Chapter 8 Flashcards
_______ _______ are assets that depreciate over their useful life and are sometimes called ‘property, plant, and equipment’.
fixed assets
When is expense recognized from using depreciation?
In the accounting period that the asset was used.
T or F: Land is subject to depreciation.
False, it has an infinite life and is captured separate from fixed assets.
What are the 4 continuous phases that are used for operational assets?
(1) Acquiring funding
(2) Buying the asset
(3) Using the asset
(4) Retiring the asset
What items are not included in the cost of long-term assets?
Interest on notes payable or maintenance costs incurred while using the asset.
What does the term capitalized mean?
Identifying a cost as an asset.
When a cost is incurred, if it is ________ it is recorded as an asset.
capitalized.
Depreciation is used to __________ the cost of an asset to expense during the periods it is used to generate revenue.
allocate
How is the matching principle applied to depreciation?
You will only record expenses of depreciation when it is used to generate revenue.
T or F: The purpose of depreciation is to determine the fair market value of an asset.
False, it rarely equals the asset’s fair market value.
How is depreciation recorded?
Depreciation expense increases (decreases net income)
Accumulated depreciation increases (contra-asset account) and is subtracted from property, plant and equipment.
How is net book value calculated?
Asset’s cost - accumulated depreciation = net book value
When calculating net book value, when do you change the asset’s cost?
You never change the asset’s cost, you will only increase your contra-asset account (accumulated depreciation) which subtracts from equipment account.
Under straight-line depreciation, the _____ ______ of depreciation is recorded each year.
same amount
How is the depreciation per year calculated under straight line depreciation?
Depreciation per year = (Cost - residual value)/useful life
______ ____ is the management’s estimate of the economic life to the company.
useful life
_________ _______ (a.k.a. salvage value) is the estimate of the asset’s value to the company at the end of the useful life.
residual value
T or F: Cost of an asset may also include taxes, delivery, or related fees to use the asset.
True
What are some items that aren’t recorded to the equipment account when an asset is purchased?
Interest expense or repairs.
Which value only represents how much depreciation was recorded in the most recent accounting period and which value represents the amount of depreciation over the asset’s life?
Depreciation expense is recorded for the accounting period
Accumulated depreciation is the amount for the asset’s entire life
What kind of expense is depreciation expense?
An operating expense
T or F: The cost of the asset changes on the balance sheet as the company uses it, year by year.
False, the cost will always remain the same. The accumulated depreciation, which is subtracted from the asset cost, is what changes.
When equipment is sold for more than the net book value, it is considered a _____ and when it is sold for less, it is considered a _____.
Gain
Loss
When deciding how much cost to record for the purchase of a building, what should be considered?
(1) Purchase price
(2) Sales tax
(3) Title search and transfer doc costs
(4) Realtor’s and attorney fees
(5) remodeling costs
When deciding how much cost to allocate for the purchase of land, what should be included?
(1) Purchase price
(2) Sales tax
(3) Title search and transfer docs
(4) Realtor and attorney fees
(5) Costs for removal of old buildings
(6) Grading costs
If a company purchases new equipment, what should be considered as part of the cost of the asset?
(1) Purchase price (less discounts)
(2) Sales tax
(3) Delivery costs
(4) Installation costs
(5) Costs to adapt for intended use
