Question 1

Which method of depreciation generally allocates the largest amount of depreciation to the first year of the asset's life?

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Question 2

If a business chooses to use the straight-line method for tax purposes rather than MACRS, how will this choice affect the amount of income taxes paid in the first year of an asset's life?

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Question 3

On January 1, Year 1, Jefferson Manufacturing Company purchased equipment for $212,000. Jefferson paid $4,000 to have the machine installed. The equipment is expected to have a 5-year useful life and a salvage value of $26,000..a)Plant assets are classified as long-term assets, while intangible assets are treated as current assets.b)Intangible assets include patents, copyrights, and natural resources.c)Intangible assets with indefinite useful lives will be not be amortized.d)The cost of land should be depleted over its useful life.e)The cost of a natural resource should be expensed (depleted)over its useful life.

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Question 4

Assume that the estimate of an asset's useful life is changed at the beginning of Year 2. Explain the implications of revising that estimate on previous, current, and future calculations of deprecation and how depreciation using the straight-line method would be computed in Year 2.

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Question 5

Explain how impairment losses for intangible assets with indefinite useful lives are determined.

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Question 6

Indicate whether each of the following statements is true or false.a)Long-term assets having no physical substance are called intangible assets.b)Trademarks are examples of an intangible asset.c)Natural resources are examples of tangible long-term assets.d)Land is never classified as a component of property, plant, and equipment.e)Goodwill is classified as Property, Plant and Equipment.

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b)True c)True d)False e)Fa)This is true. Intangible assets derive their value from rights and privileges.b)This is true.c)This is true. Natural resources are tangible assets.d)This is false. Land is normally classified as a component of property, plant, and equipment but is not subject to depreciation.e)This is false. Goodwill is an intangible asset because it does not have physical substance.

Question 7

What is the name of the provision in the tax code that requires one-half year's depreciation to be charged in the year in which an asset is acquired and one-half year's depreciation in the final year of depreciation?

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Question 8

What is meant by a "basket purchase"? What method is commonly used to determine the cost of individual assets?

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Question 9

Describe what is meant by the term "goodwill."

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Question 10

Why do some say that the GAAP treatment of research and development puts the US at a competitive disadvantage compared to businesses in other countries?

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Question 11

Indicate whether each of the following statements is true or false.a)Sales taxes paid on the purchase of equipment would be expensed in the year of the purchase.b)Real estate fees and attorney's fees related to the purchase of a building would be added to the cost of the building.c)Payment of a fine for improper burning of a demolished building would be added to the land account.d)Delivery charges on equipment would be expensed in the year of the purchase.e)The matching concept requires that plant assets be recorded at the amount paid for the assets.

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b)True c)False d)False e)Fa)This is false. Sales tax is included in the cost of the asset purchased.b)This is true. The cost of a building includes any one-time fee related to the purchase.c)This is false. The fine would be expensed because it was not necessary to use the land. It was because of the company's own negligence.d)This is false. The delivery charges are a necessary cost to obtain the equipment and prepare it for its initial use, so they would be added to the cost of the equipment.e)This is false. That is a description of the historic cost concept.

Question 12

What term is used to describe the process of allocating the cost of natural resources to expense?

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Question 13

Explain how the gain or loss is computed on the sale of a piece of equipment.

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Question 14

What accounts are affected by a capital expenditure that extends the life of a plant asset?

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Question 15

Explain why goodwill is not amortized and what is required as a result.

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Question 16

Explain the meaning of the terms "tangible" and "intangible" and discuss how these terms are used in describing assets.

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Question 17

Assume that two companies are in similar circumstances except for their choice of depreciation methods. Explain how the amounts of depreciation expense reported on the income statement of the company that uses the straight-line method will differ from the amounts reported by the company that uses the double-declining-balance method.

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Question 18

For what type of assets is the recognition of expense called "amortization"?

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Question 19

On January 1, Year 1, Warren Company purchased a machine for $120,000. Warren estimated the useful life of the machine to be 10 years and the salvage value to be $20,000. Indicate whether each of the following statements is true or false.a)Depreciation expense for Year 1 under the straight-line method would be $12,000.b)Depreciation expense for Year 1 under the double declining method would be $24,000.c)The accumulated depreciation at the end of Year 2 under the straight-line method would be $20,000.d)The accumulated depreciation at the end of Year 2 under the double declining method would be $48,000.e)The book value of the machine under both the double declining method and the straight-line method at the end of 10 years would be $20,000.

Accepted Answer

b)True c)True d)False e)Ta)This is false. Annual depreciation expense = ($120,000 − $20,000)÷ 10 years = $10,000b)This is true. Year 1 Depreciation expense = $120,000 × (2 × 10%)= $24,000c)This is true. Accumulated depreciation at the end of Year 2 = $10,000 annual depreciation × 2 years = $20,000d)This is false. Year 1 Depreciation expense = $120,000 × (2 × 10%)= $24,000; Year 2 Depreciation expense = ($120,000 − $24,000)× (2 × 10%)= $19,200; Accumulated depreciation at end of Year 2 = $24,000 + $19,200 = $43,200e)This is true. Regardless of depreciation method, the book value of an asset will be equal to its salvage value at the end of its useful life.

Question 20

What type of account is Accumulated Depreciation?

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Quiz 8: Accounting for Long-Term Operational Assets