chapter 9 concepts

Question 1

Plant assets (property, plant, and equipment; plant and equipment; and fixed assets)

Answer 1

Resources that have physical substance, are used in the operations of the business, and are not intended for sale to customers.

Question 2

The historical cost principle requires that companies record plant assets at ____

Answer 2

Cost. Cost consists of all expenditures necessary to acquire an asset and make it ready for its intended use.

Question 3

Revenue expenditures

Answer 3

Expenditures that are immediately charged against revenues as an expense.

Question 4

Capital expenditures

Answer 4

Expenditures that increase the company’s investment in plant assets.

Question 5

Cash equivalent price

Answer 5

An amount equal to the fair value of the asset given up or the fair value of the asset received, whichever is more clearly determinable.

Question 6

The cost of land includes

Answer 6

(1) the cash purchase price, (2) closing costs such as title and attorney’s fees, (3) real estate brokers’ commissions, and (4) accrued property taxes and other liens on the land assumed by the purchaser.

Question 7

Land improvements

Answer 7

structural additions with limited lives that are made to land, such as driveways, parking lots, fences, landscaping, and underground sprinklers. The cost of land improvements includes all expenditures necessary to make the improvements ready for their intended use.

Question 8

True or False. inclusion of interest costs in the cost of a constructed building is limited to interest costs incurred during the construction period.

Answer 8

true

Question 9

Two criteria apply in determining the cost of equipment:

Answer 9

(1) the frequency of the cost—one time or recurring, and (2) the benefit period—the life of the asset or one year.

Question 10

Ordinary repairs

Answer 10

Expenditures to maintain the operating efficiency and expected productive life of the asset.

Question 11

Additions and improvements

Answer 11

Costs incurred to increase the operating efficiency, productive capacity, or expected useful life of a plant asset.

Question 12

lease

Answer 12

a contractual agreement in which the owner of an asset (the lessor) allows another party (the lessee) to use the asset for a period of time at an agreed price.

Question 13

advantages of leasing an asset versus purchasing it are:

Answer 13

1. Reduced risk of obsolescence.
2. Little or no down payment.
3. Shared tax advantages.
4. Assets and liabilities not reported.

Question 14

Operating lease

Answer 14

A contractual agreement allowing one party (the lessee) to use another party’s asset (the lessor); accounted for like a debt-financed purchase by the lessee.

Question 15

Capital lease

Answer 15

A contractual agreement allowing one party (the lessee) to use another party’s asset (the lessor); accounted for like a debt-financed purchase by the lessee.

Question 16

Depreciation

Answer 16

The process of allocating to expense the cost of a plant asset over its useful life in a rational and systematic manner.

Question 17

True or False depreciation is a cost allocation process, not an asset valuation process

Answer 17

True

Question 18

Depreciation applies to three classes of plant assets:

Answer 18

land improvements, buildings, and equipment. Land is not a depreciable asset

Question 19

Obsolescence

Answer 19

the process by which an asset becomes out of date before it physically wears out.

Question 20

True or False Recognizing depreciation for an asset does not result in the accumulation of cash for replacement of the asset.

Answer 20

True. The balance in Accumulated Depreciation represents the total amount of the asset’s cost that the company has charged to expense to date; it is not a cash fund.

Question 21

Depreciable cost

Answer 21

The cost of a plant asset less its salvage value.

Question 22

Straight-line method

Answer 22

A method in which companies expense an equal amount of depreciation for each year of the asset’s useful life.

Question 23

Straight-line method

Answer 23

A method in which companies expense an equal amount of depreciation for each year of the asset’s useful life.

Question 24

Depreciation expense formula

Answer 24

cost - salvage value / useful life

Question 25

Declining-balance method

Answer 25

A depreciation method that applies a constant rate to the declining book value of the asset and produces a decreasing annual depreciation expense over the asset’s useful life.

Question 26

Accelerated-depreciation method

Answer 26

A depreciation method that produces higher depreciation expense in the early years than the straight-line approach.

Question 27

double declining balance method

Answer 27

2 x basic depreciation rate x book value. Used with declining balance approach

Question 28

Units-of-activity method

Answer 28

A depreciation method in which useful life is expressed in terms of the total units of production or use expected from the asset.

Question 29

When a change in an estimate is required, the company makes the change in _______but not to prior periods.

Answer 29

current and future years

Question 30

A permanent decline in the fair value of an asset.

Answer 30

Impairment

Question 31

practice of timing the recognition of gains and losses to achieve certain income results is known as

Answer 31

earnings management.

Question 32

Intangible assets

Answer 32

Rights, privileges, and competitive advantages that result from the ownership of long-lived assets that do not possess physical substance.

Question 33

Companies record intangible assets at ____

Answer 33

Cost. Cost is comprised of all expenditures necessary for the company to acquire the right, privilege, or competitive advantage.

Question 34

Amortization

Answer 34

The process of allocating to expense the cost of an intangible asset.

Question 35

The cost of intangible assets with ______ lives should not be amortized.

Answer 35

indefinite

Question 36

Patent

Answer 36

An exclusive right issued by the U.S. Patent Office that enables the recipient to manufacture, sell, or otherwise control an invention for a period of 20 years from the date of the grant.

Question 37

Research and development costs

Answer 37

Expenditures that may lead to patents, copyrights, new processes, and new products; must be expensed as incurred.

Question 38

Copyright

Answer 38

An exclusive right granted by the federal government allowing the owner to reproduce and sell an artistic or published work. Copyrights last for the life of the creator plus 70 years.

Question 39

Trademark (trade name)

Answer 39

A word, phrase, jingle, or symbol that distinguishes or identifies a particular enterprise or product.

Question 40

Franchise

Answer 40

A contractual arrangement under which the franchisor grants the franchisee the right to sell certain products, to perform specific services, or to use certain trademarks or trade names, usually within a designated geographic area.

Question 41

Goodwill

Answer 41

The value of all favorable attributes that relate to a company that are not attributable to any other specific asset. Goodwill is not amortized because it is considered to have an indefinite life.

Question 42

Return on assets

Answer 42

A profitability measure that indicates the amount of net income generated by each dollar of assets;

return on assets = net income / average total assets.

Question 43

Asset turnover

Answer 43

Indicates how efficiently a company uses its assets to generate sales;

asset turnover = net sales / average total assets.

Question 44

profit margin

Answer 44

net income / net sales

Question 45

true or false Unlike other depreciation methods, the declining-balance method ignores salvage value in determining the amount to which the declining-balance rate is applied.

Answer 45

true