Question 1

How does an asset impairment loss impact a company's financial statements?

Accepted Answer

An asset impairment loss lowers the value of the asset, which in turn reduces total assets on the balance sheet. This reduction in assets will also decrease stockholders' equity because the asset is no longer worth as much as it was before. Additionally, because the loss reduces net income, it will also decrease retained earnings.

Question 2

A loss on disposal of an asset would be reported:

Accepted Answer

A loss on disposal of an asset represents a cost incurred by the company, and as such it is reported as an expense in the Operating Expenses section of the income statement. It does not affect the balance sheet accounts directly.

Question 3

A company sells a long-lived asset that originally cost $200,000 for $50,000 on December 31,2014.The accumulated depreciation account had a balance of $110,000 after the current year's depreciation of $45,000 had been recorded.The company should recognize a:

Accepted Answer

The book value of the long-lived asset is calculated as follows: 
Original cost - Accumulated depreciation = Book value 
$200,000 - $110,000 = $90,000

Since the asset was sold for $50,000, the company incurred a loss on the sale. The loss on sale is calculated as follows: 
Proceeds from sale - Book value = Loss on sale 
$50,000 - $90,000 = -$40,000

Therefore, the correct answer is C, a $40,000 loss on sale.

Question 4

A company sells a piece of equipment half-way through the accounting period.The straight-line rate of depreciation on the equipment is $40,000 per year.Before recording the asset sale,the company should debit:

Accepted Answer

Since the equipment was sold halfway through the accounting period, it means it was used for only half the year. Therefore, the amount of depreciation recorded should be half of the full-year amount of $40,000, which is $20,000. The company should debit depreciation expense for $20,000 and credit accumulated depreciation for $20,000 to record the sale of the asset. Option A and B are incorrect because they assume the full-year depreciation rate should be recorded. Option D is incorrect because it suggests recording the sale of the asset as a debit to cash, which is not accurate since the equipment was sold halfway through the accounting period and therefore would not have been fully paid off.

Question 5

An asset is purchased on January 1 for $40,000.It is expected to have a useful life of five years after which it will have an expected salvage value of $5,000.The company uses the straight-line method.If it is sold for $30,000 exactly two years after it is purchased,the company will record a:

Accepted Answer

The answer of An asset is purchased on January 1...

Question 6

A company bought a piece of equipment for $40,000,expecting to use it for eight years.The company then plans to sell it for $3,500.The company has already recorded depreciation of $35,995.Using the double-declining-balance method,the company's annual depreciation expense for the upcoming year would be:

Accepted Answer

The double-declining-balance method calculates depreciation based on the book value at the beginning of the year. The book value is $40,000 - $35,995 = $4,005. The double-declining rate is 2/8 = 0.25. So, $4,005 * 0.25 = $1,001. However, the depreciation cannot reduce the book value below the salvage value of $3,500, so the depreciation expense is $4,005 - $3,500 = $505.

Question 7

A company paid $17,000 for a vehicle that had an estimated useful life of 4 years,total capacity of 100,000 miles,and a residual value of $1,000.After 2 full years of using the vehicle (20,000 miles in year 1 and 27,000 miles in year 2),the company sold the vehicle for $6,000 and reported a loss on disposal of $3,480.What method of depreciation did the company use?

Accepted Answer

The company used the units-of-production method, as the depreciation was based on mileage (20,000 miles in year 1 and 27,000 miles in year 2). The loss on disposal calculation aligns with this method.

Question 8

When a company sells a long-lived asset,stockholders' equity will change by the:

Accepted Answer

When a company sells a long-lived asset, the stockholders' equity will change by the difference between the sales price and the asset's book value. This is because the sale of the asset will result in a gain or loss, which will affect the company's net income and therefore stockholders' equity. The amount of the sale, the asset's book value, and its accumulated depreciation are all important factors in determining the gain or loss on the sale, but they do not impact stockholders' equity directly.

Question 9

A trucking company sold its fleet of trucks for $55,000.The trucks had originally cost $1,410,000 and had accumulated depreciation of $1,269,000 through the date of disposal.What gain or loss did the trucking company record when it sold the fleet of trucks?

Accepted Answer

The answer of A trucking company sold its fleet of...

Question 10

After the early years of an asset's life,accelerated depreciation methods:

Accepted Answer

Accelerated depreciation methods result in a higher depreciation expense in the early years of an asset's life, causing the asset to be carried at a lower book value than the straight-line method. This is because more of the asset's cost is expensed in the earlier years, resulting in a faster reduction in the asset's book value.

Question 11

When a company sells equipment for cash on a date other than the last day of the accounting period,it must:

Accepted Answer

The company should first record depreciation expense for the period up to the date of sale and then record the disposal by decreasing both equipment and accumulated depreciation while increasing cash. This will result in a gain or loss being reported if total assets increase or decrease. Option A is incorrect because the company should only record depreciation up to the date of sale, not for the entire accounting period. Option B is incorrect because revenue should only be recognized at the time of sale, not when the equipment is disposed of. Option D is incorrect because accumulated depreciation is a contra asset account and is not affected by the sale of equipment for cash.

Question 12

A truck costing $12,000,on which $9,000 of accumulated depreciation has been recorded was sold for $2,000 cash.The entry to record this event would include a:

Accepted Answer

The truck was sold for $2,000, but its original cost was $12,000 and $9,000 worth of depreciation had been accumulated.

$12,000 (original cost) - $9,000 (accumulated depreciation) = $3,000 (book value)

Since the truck was sold for $2,000, it resulted in a loss for the company. The loss would be calculated as follows:

$2,000 (selling price) - $3,000 (book value) = -$1,000 (loss)

Therefore, the entry to record this event would include a loss of $1,000.

Question 13

Under what circumstances should a company record an asset impairment loss?

Accepted Answer

A company should record an asset impairment loss when the net book value of the asset is greater than the expected future cash flows for the asset. This indicates that the asset is not likely to generate sufficient cash flows to recover its carrying amount, and therefore a loss should be recognized. The other options are not criteria for impairments.

Question 14

If a fully depreciated asset with no residual value is retired without receiving any cash on retirement:

Accepted Answer

Since the asset is fully depreciated with no residual value, its net book value is zero. Therefore, retiring the asset without receiving any cash will not result in a gain or loss on disposal.

Question 15

A book manufacturing company sells equipment for $450,000 when the book value of the equipment is $400,000.The company would record the extra $50,000 as:

Accepted Answer

The extra $50,000 would be recorded as a gain, which would increase net income and stockholders' equity. This is because the company sold the equipment for more than its book value, resulting in a profit.

Question 16

One difference between the double-declining-balance method and the straight-line method is that the double-declining-balance method:

Accepted Answer

The double-declining-balance method utilizes the book value of the asset in the calculation of depreciation, whereas the straight-line method uses the depreciable cost.

Question 17

Your company rents out computers to local businesses and schools.You have 1,000 computers with a net book value of $160,000.As a result of changing technology,your computers are more difficult to rent so you must severely reduce your rental price,which causes a decrease in estimated future cash flows.The fair value of the computers is estimated to be $125,000 because of their outdated technology.Your company should report an asset impairment loss of:

Accepted Answer

The asset impairment loss should be calculated as the difference between the net book value and fair value. In this case, the loss would be $35,000 ($160,000 - $125,000). Therefore, the correct answer is C.

Question 18

The cost of developing a prototype would probably be capitalized by which of the following companies?

Accepted Answer

Lego is a company that produces physical products, including toys and games. Developing a prototype would likely be considered a research and development expense that should be capitalized as an intangible asset on the company's balance sheet. Southwest Airlines, Walmart, and Cedar Fair are not necessarily focused on physical product development and may not have the same need to capitalize prototype development costs.

Question 19

Use the information above to answer the following question.What is the adjusted balance in the Accumulated Depreciation account at the end of 2015?

Accepted Answer

The answer of Use the information above to answer the...

Question 20

A piece of equipment was acquired on January 1,2013,at a cost of $22,000,with an estimated residual value of $2,000 and an estimated useful life of four years.The company uses the double-declining-balance method.What is its book value at December 31,2014?

Accepted Answer

The double-declining-balance method is a depreciation method that allocates a larger portion of the depreciation expense to the early years of an asset's life. The depreciation rate is twice the straight-line depreciation rate.The book value of an asset is the cost of the asset minus the accumulated depreciation. The accumulated depreciation is the total amount of depreciation that has been taken on the asset to date.To calculate the book value of the equipment at December 31, 2014, we need to first calculate the depreciation expense for 2013 and 2014.The depreciation expense for 2013 is:Depreciation expense = (Cost - Residual value) x Depreciation rate= ($22,000 - $2,000) x (2 x 1/4)= $20,000 x 1/2= $10,000The depreciation expense for 2014 is:Depreciation expense = (Book value at the beginning of the year - Residual value) x Depreciation rate= ($22,000 - $10,000) x (2 x 1/4)= $12,000 x 1/2= $6,000The book value of the equipment at December 31, 2014 is:Book value = Cost - Accumulated depreciation= $22,000 - ($10,000 + $6,000)= $22,000 - $16,000= $6,000Therefore, the book value of the equipment at December 31, 2014 is $6,000.

Quiz 9: Long-Lived Tangible and Intangible Assets