Chapter 9

Question 1

What is the duration for PPE?

Answer 1

They are fixed assets that are used for more than 1 year

Question 2

What costs count as part of dollar amount for PPE?

Answer 2

All costs that are required to make it ready for its intended use including:

(1) Sticker price
(2) Sales tax
(3) Shipping costs
(4) Installation costs

Question 3

Balance account for shipping costs when destination is the company’s store?

Answer 3

Inventory asset increases and cash decreases

Question 4

Balance account for shipping costs when destination is the customer?

Answer 4

Increase in operating expenses and decrease in cash

Question 5

When you purchased your building, you paid for the real estate broker free. Should this fee be added to part of the building?

Answer 5

Yes

Question 6

Over the life of the asset, a company can incur maintenance and repair costs. Should they be capitalized?

Answer 6

It depends.

Question 7

What is major rennovation maintenance cost?

Answer 7

Major maintenance will increase the value of equipment (e.g., longer useful life), unlike minor maintenance

Question 8

Over the life of the asset, a company incurs minor maintenance and rapir cost. Should they be capitalized?

Answer 8

No

Question 9

Over the life of the asset, a company incurs major maintenance and rapir cost. Should they be capitalized?

Answer 9

Yes

Question 10

What does capitalization mean?

Answer 10

Booking thoses costs as assets on B/S, whereas expensing foes not affect assets on B/S at all.

Question 11

When are capital assets initially recoreded?

Answer 11

At cost

Question 12

Is the cost of capital assets depreciated?

Answer 12

Yes

Question 13

Where is the capital asset presented at?

Answer 13

At any period, at the depreciated historical cost

Question 14

What is the net carrying amoutn of PPE?

Answer 14

Gross PPE - Accumulated depreciation

Question 15

If net amount is 100 and fair market of the asset is 300 do we change net amount to 300?

Answer 15

No in most cases we stick to historical cost principle so we do not increase net PPE at all even if there is increase in value

Question 16

What if the fair market value of this asset or the similar aset in the market is 50 but net amount is 100

Answer 16

(Dr) Impairment loss increases by 50

(Cr) Accumulated depreciation increases by 50

Question 17

What are the two sources for an increase in accumulated depreciation?

Answer 17

(1) Regular depreciation increase due to use
(2) Impairment loss
(important to know for final exam)

Question 18

Is depreciation a valuation process or cost allocation process for PPE?

Answer 18

Cost allocation

Question 19

What factors do we need to have to calculate depreciation?

Answer 19

(1) Original purchase price plus any other necessary costs to make it ready for use
(2) Useful life
(3) Residual value (estimated amount to be received at the end of the asset’s useful life)

Question 20

Example:
Acquisition cost = 50,000
estimated residual value = 5,000
estimated useful life: 5 years
Depreciation expense per year?

Answer 20

(AC - RV)/useful life in years
= 50,000-5,000/5
= 9,000

Question 21

Equation using units of activity

Answer 21

(Cost-Residual Value)/Estimatd total units of output

Question 22

What oes the units of activity method assume?

Answer 22

That the asset provides the benefit of each time it produces a unit. Probably the best method to match expenses to revenues but the method that is the most arbitrary, and that requires the most assumptions.

Question 23

What is the change in useful life or residual valu of asset?

Answer 23

This is a change basedo n new information receieved in the current period. We’re not aware of this information before, therefore, it is not fair to go back and adjust net income of prior years

Question 24

When do we make adjustments in change in useful life or residual value of asset?

Answer 24

Since it will affect the value of the asset for the rest of its life, the adjustment should be made prospectively. We do not go back and change

Question 25

How do you calculate what the depreciation expense is for the 4th year (for example)?

Answer 25

Gross PPE is amount you bought PPE at.
Find net book value at end of the 3rd year
subtract RV from book value and divide by 3 years

(Book value = NOT FINISHED

Question 26

Double declining balance rate?

Answer 26

2*(1/useful life) (Just double depreciation rate)

Question 27

Depreciation expense?

Answer 27

(Cose - accumulation depreciation at beginning of period) * Depreciation rate

Question 28

When do you use residual value in double declining balance?

Answer 28

At the end of all the years the calculatoion of expense is the amount of that year minus the residual value

Question 29

Why do we have accelerated depreciation methods?

Answer 29

Some assets bring a lot to a firm when they are new, but their usefullness declines rapidly over time, or their cost of operation increases over time.

Question 30

Assume that the residual caue of the PE is 0. PPE was purchased at the beginning of the fiscal year. During the first year use of the PPE., the depreciation expense under the double declining methos is 2 times the depreciation expense under the straight line depreciation method. Is this statement correct?

Answer 30

In the non-zero casse: residual value is not 0. In this case when you look at first year, depreciation expense on double declining method, it is more than two times for straight line. So in the non-zero case the answer would be no.
If residual value is 0 then straight line is half of double declining. So the answer is Yes.

Question 31

Which gives higher net earnings between straight line method and double declining balance method in the first year of depreciation?

Answer 31

Net income = revenue - expense so for higher net income we need a smaller depreciation expense. The method that gives us a lower depreciation expense in the first year is straight line

Question 32

Which gives a higher book value (carrying value of PPE) between straight line method and double declining balance method in the first year of depreciation?

Answer 32

Book value = gross PPE - accumulated depreciation.
For higher book value we need smaller accumulated depreciation. In the first year, depreciation expense and accumulated depreciation is the same so straight line gives smaller accumulated depreciation in first year (since it has a smaller depreciation expense), and therefore a higher book value

Question 33

Why may a company sell capital assets?

Answer 33

(1) No longer using the asset
(2) Change in line of business
(3) Change in volume of productions

Question 34

A company sells the limousine at the end of 5 year useful life at 6000. It has the following balances:
Limousine vehicle 50,000
Accumulated depreciation 45,000
What is the journal entry for this sale?

Answer 34

(Dr) Cash increases by 6,000 and Accumulated depreciation decreases by 45,000 (Cr) PPE decreases by 50,000 and gain from sale of equipment increases by 1,000

Question 35

A company sells the limousine at the end of 5 year useful life at 6000. It has the following balances:
Limousine vehicle 50,000
Accumulated depreciation 45,000
What is the journal entry if this sale does not occur

Answer 35

(Dr) AD 45,000 Loss on disposal of PPE 5,000 (Cr) PPE 50,000

Question 36

What are intangible assets?

Answer 36

Items that meet the definition of an asset, but do not have any physical form
Examples:
- patent
- brand name
- customer list
- Computer license or ofrware code
- Rights to a song

Question 37

Intangible assets guidelines?

Answer 37

(1) Can capitalize intangibles when they are purchased (part of cash)
(2) Cannot capitalize intangible assets if they are developed internally (part of expenses)

Question 38

What is amortization expense?

Answer 38

If your intangible asset has a useful like, then amortize the value over the life usually based on the straight line method. A patent for example is an intangible asset with a useful life

Question 39

Patent value at 20,000 with a protection of 20 years. What is the amortization expense and accumulated amortization?

Answer 39

Amortization expense 1,000

Accumulated amortization 1,000

Question 40

When do we not amortize?

Answer 40

When the intangible asset does not have a useful life

Question 41

What is R&D expensing rule?

Answer 41

Research costs have to be expensed as they are incurred, because of large uncertainty

Question 42

What is goodwill?

Answer 42

An asset representing the future economic benefits arising from the purchase of a business that are not individually identified and separatelt recognized

Question 43

What is the difference between Merger and acquisition?

Answer 43

Merger: A + B = A
A company buys all of B’s assets and B company disappears. It is not longer a reporting entitiy, it is a division of A company
Acquisition: A + B => A + B => Consolidated F/S
A and B company both do their own thing but there is a consolidated financial statement.

Question 44

When does goodwill arise?

Answer 44

From the merger case

Question 45

Equation for goodwill?

Answer 45

Purchased price - fair value of net identifiable assets

Question 46

Sources of goodwill?

Answer 46

Brand names
very efficient process
Knowledge
Location
Customer base
Employees

Question 47

What is the goodwill impairment test?

Answer 47

Management is required to periodically review the goodwill’s carrying value to determine the existence of impairment. If the value of goodwill is reduced, then an impairment loss is recognized