance- loss reflects the new book value that was not previously depreciated

Question 10

Journal entry for scraped/abandoned

Answer 10

Debit:
Accumulated Depreciation
Loss

Credit;
Equipment

abandoned equipment costing $100,000
it was 75% depreciated

Question 11

Journal entry for scraped/abandoned

Answer 11

Debit:
Accumulated Depreciation 75,000
Loss 25,000

Credit;
Equipment 100,000

abandoned equipment costing $100,000
it was 75% depreciated

Question 12

Asset is disposed at sale

Answer 12

includes:
- proceeds of sale
- depreciation
- loss

Question 13

Journal entry for sale - loss

Answer 13

Debit:
Accumulated Depreciation 75,000
Loss 15,000
Cash 10,000

Credit: Equipment 100,000

sold equipment costing $100,000 for $10,000
it was 75% depreciated -loss for $15,000 as net book is $25,000

Question 14

Journal Entry for sale - gain

Answer 14

Debit:
Accumulated Depreciation 75,000
Cash 30,000

Credit:
Gain 5,000
Equipment 100,000

sold equipment costing $100,000 for $30,000
depreciated 75%
net book value $30,000

Question 15

Journal entry for scraped/abandoned

Answer 15

Debit:
Accumulated Depreciation 75,000
Loss 25,000

Credit;
Equipment 100,000

abandoned equipment costing $100,000
it was 75% depreciated
net book $25,000

Question 16

exchange transaction

Answer 16

Trading one asset for another; to be booked at fair value if the transaction has commercial substance

Question 17

exchange transaction

Answer 17

Trading one asset for another; to be booked at fair value if the transaction has commercial substance

aren’t always taxable events

Question 18

Commercial Substance

Answer 18

The quality of an exchange transaction such that it changes the future cash flow potential of the entity

Question 19

Boot

Answer 19

Boot is the term used to describe additional monetary consideration that may accompany an exchange transaction

Question 20

Impairment

Answer 20

When the carrying amount of an asset is not recoverable from its future cash flow

Question 21

Natural Resource

Answer 21

Oil and gas reserves, mineral deposits, thermal energy sources, and standing timber are just a few examples of such assets that a firm may own

Question 22

depletion

Answer 22

The process used to allocate the cost of a natural resource asset to the accounting periods benefited

Question 23

Depletion equation

Answer 23

cost of resource - expected residual value / estimated units in resource deposit= depletion per unit