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Principles of Accounting - Financial > Chapter 7 > Flashcards

Chapter 7 Flashcards

1
Q

What are assets that you can actually touch?

A

Tangible assets

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2
Q

What are assets that you can’t touch?

A

Intangible assets

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3
Q

List some examples of tangible assets

A

Land, land improvements, buildings, equipment, and natural resources

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4
Q

List some examples of intangible assets

A

Patents, trademarks, copyrights, franchises, and goodwill

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5
Q

What value do we record a long-term asset at?

A

At its cost + all expenses necessary to get the asset ready for use

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6
Q

What term is used to describe recording an expenditure as an asset?

A

Capitalize

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7
Q

What assets does the property, plant, and equipment category consist of?

A

Land, land improvements, buildings, equipment, and natural resources

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8
Q

What account includes the cost of the land and all expenditures necessary to get the land ready for its intended use?

A

Land

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9
Q

What is included in the total cost of land?

A

Initial purchase price, commissions, back property taxes, title insurance, cost of removing existing building, salvaged material, and the cost of leveling land

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10
Q

What is the only expenditure that decreases the total cost of land?

A

Salvaged material

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11
Q

Is salvaged material a positive or a negative?

A

Negative

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12
Q

What are amounts spent to improve the land?

A

Land improvements

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13
Q

What is a term that includes administrative offices, retail stores, manufacturing facilities, and storage warehouses?

A

Buildings

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14
Q

What is a broad term that includes machinery used in manufacturing, computers and other office equipment, vehicles, furniture, and fixtures?

A

Equipment

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15
Q

What are purchases of more than one asset at the same time for one purchase price?

A

Basket Purchases

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16
Q

Fill in the Blank:

Basket purchases allocate the total purchase price based on the _______________ of the individual assets

A

Relative fair values

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17
Q

What is the formula to find the Allocated Percentage?

A

Estimated fair value/total fair value

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18
Q

What is the formula to find a basket purchases’ recorded amount?

A

Allocation percentage x purchase price(amount of basket purchase)

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19
Q

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

A

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
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20
Q

What is distinguished from other assets by the fact that they are physically used up, or depleted?

A

Natural resources

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21
Q

What lack physical substance but are very valuable?

A

Intangible assets

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22
Q

What gives exclusive right to manufacture a product or to use a process?

A

Patents

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23
Q

How long do patents last?

A

20 years

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24
Q

What is an exclusive right of protection given to the creator of a published work?

A

Copyright

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25
Q

How long do copyrights last?

A

The creator’s life plus 70 years

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26
Q

What is a word, slogan, or symbol that distinctively identifies a company, product, or service?

A

Trademark

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27
Q

How often do trademarks need to be renewed?

A

Every 10 years

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28
Q

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?

A

Franchises

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29
Q

What is recorded only when one company acquires another company?

A

Goodwill

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30
Q

What is the formula to find Goodwill?

A

Purchase price – fair value of identifiable net assets required

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31
Q

What is portion of purchase price that exceeds the fair value of identifiable net assets?

A

Goodwill

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32
Q

What is the layout of the chart for goodwill?

A

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)

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33
Q

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

A

b. Patent

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34
Q

Fill in the Blank: Capitalize or Expense

We _______ an expenditure as an asset if it increases future benefits.

A

Capitalize

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35
Q

Fill in the Blank: Capitalize or Expense

We _______ an expenditure if it benefits only the current period.

A

Expense

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36
Q

Do you have to record an asset it you capitalize it?

A

Yes

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37
Q

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

A

d. Performing a tune-up on the delivery truck

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38
Q

What is the allocation of an asset’s cost to expense over time?

A

Depreciation

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39
Q

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.

A

Depreciation Expense 300

Accumulated Depreciation 300

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40
Q

Is accumulated depreciation a positive or negative on the balance sheet?

A

Negative

41
Q

List the 3 common depreciation methods

A
  1. Straight-Line
  2. Declining-Balance
  3. Activity-Based
42
Q

Which depreciation method takes an equal amount of depreciation each year?

A

Straight-Line method

43
Q

What is the most common depreciation method used in financial accounting?

A

The straight-line method

44
Q

Which depreciation method is an accelerated method?

A

Declining-balance

45
Q

Which depreciation method calculates depreciation based on the use of the asset?

A

Activity-based

46
Q

What is the formula to find depreciation cost?

A

Cost - residual value

47
Q

What is the formula to find straight line’s depreciation rate?

A

1/Useful life

48
Q

What is the layout of the straight-line method schedule?

A 
Year
Depreciation cost
Depreciation rate
Depreciation expense
Accumulated depreciation
Book Value
49
Q

How do you find depreciation expense using the straight-line method?

A

Depreciation cost x rate

50
Q

How do you find the accumulated depreciation of year 2?

A

Year 1 AD + Year 2 DE

51
Q

How do you find the book value of year 1?

A

Original cost - Depreciation expense

52
Q

Can your book value go below the residual value?

A

No

53
Q

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

A

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

54
Q

What is the layout of the declining-balance method schedule?

A 
Year
Beginning Book Value
Depreciation Rate
Depreciation Expense
Accumulated Depreciation
Book Value
55
Q

What is the beginning book value equal to?

A

The original cost

56
Q

How do you find the declining-balance method depreciation rate?

A

2/Useful life

57
Q

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

A

b. $ 10,000

Original Cost (Beg. BV) = 30,000
Rate = 2/6 (33.33)
DE = 30,000 x 33.33
DE = 10,000
58
Q

What is the layout of the activity-based method schedule?

A 
Year
Miles
Depreciation Rate
Depreciation Expense
Accumulated Depreciation
Book Value
59
Q

What is the formula to find the activity-based method’s depreciation rate?

A

Depreciation cost/ total miles (or hours)

60
Q

Which methods reduce taxable income more in the earlier years of an asset’s life?

A

Accelerated methods

61
Q

Which depreciation method do most companies use for financial reporting?

A

Straight-line method

62
Q

Which depreciation method do most companies use for tax reporting?

A

The MACRS accelerated method

63
Q

What is allocating the cost of most tangible assets to expense called?

A

Depreciation

64
Q

What is allocating the cost of most intangible assets to expense called?

A

Amortization

65
Q

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.

A

Amortization expense 40,000
Franchises 40,000

(800,000/20 = 40,000)

66
Q

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.

A

Amortization expense 9,000
Patents 9,000

72,000/8 years = 9,000

67
Q

Which intangible assets are subject to amortization?

A

Copyrights, patents, franchises, and trademarks with finite life

68
Q

Which intangible assets aren’t subject to amortization?

A

Goodwill and trademarks with indefinite life

69
Q

Which of the following intangible assets would not be subject to amortization?

a. Patents
b. Trademarks with an indefinite life
c. Copyrights
d. Franchises

A

b. Trademarks with an indefinite life

70
Q

What are the 3 methods of asset disposal?

A

Sale, Retirement, and Exchange

71
Q

What is the most common method to dispose of an asset?

A

A sale

72
Q

What is when a long-term asset is no longer useful but cannot be sold?

A

A retirement

73
Q

What occurs when two companies trade long-term assets?

A

An exchange

74
Q

What is the layout of the chart for gain/loss on sale?

A 
Sale amount
Less:
Original cost
Less: Accumulated Depreciation
Book value at end of year (Cost - AD)
Gain/Loss
75
Q

If you have a gain on sale what do you debit and credit?

A

You debit cash and accumulated depreciation and credit the asset account and gain

76
Q

If you have a loss on sale what do you debit and credit?

A

You debit cash, accumulated depreciation, and loss and credit the asset account

77
Q

If you have a loss on retirement what do you debit and credit?

A

You debit accumulated depreciation and loss and credit the asset account

78
Q

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

A

b. Double-declining-balance

79
Q

If you have a gain on exchange what do you debit and credit?

A

You debit the (new) asset account and accumulated depreciation and credit cash, (old) asset account, and gain

80
Q

If you have a loss on retirement what does your sale amount equal?

A

0

81
Q

What is the layout of the chart for gain on exchange?

A 
Trade-in Allowance
Less:
Original cost
Less: Accumulated Depreciation
Book value at end of year (Cost - AD)
Gain
82
Q

What is the formula to find the trade-in allowance?

A

New cash amount - old cash amount

83
Q

Fill in the Blank: Gain or Loss

If we dispose of an asset for more than book value, we record a ____.

A

Gain

84
Q

Fill in the Blank: Gain or Loss

If we dispose of an asset for less than book value, we record a ____.

A

Loss

85
Q

What indicates the amount of net income generated for each dollar invested in assets?

A

Return on assets

86
Q

What are the 2 formulas to find return on assets?

A
  1. Net income / average total assets

2. Profit margin x asset turnover

87
Q

What indicates the earnings per dollar of sales?

A

Profit Margin

88
Q

What measures the sales per dollar of assets invested?

A

Asset turnover

89
Q

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

a. 9.2%

2,223/24,128 = 9.2%

90
Q

Fill in the Blank: Less than or Greater than

The long-term asset is impaired if future cash flows are ________ book value

A

Less than

91
Q

Fill in the Blank: Less than or Greater than

The long-term asset isn’t impaired if future cash flows are ________ book value

A

Greater than

92
Q

If the asset is impaired then do you have to record the loss?

A

Yes

93
Q

If the asset isn’t impaired then do you have to record the loss?

A

No

94
Q

What occurs when the expected future cash flows (future benefits) generated for a long-term asset fall below its book value?

A

Impairment

95
Q

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

A

Loss 38,000
Trademark 38,000

50,000 - 12,000 = 38,000
BV - FV

96
Q

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

A

No entry, asset isn’t impaired

97
Q

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

A

d. Book value exceeds estimated future cash flows

98
Q

What is the formula to find the fair value of identifiable net assets?

A

Fair value of assets - fair value of liabilities

Principles of Accounting - Financial (11 decks)

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