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Questions and Answers
Which of the following characteristics is NOT typically associated with plant assets?
Which of the following characteristics is NOT typically associated with plant assets?
- Held for resale (correct)
- Long-term in nature
- Possess physical substance
- Used in operations
A company purchases land with an old building on it, which it plans to demolish and then construct a new building. Which of the following costs would NOT be allocated to the cost of the land?
A company purchases land with an old building on it, which it plans to demolish and then construct a new building. Which of the following costs would NOT be allocated to the cost of the land?
- Real estate broker's commission
- Title insurance fees
- Architectural design fees for the new building (correct)
- Demolition costs of the old building
A company incurs costs to remodel an office building it recently purchased. According to accounting principles, these costs should be:
A company incurs costs to remodel an office building it recently purchased. According to accounting principles, these costs should be:
- Amortized over a 5-year period.
- Added to the cost of the building. (correct)
- Expensed immediately.
- Treated as a separate land improvement.
Which of the following statements correctly describes depreciation?
Which of the following statements correctly describes depreciation?
Which factor is NOT considered when calculating depreciation expense?
Which factor is NOT considered when calculating depreciation expense?
A company uses the straight-line method to depreciate an asset. Which of the following is true regarding the annual depreciation expense?
A company uses the straight-line method to depreciate an asset. Which of the following is true regarding the annual depreciation expense?
Under which depreciation method does the depreciation expense vary based on the asset's usage?
Under which depreciation method does the depreciation expense vary based on the asset's usage?
Which of the following best describes the declining-balance method of depreciation?
Which of the following best describes the declining-balance method of depreciation?
If a company disposes of a plant asset by discarding it, what accounting treatment is required?
If a company disposes of a plant asset by discarding it, what accounting treatment is required?
When a plant asset is sold, a gain on disposal occurs when the:
When a plant asset is sold, a gain on disposal occurs when the:
Chan Company sells office equipment for $20,000 cash on September 30, 2018. The equipment originally cost $72,000 and had accumulated depreciation of $42,000 as of January 1, 2018. What is the loss on disposal?
Chan Company sells office equipment for $20,000 cash on September 30, 2018. The equipment originally cost $72,000 and had accumulated depreciation of $42,000 as of January 1, 2018. What is the loss on disposal?
What accounting method is generally used to compute periodic depletion of natural resources?
What accounting method is generally used to compute periodic depletion of natural resources?
How does depletion relate to natural resources in accounting?
How does depletion relate to natural resources in accounting?
Which of the following is an example of an intangible asset?
Which of the following is an example of an intangible asset?
Which of the following accounting treatments is appropriate for intangible assets with a definite life?
Which of the following accounting treatments is appropriate for intangible assets with a definite life?
What is the accounting term used to describe the allocation of the cost of an intangible asset to expense over its useful life?
What is the accounting term used to describe the allocation of the cost of an intangible asset to expense over its useful life?
Which of the following intangible assets is NOT typically amortized?
Which of the following intangible assets is NOT typically amortized?
Which of the following methods is typically used to amortize intangible assets?
Which of the following methods is typically used to amortize intangible assets?
In the journal entry to record amortization of an intangible asset, which account is typically credited?
In the journal entry to record amortization of an intangible asset, which account is typically credited?
Unlike plant assets, how are intangible assets typically recorded?
Unlike plant assets, how are intangible assets typically recorded?
A company purchased land for $500,000. Closing costs were $10,000, and costs to clear the land were $5,000. What amount should the company record as the cost of the land?
A company purchased land for $500,000. Closing costs were $10,000, and costs to clear the land were $5,000. What amount should the company record as the cost of the land?
Gray Company bought a machine for $270,000 on January 1, 2020. The machine has an estimated useful life of 5 years and a salvage value of $20,000. Using the straight-line method, what is the annual depreciation expense?
Gray Company bought a machine for $270,000 on January 1, 2020. The machine has an estimated useful life of 5 years and a salvage value of $20,000. Using the straight-line method, what is the annual depreciation expense?
On January 1, 2020, a company purchased equipment for $500,000. The equipment is expected to produce 100,000 units during its life. If 15,000 units were produced in 2020, and the salvage value is $50,000, what is the depreciation expense for 2020 using the units-of-activity method?
On January 1, 2020, a company purchased equipment for $500,000. The equipment is expected to produce 100,000 units during its life. If 15,000 units were produced in 2020, and the salvage value is $50,000, what is the depreciation expense for 2020 using the units-of-activity method?
A company purchased a patent for $200,000 on January 1, 2020. The patent has a remaining legal life of 10 years and an expected useful life of 8 years. What is the amortization expense for the year ended December 31, 2020?
A company purchased a patent for $200,000 on January 1, 2020. The patent has a remaining legal life of 10 years and an expected useful life of 8 years. What is the amortization expense for the year ended December 31, 2020?
Flashcards
Plant Assets
Plant Assets
Assets used in operations, long-term, possessing physical substance, and subject to depreciation.
Cost of Land
Cost of Land
All costs to acquire land and prepare it for use, including legal fees, commissions, and clearing costs.
Depreciation
Depreciation
The process of allocating the cost of tangible assets to expense over its service life.
Useful Life
Useful Life
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Salvage Value
Salvage Value
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Straight-Line Depreciation
Straight-Line Depreciation
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Units-of-Activity Method
Units-of-Activity Method
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Declining-Balance Method
Declining-Balance Method
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Plant Asset Disposal Methods
Plant Asset Disposal Methods
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Retiring an Asset
Retiring an Asset
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Sale of Plant Assets
Sale of Plant Assets
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Cost of Natural Resource
Cost of Natural Resource
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Depletion
Depletion
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Intangible Assets
Intangible Assets
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Amortization
Amortization
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Study Notes
Plant Assets
- Include land, land improvements, buildings, and equipment like machinery, furniture, and tools.
- Major characteristics are that they are used in operations rather than for resale, long-term, usually depreciated, and possess physical substance.
- These are also referred to as property, plant, and equipment, plant and equipment, and fixed assets.
Determining the Cost of Plant Assets: Land
- Includes all costs to acquire land and prepare it for use.
- Costs typically include the purchase price, closing costs such as title and attorney's fees, real estate brokers' commissions, costs of grading, filling, draining, and clearing, and any liens, mortgages, or encumbrances on the property.
Determining the Cost of Plant Assets: Buildings
- Includes all costs related directly to purchase or construction.
- Purchase costs consist of the purchase price, closing costs (attorney's fees, title insurance, etc.), real estate broker's commission, remodeling, and replacing or repairing the roof, floors, electrical wiring, and plumbing.
- Construction costs are the contract price plus payments for architects' fees, building permits, and excavation costs.
Depreciation
- This is the process of allocating the cost of tangible assets to expense in a systematic and rational manner to those periods expected to benefit from the use of the asset.
- This is a process of cost allocation, not asset valuation.
- Depreciation applies to land improvements, buildings, and equipment, but not land.
- Cost factors in computing depreciation are all expenditures necessary to acquire the asset and make it ready for intended use.
- Additional Cost factors in computing depreciation are useful life, the estimate of the expected life based on need for repair, service life, and vulnerability to obsolescence, and salvage value; the estimate of the asset's value at the end of its useful life
Depreciation Methods
- Objective: Select the method that best measures an asset’s contribution to revenue over its useful life.
- Straight-line Method
- Units-of-Activity Method
- Declining-Balance Method
Straight-Line Depreciation
- Expense is the same amount for each year.
- Depreciable cost is the cost of the asset less its salvage value.
- This method predominates in practice.
Units-of-Activity Depreciation
- Expense varies based on units of activity.
- Depreciable cost is cost less salvage value.
- Companies estimate total units of activity to calculate depreciation cost per unit.
Declining-Balance Depreciation
- Utilizes decreasing annual depreciation expense over the asset's useful life.
- Rate applied to book value (cost less accumulated depreciation).
Plant Asset Disposals
- Companies can dispose of plant assets through retirement, sale, or exchange.
- The depreciation should be recorded up to the date of disposal.
- The asset is eliminated by debiting Accumulated Depreciation and crediting the asset account.
Plant Asset Disposal: Retirement
- Gomez Company retires delivery equipment costing $41,000 with accumulated depreciation of also $41,000; no salvage value is received.
- Accumulated depreciation is debited for $41,000, and equipment is credited for $41,000.
- When accumulated depreciation of Gomez Company is $39,000, accumulated depreciation is debited for $39,000, equipment is credited for $41,000, and loss on disposal is debited for $2,000.
Sale of Plant Assets
- Compares the book value of the asset with proceeds from the sale.
- If proceeds exceed book value, a gain on disposal occurs.
- If proceeds are less than the book value, a loss on disposal occurs.
Plant Asset Disposal: Sale
- Chan Company sells office equipment on September 30, 2018, for $20,000 cash.
- The equipment originally cost $72,000 with accumulated depreciation of $42,000 as of January 1, 2018.
- Cash is debited for $20,000, accumulated depreciation is debited for $42,000, office equipment is credited for $72,000, and loss on disposal is debited for $10,000.
Natural Resources
- Cost is the price needed to acquire the resource and prepare it for its intended use.
- Depletion is the allocation of the cost to expense in a rational and systematic manner over the resource's useful life.
- Depletion is to natural resources as depreciation is to plant assets.
- Companies generally use a units-of-activity method.
Intangible Assets
- These are rights, privileges, and competitive advantages that do not possess physical substance.
- Normally classified as long-term assets.
- Common types include patents, copyrights, franchises or licenses, trademarks or trade names, and goodwill.
Depreciation for Intangible Assets
- Depreciation for intangible assets is referred to as amortization.
- Amortization is only applicable for intangible assets with limited life, not for those with unlimited life.
- The amortization method is similar to depreciation.
- Intangible assets are typically amortized using the straight-line method.
- To record amortization, a company debits amortization expense and credits the intangible asset, unlike depreciation, with no contra-asset account used.
- These assets are recorded at their purchasing price, unlike plant assets, which also include designing, remodeling, and construction costs, if any.
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