Podcast
Questions and Answers
A company purchases a new machine. Which of the following costs should NOT be included in the initial cost of the machine?
A company purchases a new machine. Which of the following costs should NOT be included in the initial cost of the machine?
- Sales tax on the purchase
- Shipping costs to deliver the machine
- Installation costs to set up the machine
- Routine maintenance costs after the machine is operational (correct)
When a company purchases several assets together for a single price, this is known as a basket purchase. How is the purchase price typically allocated among the individual assets?
When a company purchases several assets together for a single price, this is known as a basket purchase. How is the purchase price typically allocated among the individual assets?
- Based on the company's intended use of each asset.
- Based on the relative fair values of the individual assets. (correct)
- Equally among all assets regardless of their individual values.
- Based on the assets' original costs as estimated by the seller.
Which of the following scenarios would result in the recognition of goodwill on a company's balance sheet?
Which of the following scenarios would result in the recognition of goodwill on a company's balance sheet?
- The company acquires another company for a price greater than the fair value of its net assets. (correct)
- The company successfully defends a valuable patent in court.
- The company develops a strong brand reputation through effective marketing.
- The company's assets appreciate significantly in value over time.
A company uses the straight-line method to depreciate an asset. If the asset's cost is $100,000, its residual value is $10,000, and its service life is 5 years, what is the annual depreciation expense?
A company uses the straight-line method to depreciate an asset. If the asset's cost is $100,000, its residual value is $10,000, and its service life is 5 years, what is the annual depreciation expense?
Under the double-declining balance method, which factor remains constant when calculating depreciation expense each year?
Under the double-declining balance method, which factor remains constant when calculating depreciation expense each year?
A company disposes of equipment for cash. To calculate the gain or loss on the disposal, what must be compared?
A company disposes of equipment for cash. To calculate the gain or loss on the disposal, what must be compared?
What is the primary difference between depreciation and amortization?
What is the primary difference between depreciation and amortization?
Which of the following is the correct journal entry to record amortization expense?
Which of the following is the correct journal entry to record amortization expense?
An asset impairment occurs when the book value of an asset exceeds its ____.
An asset impairment occurs when the book value of an asset exceeds its ____.
A company owns a building. Which of the following would be classified as a 'land improvement' rather than part of the building itself?
A company owns a building. Which of the following would be classified as a 'land improvement' rather than part of the building itself?
A company purchased equipment on January 1st for $50,000 with a residual value of $5,000 and a useful life of 10 years. At the beginning of year 6, the accumulated depreciation using the straight-line method would be?
A company purchased equipment on January 1st for $50,000 with a residual value of $5,000 and a useful life of 10 years. At the beginning of year 6, the accumulated depreciation using the straight-line method would be?
Which of the following factors is NOT needed to calculate depreciation expense using the activity-based method?
Which of the following factors is NOT needed to calculate depreciation expense using the activity-based method?
A company sells salvaged materials from newly acquired property. How does this sale affect the recorded cost of the Plant, Property, and Equipment (PP&E)?
A company sells salvaged materials from newly acquired property. How does this sale affect the recorded cost of the Plant, Property, and Equipment (PP&E)?
If an asset is owned for only part of the year, how is depreciation expense adjusted under the straight-line and double-declining balance methods?
If an asset is owned for only part of the year, how is depreciation expense adjusted under the straight-line and double-declining balance methods?
A company retires an asset that is fully depreciated. Which account is NOT affected by this transaction?
A company retires an asset that is fully depreciated. Which account is NOT affected by this transaction?
A company uses the activity-based depreciation method for a machine. The machine cost $80,000, has a residual value of $10,000, and is expected to produce 100,000 units. If the machine produces 15,000 units in its first year, what is the depreciation expense for that year?
A company uses the activity-based depreciation method for a machine. The machine cost $80,000, has a residual value of $10,000, and is expected to produce 100,000 units. If the machine produces 15,000 units in its first year, what is the depreciation expense for that year?
Which of the following factors would NOT be a valid reason for an asset impairment?
Which of the following factors would NOT be a valid reason for an asset impairment?
A company exchanges an old asset for a new asset. To determine if there is a gain or loss on the exchange, what must be compared?
A company exchanges an old asset for a new asset. To determine if there is a gain or loss on the exchange, what must be compared?
A company incorrectly expensed a capitalizable expenditure. What is the effect of this error in the year the error occurred?
A company incorrectly expensed a capitalizable expenditure. What is the effect of this error in the year the error occurred?
Goodwill has an indefinite life, so it is not amortized, but how is it accounted for?
Goodwill has an indefinite life, so it is not amortized, but how is it accounted for?
Flashcards
Tangible Assets
Tangible Assets
Assets with physical substance that can be touched, such as buildings, land, and equipment.
Intangible Assets
Intangible Assets
Assets lacking physical substance, such as patents, trademarks, franchises, and goodwill.
Recording PP&E
Recording PP&E
Plant, Property, and Equipment are recorded at the original cost plus expenditures necessary to use the asset.
Common PP&E Expenditures
Common PP&E Expenditures
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Salvaged Materials
Salvaged Materials
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Land Improvements
Land Improvements
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Basket Purchase
Basket Purchase
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Goodwill
Goodwill
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Net Assets
Net Assets
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Depreciation
Depreciation
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Journal Entry: Depreciation
Journal Entry: Depreciation
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Service Life (Useful Life)
Service Life (Useful Life)
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Residual (Salvage) Value
Residual (Salvage) Value
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Straight Line Depreciation
Straight Line Depreciation
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Double Declining Depreciation
Double Declining Depreciation
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Activity Based Depreciation
Activity Based Depreciation
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Amortization
Amortization
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Journal Entry: Amortization
Journal Entry: Amortization
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Book Value
Book Value
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Asset Impairment
Asset Impairment
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Study Notes
- Long-term assets are categorized into tangible and intangible assets.
Tangible Assets
- Tangible assets have a physical form that can be touched, such as buildings, land, and equipment.
Intangible Assets
- Intangible assets lack physical substance and cannot be touched; examples include patents, trademarks, franchises, and goodwill.
Recording Acquisition of Long-Term Assets
- Plant, Property, and Equipment (PP&E) is recorded at the original cost plus any expenditures necessary to use the asset.
- Expenditures included in PP&E: real estate fees, commissions, back taxes, property clearing, remodeling, sales tax, shipping, and assembly.
- If salvaged materials are sold when PP&E is purchased, the total cost is reduced by the cash received.
- Land improvements like parking lots and sidewalks are recorded separately from the land itself.
- A basket purchase occurs when several assets are bought for one price which is allocated based on the fair values of the assets.
- Goodwill is recorded only when a company acquires another company and represents the excess of the purchase price over the fair value of the acquired company's net assets.
- Net assets equal assets minus liabilities.
- Goodwill cannot be internally generated.
Allocating Cost of Long-Term Assets
- PP&E depreciates because its value decreases over time while benefiting the company.
- The journal entry to record depreciation expense involves debiting depreciation expense and crediting accumulated depreciation.
- Service life estimates the time a company expects to use the asset.
- Residual (salvage) value is the amount expected upon disposal of the asset.
Depreciation Methods
- Straight Line depreciation is calculated as (asset cost - residual value) / service life.
- Double Declining depreciation uses the formula: beginning book value x (2 / service life).
- Activity Based depreciation is (asset cost – residual value) / total activity.
- Depreciation expense is adjusted if the asset is not owned for the entire year such as multiplying by 9/12 if owned for nine months.
- Intangible assets also decrease in value through amortization with most companies using the straight-line method.
- The journal entry to record amortization expense involves debiting amortization expense and crediting the intangible asset such as a patent.
Depreciation Relationship
- Accumulated depreciation is a contra-asset account that accumulates depreciation expense in current and prior periods.
- Book value equals the original cost of the asset minus accumulated depreciation and appears on the balance sheet.
- Calculate depreciation expense for any given year using the various methods.
- Calculate ending accumulated depreciation for any year.
- Calculate book value at the end of any year,
Disposing of Long-Term Assets
- Three methods exist to dispose of a long-term asset: sale, retirement, and exchange.
- Gain or loss is calculated by subtracting what the company gave up from what the company got. A gain results from receiving more than giving up, and a loss from giving up more.
Asset Impairments
- Asset impairments occur when the book value exceeds the asset’s fair value due to a decrease in fair value, damage, or adverse changes in the business environment.
- A two-step process is used to test and determine the amount of loss from asset impairment.
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