Chapter 18 Property, Plant, and Equipment

Question 1

Real Property:

Answer 1

consists of land, land improvements (such as sidewalks and parking lots), buildings, and other structures attached to the land.

Question 2

Tangible personal property:

Answer 2

includes machinery, equipment, furniture, and fixtures that can be removed and used elsewhere.

Question 3

Capitalized costs

Answer 3

are all costs recorded as part of the asset’s cost.

Question 4

land improvements:

Answer 4

(such as sidewalks and parking lots), buildings, and other structures attached to the land.
Land improvements include the cost of installing permanent walks or roadways, curbing, gutters, and drainage facilities. These costs are debited to the asset account Land Improvements. Land improvements are depreciated.

Question 5

The acquisition cost of land purchased for a building site should include the net costs (less salvage) of removing unwanted buildings and grading and draining the land. Remember that land is not depreciated.

Answer 5

The acquisition cost of land purchased for a building site should include the net costs (less salvage) of removing unwanted buildings and grading and draining the land. Remember that land is not depreciated.

Question 6

Purchase for land and a building:

Answer 6

If land and a building are purchased together for a single price, the purchase price is allocated between the Land and Building accounts. The amount allocated to the building is depreciated. The amount allocated to land is not depreciated.

Question 7

Land:

Answer 7

Land is not depreciated. Land has an indefinite life. Land does not deteriorate or get used up.

Question 8

Accumulated Depreciation:

Answer 8

Accumulated Depreciation shows all depreciation that has been taken during the asset’s life.

Question 9

At the end of each accounting period, depreciation for the period is debited to Depreciation Expense and credited to a contra asset account, Accumulated Depreciation.

Answer 9

At the end of each accounting period, depreciation for the period is debited to Depreciation Expense and credited to a contra asset account, Accumulated Depreciation.

Question 10

net book value:

Answer 10

Book value is rarely the same as fair market value, which is the asset’s price on the open market.

Question 11

Salvage value, residual value or scrap value:

Answer 11

is an estimate of the amount that could be obtained from an asset’s sale or disposition at the end of its useful life.

Question 12

the Net salvage value:

Answer 12

is the salvage value of the asset less any costs to remove or sell it.

Question 13

declining-balance method of depreciation:

Answer 13

Under the declining-balance method of depreciation, the book value of an asset at the beginning of the year is multiplied by a percentage to determine depreciation for the year. The declining-balance method is an accelerated method of depreciation. A method of depreciating asset cost that allocates greater amounts of depreciation to an asset’s early years of useful life. The declining-balance computation ignores salvage value until the year in which the book value is reduced to estimated salvage value. Figure 18.2 illustrates the declining-balance method in graphical form.

Question 14

Double-declining-balance method:

Answer 14

DDB uses a rate equal to twice the straight-line rate and applies that rate to the book value of the asset at the beginning of the year.

Question 15

the Units-of-output method, also known as the Units-of -production method:

Answer 15

calculates depreciation at the same rate for each unit produced. The unit of production may be measured in terms of the:

physical quantities of production,

number of hours the asset is used,

other measures.

This method is often used to depreciate the cost of cars, trucks, and other motor vehicles, using miles as a measure of production.

Question 16

A gain:

Answer 16

is the disposition of an asset for more than its book value.

Question 17

When assets are disposed of, the business often incurs a gain or a loss. A gain is the disposition of an asset for more than its book value. A loss is the disposition of an asset for less than its book value. The formula is:
Proceeds - book value = Gain or loss

Answer 17

When assets are disposed of, the business often incurs a gain or a loss. A gain is the disposition of an asset for more than its book value. A loss is the disposition of an asset for less than its book value. The formula is:
Proceeds - book value = Gain or loss

Question 18

The gain is recorded in the Gain on Sale of Equipment account. The gain is shown on the income statement in the Other Income section.

Answer 18

The gain is recorded in the Gain on Sale of Equipment account. The gain is shown on the income statement in the Other Income section.

Question 19

The loss is recorded in the Loss on Sale of Equipment account. The loss appears on the income statement in the Other Expenses section.

Answer 19

The loss is recorded in the Loss on Sale of Equipment account. The loss appears on the income statement in the Other Expenses section.

Question 20

Gains and Losses on Sales of Assets:

Answer 20

Some companies use a single account to record both gains and losses on sales of assets. The account is called Gains and Losses on Sales of Assets. It appears on the income statement in the Other Income section (if net gain) or Other Expenses section (if net loss).

Question 21

The allowance is the difference between the fair value of the new asset and the amount of cash paid. For example, if Howard received a trade-in allowance of $7,800 on the old asset with a book value of $7,000, there is an implicit gain of $800. On the other hand, if the trade-in allowance is only $6,700 on an asset with a book value of $7,000, there is an implicit loss of $300.

Answer 21

The allowance is the difference between the fair value of the new asset and the amount of cash paid. For example, if Howard received a trade-in allowance of $7,800 on the old asset with a book value of $7,000, there is an implicit gain of $800. On the other hand, if the trade-in allowance is only $6,700 on an asset with a book value of $7,000, there is an implicit loss of $300.

Question 22

Financial Accounting for Trade-In if Gain Is Realized on the Transaction :
Suppose that the new truck Howard acquired has an agreed-on price of $42,000, which is also its fair value. The dealer granted Howard a trade-in allowance of $7,800 and Howard paid cash of $34,200. As a result, Howard is deemed to have received $7,800 for the old truck. The implicit gain on the trade-in is $800 ($7,800 trade-in allowance, minus $7,000 book value of the old truck.) However, gains on trade-ins are not recognized for financial accounting purposes. This rule is based on the conservatism concept and the realization principle, which hold that gains should not be recognized until cash or other types of liquid assets have been received in return.

Answer 22

Financial Accounting for Trade-In if Gain Is Realized on the Transaction :
Suppose that the new truck Howard acquired has an agreed-on price of $42,000, which is also its fair value. The dealer granted Howard a trade-in allowance of $7,800 and Howard paid cash of $34,200. As a result, Howard is deemed to have received $7,800 for the old truck. The implicit gain on the trade-in is $800 ($7,800 trade-in allowance, minus $7,000 book value of the old truck.) However, gains on trade-ins are not recognized for financial accounting purposes. This rule is based on the conservatism concept and the realization principle, which hold that gains should not be recognized until cash or other types of liquid assets have been received in return.

Question 23

Conservatism:

Answer 23

Conservatism:
According to the modifying convention of conservatism, accountants record transactions using the alternative that is least likely to overstate income.

Question 24

Conservatism:

Answer 24

Conservatism:
According to the modifying convention of conservatism, accountants record transactions using the alternative that is least likely to overstate income.

Question 25

Federal Income Tax for Trade-In transaction:

Answer 25

is easier than those for financial accounting because neither gain nor loss is recognized for tax purposes.

Question 26

Depletion:

Answer 26

is the term used to describe allocating the cost of the natural resource to expense over the period in which the resource produces revenue.

Question 27

Depletion of the cost of natural resources for financial statement preparation is called cost depletion. It is similar to the units-of-output method of depreciation. The formula is:
Cost of Natural resource/Estimated units of the resource=
Depletion per unit

Answer 27

Depletion of the cost of natural resources for financial statement preparation is called cost depletion. It is similar to the units-of-output method of depreciation. The formula is:
Cost of Natural resource/Estimated units of the resource=
Depletion per unit

Question 28

Oil and gas production and mining operations use long-lived assets such as oil pumps and mining equipment. These assets are depreciated, usually using the units-of-output method.

Answer 28

Oil and gas production and mining operations use long-lived assets such as oil pumps and mining equipment. These assets are depreciated, usually using the units-of-output method.

Question 29

Percentage depletion

Answer 29

for a property is calculated by multiplying the gross income from the sale of the natural resource by a percentage. The percentage depends on the specific natural resource.

Question 30

In 2013, a mining company has sales of $1,800,000 for ore produced from a mine. For tax purposes, the book value (capitalized costs, less depletion taken in prior years) of the minerals at the beginning of the year was $16,000. The allowable percentage depletion rate for the minerals produced is 15 percent. The company will deduct $270,000 on its federal income tax return ($1,800,000 × 0.15 = $270,000). In future years, there will be no allowable cost depletion, but percentage depletion may continue to be taken even though the book value for tax purposes is zero.

Answer 30

In 2013, a mining company has sales of $1,800,000 for ore produced from a mine. For tax purposes, the book value (capitalized costs, less depletion taken in prior years) of the minerals at the beginning of the year was $16,000. The allowable percentage depletion rate for the minerals produced is 15 percent. The company will deduct $270,000 on its federal income tax return ($1,800,000 × 0.15 = $270,000). In future years, there will be no allowable cost depletion, but percentage depletion may continue to be taken even though the book value for tax purposes is zero.

Question 31

Impairment:

Answer 31

exists when book value exceeds the “fair value” of the asset.

Question 32

recoverability test

Answer 32

The recoverability test is a comparison of the asset’s carrying value (net book value) with the estimated net cash flows from future use of the asset, including eventual disposition of the asset. If the estimated net future cash flows are less than the asset’s book value, impairment has occurred.

Question 33

Turner made a projection of future cash inflows from services and cash outflows from expenses over the expected remaining life of the facilities and estimates that future net cash flows from its operations will total $690,000. These future cash flows are less than the asset’s $792,000 book value, so impairment does exist.

Answer 33

Turner made a projection of future cash inflows from services and cash outflows from expenses over the expected remaining life of the facilities and estimates that future net cash flows from its operations will total $690,000. These future cash flows are less than the asset’s $792,000 book value, so impairment does exist.

Question 34

If the market value, or present value, is less than the net book value of the asset, impairment exists and should be recorded in the amount of the excess of book value over market value.

Answer 34

If the market value, or present value, is less than the net book value of the asset, impairment exists and should be recorded in the amount of the excess of book value over market value.

Question 35

Once an impairment write-down of an asset has been made, the amount charged off is not reinstated even if the market value subsequently increases—the conservatism constraint and the realization principle in effect.

Answer 35

Once an impairment write-down of an asset has been made, the amount charged off is not reinstated even if the market value subsequently increases—the conservatism constraint and the realization principle in effect.

Question 36

Intangible Assets:

Answer 36

are assets that lack a physical substance. The major types of intangible assets are patents, copyrights, franchises, trademarks, brand names, organizational costs, computer software, and goodwill. With the exception of computer software, intangible assets usually do not have any physical attributes.

Question 37

Patent:

Answer 37

is an exclusive right given by the U.S. Patent Office to manufacture and sell an invention for a period of 17 years from the date the patent is granted. A patent may not be renewed; however, a new patent may be obtained if significant improvements in the original idea can be demonstrated. The right to the patent may be sold, assigned, or otherwise controlled by the owner.

Question 38

Copyright:

Answer 38

is the exclusive right granted by the federal government to produce, publish, and sell a literary or artistic work for a period equal to the creator’s life plus 70 years.

Question 39

franchises:

Answer 39

The first type is a right granted by a governmental unit for the business to provide a service to the governmental unit (such as cable television). The second type is an exclusive dealership or an exclusive arrangement between a manufacturer and a dealer or distributor.

Question 40

Trademarks, trade names, and brand names:

Answer 40

are used to build consumer confidence and loyalty. They can be registered with the U.S. Patent Office. They can be sold, traded, or otherwise controlled by the owner.

Question 41

Organizational costs:

Answer 41

Organizational costs are the costs incurred when organizing a business. Organizational costs include attorneys’ fees, accountants’ fees, legal filing fees, and other costs of beginning a business.

Question 42

Computer software:

Answer 42

consists of written programs that instruct a computer’s hardware to do certain tasks. Software can be developed by the company’s employees or purchased outside the company. For some firms, computer software is the most important (and most costly) asset owned.

Question 43

Goodwill:

Answer 43

represents the value of a business in excess of the value of its identifiable assets. Goodwill is recorded only at the time of the purchase of a business. It usually occurs when a business being purchased has extraordinary earnings or earnings potential.

Question 44

For many companies, intangible assets are a very important part of the total assets. For example, in its balance sheet at the end of 2009, Johnson & Johnson reported total assets of $94.682 billion. This total included Goodwill, $14.862 billion and other intangibles of $16.323 billion.

Answer 44

For many companies, intangible assets are a very important part of the total assets. For example, in its balance sheet at the end of 2009, Johnson & Johnson reported total assets of $94.682 billion. This total included Goodwill, $14.862 billion and other intangibles of $16.323 billion.

Question 45

Research and Development Expense account:

Answer 45

Costs to develop intangible assets internally are expensed in the year incurred to the Research and Development Expense account. Similarly, costs related to software development by a company are expensed in the year incurred. However, there are special rules if the software is to be sold, leased, or otherwise marketed:

Question 46

Amortization:

Answer 46

The periodic transfer of intangible’s cost to expense is known as amortization.
The costs are typically amortized on a straight-line basis or on a units-of-production basis.

Question 47

We classify intangible assets into three categories: (1) intangible assets with definite lives subject to amortization, (2) intangible assets with indefinite lives not subject to amortization and (3) goodwill.

Answer 47

We classify intangible assets into three categories: (1) intangible assets with definite lives subject to amortization, (2) intangible assets with indefinite lives not subject to amortization and (3) goodwill.