Chapter 7 Flashcards
What are assets that you can actually touch?
Tangible assets
What are assets that you can’t touch?
Intangible assets
List some examples of tangible assets
Land, land improvements, buildings, equipment, and natural resources
List some examples of intangible assets
Patents, trademarks, copyrights, franchises, and goodwill
What value do we record a long-term asset at?
At its cost + all expenses necessary to get the asset ready for use
What term is used to describe recording an expenditure as an asset?
Capitalize
What assets does the property, plant, and equipment category consist of?
Land, land improvements, buildings, equipment, and natural resources
What account includes the cost of the land and all expenditures necessary to get the land ready for its intended use?
Land
What is included in the total cost of land?
Initial purchase price, commissions, back property taxes, title insurance, cost of removing existing building, salvaged material, and the cost of leveling land
What is the only expenditure that decreases the total cost of land?
Salvaged material
Is salvaged material a positive or a negative?
Negative
What are amounts spent to improve the land?
Land improvements
What is a term that includes administrative offices, retail stores, manufacturing facilities, and storage warehouses?
Buildings
What is a broad term that includes machinery used in manufacturing, computers and other office equipment, vehicles, furniture, and fixtures?
Equipment
What are purchases of more than one asset at the same time for one purchase price?
Basket Purchases
Fill in the Blank:
Basket purchases allocate the total purchase price based on the _______________ of the individual assets
Relative fair values
What is the formula to find the Allocated Percentage?
Estimated fair value/total fair value
What is the formula to find a basket purchases’ recorded amount?
Allocation percentage x purchase price(amount of basket purchase)
A company makes a basket purchase of land, buildings, and equipment with estimated fair values of $70,000, $150,000, and $30,000, respectively. The purchase price is $210,000. How much should be recorded to the Land account?
a. $ 126,000
b. $ 70,000
c. $ 58,800
d. $ 25,200
c. $ 58,800
Purchase Price = 210,000 TFV = 70,000 + 150,000 + 30,000 TFV = 250,000 Land's FV = 70,000 Land's AP = 70,000 / 250,000 = 28% Land's Recorded Amount = 210,000 x 28% = 58.800
What is distinguished from other assets by the fact that they are physically used up, or depleted?
Natural resources
What lack physical substance but are very valuable?
Intangible assets
What gives exclusive right to manufacture a product or to use a process?
Patents
How long do patents last?
20 years
What is an exclusive right of protection given to the creator of a published work?
Copyright
How long do copyrights last?
The creator’s life plus 70 years
What is a word, slogan, or symbol that distinctively identifies a company, product, or service?
Trademark
How often do trademarks need to be renewed?
Every 10 years
What are local outlets that pay for the exclusive right to use a company’s name and to sell its products within a specified geographical area?
Franchises
What is recorded only when one company acquires another company?
Goodwill
What is the formula to find Goodwill?
Purchase price – fair value of identifiable net assets required
What is portion of purchase price that exceeds the fair value of identifiable net assets?
Goodwill
What is the layout of the chart for goodwill?
Purchase Price
Less:
Fair value of assets acquired ()
Less: Fair value of liabilities acquired ()
Fair value of identifiable net assets (FVoA - FVoL)
Goodwill (PP - FVoINA)
Which of the following is an exclusive right to manufacture a product or to use a process?
a. Trademark
b. Patent
c. Copyright
d. Goodwill
b. Patent
Fill in the Blank: Capitalize or Expense
We _______ an expenditure as an asset if it increases future benefits.
Capitalize
Fill in the Blank: Capitalize or Expense
We _______ an expenditure if it benefits only the current period.
Expense
Do you have to record an asset it you capitalize it?
Yes
Which of the following costs would be expensed?
a. Adding a refrigeration unit to a delivery truck
b. Adding a new suspension system to a delivery truck that will allow for heavier loads
c. Adding a new transmission to a delivery truck, which will increase its life and future benefits
d. Performing a tune-up on the delivery truck
d. Performing a tune-up on the delivery truck
What is the allocation of an asset’s cost to expense over time?
Depreciation
Make a journal entry:
A local Starbucks pays $1,200 for equipment—say, an espresso machine, with a useful life of four years. Record depreciation expense for the first year.
Depreciation Expense 300
Accumulated Depreciation 300
Is accumulated depreciation a positive or negative on the balance sheet?
Negative
List the 3 common depreciation methods
- Straight-Line
- Declining-Balance
- Activity-Based
Which depreciation method takes an equal amount of depreciation each year?
Straight-Line method
What is the most common depreciation method used in financial accounting?
The straight-line method
Which depreciation method is an accelerated method?
Declining-balance
Which depreciation method calculates depreciation based on the use of the asset?
Activity-based
What is the formula to find depreciation cost?
Cost - residual value
What is the formula to find straight line’s depreciation rate?
1/Useful life
What is the layout of the straight-line method schedule?
Year Depreciation cost Depreciation rate Depreciation expense Accumulated depreciation Book Value
How do you find depreciation expense using the straight-line method?
Depreciation cost x rate
How do you find the accumulated depreciation of year 2?
Year 1 AD + Year 2 DE
How do you find the book value of year 1?
Original cost - Depreciation expense
Can your book value go below the residual value?
No
How much depreciation should be recorded in the first year for a delivery truck purchased on April 1 with a cost of $30,000, an expected life of five years, and an estimated residual value of $5,000? Assume the straight-line method is used.
a. $ 5,000
b. $ 3,750
c. $ 4,500
d. $ 6,000
b. $ 3,750
DE = ($30,000 − $5,000) ÷ 5 years DE = $5,000
DE from Apr to Dec = $5,000 ×(9/12 months) = $3,750
What is the layout of the declining-balance method schedule?
Year Beginning Book Value Depreciation Rate Depreciation Expense Accumulated Depreciation Book Value
What is the beginning book value equal to?
The original cost
How do you find the declining-balance method depreciation rate?
2/Useful life
How much depreciation should be recorded for the first year for a delivery truck with a cost of $30,000, an expected life of six years, and an estimated residual value of $6,000? Assume the double-declining-balance method is used.
a. $ 12,000
b. $ 10,000
c. $ 8,000
d. $ 5,000
b. $ 10,000
Original Cost (Beg. BV) = 30,000 Rate = 2/6 (33.33)
DE = 30,000 x 33.33 DE = 10,000
What is the layout of the activity-based method schedule?
Year Miles Depreciation Rate Depreciation Expense Accumulated Depreciation Book Value
What is the formula to find the activity-based method’s depreciation rate?
Depreciation cost/ total miles (or hours)
Which methods reduce taxable income more in the earlier years of an asset’s life?
Accelerated methods
Which depreciation method do most companies use for financial reporting?
Straight-line method
Which depreciation method do most companies use for tax reporting?
The MACRS accelerated method
What is allocating the cost of most tangible assets to expense called?
Depreciation
What is allocating the cost of most intangible assets to expense called?
Amortization
Make a journal entry:
In early January, Little King Sandwiches acquires franchise rights from University Hero for $800,000. The franchise agreement is for a period of 20 years. Record amortization for the first year.
Amortization expense 40,000
Franchises 40,000
(800,000/20 = 40,000)
Make a journal entry:
Little King purchases a patent for a meat-slicing process for $72,000. The original legal life of the patent was 20 years, and there are 12 years remaining. However, due to expected technological obsolescence, the company estimates that the useful life of the patent is only 8 more years. Little King uses straight-line amortization for all intangible assets. Record amortization for the first year.
Amortization expense 9,000
Patents 9,000
72,000/8 years = 9,000
Which intangible assets are subject to amortization?
Copyrights, patents, franchises, and trademarks with finite life
Which intangible assets aren’t subject to amortization?
Goodwill and trademarks with indefinite life
Which of the following intangible assets would not be subject to amortization?
a. Patents
b. Trademarks with an indefinite life
c. Copyrights
d. Franchises
b. Trademarks with an indefinite life
What are the 3 methods of asset disposal?
Sale, Retirement, and Exchange
What is the most common method to dispose of an asset?
A sale
What is when a long-term asset is no longer useful but cannot be sold?
A retirement
What occurs when two companies trade long-term assets?
An exchange
What is the layout of the chart for gain/loss on sale?
Sale amount Less: Original cost Less: Accumulated Depreciation Book value at end of year (Cost - AD) Gain/Loss
If you have a gain on sale what do you debit and credit?
You debit cash and accumulated depreciation and credit the asset account and gain
If you have a loss on sale what do you debit and credit?
You debit cash, accumulated depreciation, and loss and credit the asset account
If you have a loss on retirement what do you debit and credit?
You debit accumulated depreciation and loss and credit the asset account
If an asset is sold at the end of its first year of use, which depreciation method would result in the highest amount of gain (or lowest amount of loss) assuming the asset is used fairly evenly over its life?
a. Straight-line
b. Double-declining-balance
c. Activity-based
d. Not enough information to determine
b. Double-declining-balance
If you have a gain on exchange what do you debit and credit?
You debit the (new) asset account and accumulated depreciation and credit cash, (old) asset account, and gain
If you have a loss on retirement what does your sale amount equal?
0
What is the layout of the chart for gain on exchange?
Trade-in Allowance Less: Original cost Less: Accumulated Depreciation Book value at end of year (Cost - AD) Gain
What is the formula to find the trade-in allowance?
New cash amount - old cash amount
Fill in the Blank: Gain or Loss
If we dispose of an asset for more than book value, we record a ____.
Gain
Fill in the Blank: Gain or Loss
If we dispose of an asset for less than book value, we record a ____.
Loss
What indicates the amount of net income generated for each dollar invested in assets?
Return on assets
What are the 2 formulas to find return on assets?
- Net income / average total assets
2. Profit margin x asset turnover
What indicates the earnings per dollar of sales?
Profit Margin
What measures the sales per dollar of assets invested?
Asset turnover
Papa’s Pizza has the following items for the past year: Net sales are $24,128, net income is $2,223, total assets at the beginning of year are $14,898, and total assets at the end of year are $15,465. What is the profit margin?
a. 9.2%
b. 61.7%
c. 14.6%
d. 14.9%
a. 9.2%
2,223/24,128 = 9.2%
Fill in the Blank: Less than or Greater than
The long-term asset is impaired if future cash flows are ________ book value
Less than
Fill in the Blank: Less than or Greater than
The long-term asset isn’t impaired if future cash flows are ________ book value
Greater than
If the asset is impaired then do you have to record the loss?
Yes
If the asset isn’t impaired then do you have to record the loss?
No
What occurs when the expected future cash flows (future benefits) generated for a long-term asset fall below its book value?
Impairment
Make a journal entry:
Trademark has estimated future cash flows of $20,000, a book value of $50,000, and fair value of $12,000
Loss 38,000
Trademark 38,000
50,000 - 12,000 = 38,000
BV - FV
Make a journal entry:
Trademark has estimated future cash flows of $50,000, a book value of $20,000, and fair value of $12,000
No entry, asset isn’t impaired
An impairment loss is recorded when:
a. Fair value exceeds book value
b. Book value exceeds fair value
c. Estimated future cash flows exceed book value
d. Book value exceeds estimated future cash flows
d. Book value exceeds estimated future cash flows
What is the formula to find the fair value of identifiable net assets?
Fair value of assets - fair value of liabilities
