Intangible Assets and Depreciation Quiz

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Questions and Answers

What are the two primary sources of intangible assets?

Cash equivalents and customer loyalty

Patents and goodwill

Physical property and legal privilege

Exclusive privileges and superior management capacity (correct)

Which of the following is NOT considered an intangible asset?

Goodwill

Trademarks

Copyrights

Accounts receivable (correct)

How is amortization for intangible assets typically recorded?

Debiting Amortization Expense and crediting the intangible asset account (correct)

Debiting the asset and crediting accumulated depreciation

Debiting the asset account and crediting cash

Debiting legal fees and crediting the specific intangible asset

What is the maximum period over which intangible assets can be amortized?

40 years Signup and view all the answers

Which characteristic is NOT true regarding intangible assets?

They have a known and fixed useful life Signup and view all the answers

What depreciation method is allowed by the IRS for tax return purposes?

Modified Accelerated Cost Recovery System Signup and view all the answers

Which year shows the highest recorded accumulated depreciation?

2007 Signup and view all the answers

When estimates of useful life differ, who evaluates the reasonableness of management's estimates?

External Auditors Signup and view all the answers

What should companies avoid regarding depreciation methods?

Changing methods annually Signup and view all the answers

What was the original useful life of the equipment purchased on January 1, 2003?

10 years Signup and view all the answers

In what scenario can depreciation estimates be revised?

If new information indicates a change is necessary Signup and view all the answers

What was the estimated salvage value of the equipment in 2003?

$0 Signup and view all the answers

What is the total depreciation reported by the year 2007?

$21,000 Signup and view all the answers

Which factor is NOT considered in the revising of depreciation rates?

Predicted market trends Signup and view all the answers

What was the accumulated depreciation for the year 2005?

$15,360 Signup and view all the answers

What is the term used to describe the process of allocating the cost of a plant asset to expense over the periods it is used?

Depreciation Signup and view all the answers

In the context of accounting, what does 'capitalizing an expenditure' mean?

Recording it as an asset on the balance sheet Signup and view all the answers

What is the term for the value of an asset that is reported on the balance sheet?

Book Value Signup and view all the answers

Which of the following represents the portion of an asset's cost that has already been allocated to expense?

Accumulated Depreciation Signup and view all the answers

When allocating the cost of a lump-sum purchase to different assets, what factor is primarily considered for each asset?

The relative fair market value of the asset Signup and view all the answers

What type of expenditure typically benefits several accounting periods and is therefore capitalized?

Material expenditures that improve an asset's performance Signup and view all the answers

What is the primary difference between capital expenditures and revenue expenditures?

Capital expenditures are recorded as assets, while revenue expenditures are recorded as expenses. Signup and view all the answers

What are the two main causes of depreciation?

Physical deterioration and obsolescence Signup and view all the answers

What is the definition of obsolescence in the context of depreciation?

The process of an asset becoming outdated due to new technology or designs. Signup and view all the answers

What does the term 'residual value' refer to in the context of depreciation?

The amount of money a company expects to receive when it sells an asset at the end of its useful life. Signup and view all the answers

What is the formula for calculating depreciation expense per year using the straight-line method?

Depreciation Expense = (Cost - Residual Value) / Years of Useful Life Signup and view all the answers

If an asset has a cost of $10,000, a residual value of $1,000, and a useful life of 5 years, what would be the annual depreciation expense using the straight-line method?

$1,800 Signup and view all the answers

What is the depreciation expense for the boat in the example provided on slide 9-16, when using the straight-line method?

$4,200 Signup and view all the answers

What is the primary assumption made in the straight-line depreciation method?

The asset's value declines at a constant rate over its useful life. Signup and view all the answers

Which of the following options is NOT a synonym for residual value?

Book Value Signup and view all the answers

Which of the following statements about depreciation is FALSE?

Depreciation is a measure of the physical wear and tear on an asset. Signup and view all the answers

When does an exchange of assets have commercial substance?

When the exchange results in a significant change in future cash flows. Signup and view all the answers

What is the term used for additional monetary consideration in an exchange transaction?

Boot Signup and view all the answers

Which statement is true about exchanging similar assets?

Exchanging similar assets can have commercial substance if future cash flows are significantly different. Signup and view all the answers

According to the new FASB standard, what is the primary factor in determining whether an asset exchange has commercial substance?

The expected change in future cash flows. Signup and view all the answers

How does the presence of boot affect accounting for an asset exchange?

It requires a separate journal entry for the boot received or paid. Signup and view all the answers

Which of the following is NOT a key characteristic of intangible assets?

They are typically valued based on their current market value. Signup and view all the answers

Which of the following is an example of an intangible asset?

Patents Signup and view all the answers

A company exchanges a building for land in a transaction that has commercial substance. What is the likely accounting treatment for the exchange?

The exchange will be recorded at the fair value of the land, with any gain or loss recognized on the income statement. Signup and view all the answers

A company exchanges one truck for another truck in a transaction that does NOT have commercial substance. How will the exchange be accounted for?

The new truck will be recorded at the historical cost of the old truck. Signup and view all the answers

Why might a company choose to exchange an asset for another even if the exchange does not have commercial substance?

To simply get rid of an old or outdated asset. Signup and view all the answers

Study Notes

Plant and Intangible Assets

Plant assets are long-lived assets used in business operations, similar to long-term prepaid expenses.
The cost of plant assets represents the advance purchase of services.
As time passes and services are used, the cost is transferred to depreciation expense.

Major Categories of Plant Assets

Tangible Plant Assets: Long-term assets with physical substance (land, buildings, equipment, furniture, fixtures).
Intangible Assets: Noncurrent assets without physical substance (patents, copyrights, trademarks, franchises, goodwill).
Natural Resources: Sites acquired for extracting valuable resources (oil reserves, timber, minerals).

Accountable Events

Acquisition: The initial purchase of plant assets.
Allocation of Acquisition Cost: Distributing the cost over the asset's useful life (depreciation).
Sale or Disposal: The process of selling or getting rid of an asset.

Acquisition of Plant Assets

The cost of an asset includes the asset price and related necessary costs (getting the asset ready for use, and to the desired location).

Determining Cost

Example: Heat Co. buys a machine for $52,000 with 8% sales tax, $500 shipping, $1,300 setup, and $4,000 testing costs.
The total cost was $61,960.

Special Considerations

Land: Costs include real estate commissions, legal fees, clearing, and grading the property. Improvements to land (driveways, fences, landscaping) are recorded separately.
Buildings: Sometimes purchased for remodelling prior to use. Ordinary repairs are considered maintenance expense. Related costs like interest, insurance, and taxes are treated as current period expenses.
Equipment: Similar to buildings, ordinary repairs are treated as current period expenses.
Allocation of a Lump-Sum Purchase: The total cost is allocated to separate accounts for each asset based on their relative fair market value.

Capital Expenditures and Revenue Expenditures

Capital Expenditure: Any significant expenditure benefiting several accounting periods (e.g., building improvements). Capitalized expenditures are recorded as assets.
Revenue Expenditure: Expenditures for ordinary repairs and maintenance, affecting only the current period. Revenue expenditures are expenses in the period they occur.

Depreciation

Depreciation is the systematic allocation of the cost of a plant asset to expense over the periods in which services are received from the asset.
Depreciation affects the balance sheet (assets: plant and equipment) and income statement (expenses: depreciation).

Book Value

Book value of an asset is shown on the balance sheet as Cost - Accumulated Depreciation.

Accumulated Depreciation

Accumulated Depreciation is a contra-asset account that represents the sum of depreciation expense recorded for an asset over time.

Causes of Depreciation

Physical Deterioration: Wear and tear from use and environmental factors (sun, wind).
Obsolescence: An asset becomes outdated because newer, more efficient models are developed.

Straight-Line Depreciation

Depreciation Expense per Year = (Cost - Residual Value) / Years of Useful Life
Residual Value: The estimated amount a company will receive when disposing of an asset.

Straight-Line Depreciation Example

Example: Bass Co. buys a boat for $24,000 with an estimated residual value of $3,000 and useful life of 5 years. Annual depreciation is $4,200.

Depreciation for Fractional Periods

Half-Year Convention: When an asset is acquired during the year, use half of the annual depreciation expense in that acquisition year.

Declining-Balance Method

Depreciation Expense = Remaining Book Value × Accelerated Depreciation Rate
The accelerated depreciation rate is 200% of the straight-line rate (1/Useful Life). This method results in higher depreciation expense in the early years of an asset's life.

MACRS

MACRS (Modified Accelerated Cost Recovery System) is the only accelerated method allowed by the IRS for computing depreciation for tax return purposes.
- Deprecation rates are found in IRS tables.

Financial Statement Disclosures

Estimates of useful life and residual value may differ among companies.
The reasonableness of management's estimates is evaluated by external auditors.
Companies should maintain consistent depreciation methods over time.

Revising Depreciation Rates

Over the life of an asset, new information might cause revisions to original depreciation estimates.
Example: If an asset's useful life is revised, re-calculate the depreciation expense for the remaining useful life.

Impairment of Assets

An asset is impaired if its market value is lower than its book value. The asset's book value is adjusted to its net realizable value (market value).

Disposal of Plant and Equipment

Update depreciation to the date of disposal.
Journalize the disposal by:
- Recording cash received or paid
- Removing accumulated depreciation
- Recording a gain or loss
- Removing the asset cost

Trading in Used Assets for New Ones

The new FASB standard does not distinguish between similar and dissimilar exchanges.
An exchange has commercial substance if future cash flows change significantly.
Boot is additional monetary consideration exchanged in an asset transaction.