TEST 2 but chapter 8

Question 1

have physical substance (tangible assets)
are used in the operations of a business
are not intended for sale to customers

Answer 1

plant assets are resources that:

Question 2

plant assets are recorded at(______). cost consists of ______ necessary to acquire the asset and make it ready for its intended use

Answer 2

-historical cost principle
-all expenditures

Question 3

the cost of land includes:

Answer 3

cash purchase price
closing costs such as title and attorneys fees
real estate brokers commissions
all necessary costs incurred in making land ready for its intended use
-clearing, draining, filling and grading vacant land
-demolition and removal of old building

Question 4

land is ______ depreciated (has an indefinite useful life)

Answer 4

NOT

Question 5

when a building is purchased costs include all _______ _____ relating to the purchase or construction of a building

Answer 5

necessary expenditures

Question 6

when a building is purchased, what are the necessary expenditures that relate to the purchase or construction of a building

Answer 6

purchase price
closing costs
attorneys fees
title insurance
real estate broker’s commissions

Question 7

when a building is constructed, costs include the following items that become part of the _________ value of the building on the balance sheet

Answer 7

constructed

Question 8

when a building is constructed, what’re the costs that become part of the capitalized value on the BS

Answer 8

-contract price plus payments made by the owner for architects’ fees
-building permits
-excavation costs
-capitalized interest expense(limited to the construction period

Question 9

the cost of equipment consists of the

Answer 9

-cash purchase price
-sales tax
-freight-in charges
-insurance during transit
-assembling, installing and testing the unit

Question 10

what is the general rule

Answer 10

one-time costs generally include(insurance during transit) recurring costs not included(yearly insurance)

Question 11

most assets require substantial expenditures during their lives to maintain or enhance their productive capacity

Answer 11

repairs, maintenance, and additions

Question 12

ordinary repairs and maintenance (expense)

Answer 12

expenditures for normal operating upkeep of long-lived assets

Question 13

reccuring in nature
involve small amounts at each occurence
do not lengthen the useful life of the asset

Answer 13

Ordinary repairs and maintenance

Question 14

infrequent expenditures that increase an assets economic usefulness in the future

Answer 14

additions and improvements (capitalized)

Question 15

-infrequent in nature
-involve large amounts of money
-increase an assets economic usefulness

Answer 15

additions and improvements

Question 16

the decision to capitalize or expense is subjective-

Answer 16

think about balance sheet and income statement effects

Question 17

land has a_____

Answer 17

an unlimited life

Question 18

a long-lived asset with a limited useful life(airplane) represents….

Answer 18

a prepaid cost of a bundle of future services or benefits

Question 19

Why do we need to allocate a portion of the asset’s cost as an expense in the same period that revenues are generated by its use?

Answer 19

because of depreciation

Question 20

____ is the process of allocating the cost of buildings and equipment over their productive lives using a systematic and rational method

Answer 20

depreciation

Question 21

depreciation is NOT the process of ……..

Answer 21

determining an assets current market value

Question 22

______ is the amount of depreciation expense accumulated since the ________. (contra-account)

Answer 22

accumulated depreciation
-acquisition date

Question 23

depreciation cost is an ______

Answer 23

estimate

Question 24

what are the three amounts required for each depreciable asset:

Answer 24

-acquisition cost
-estimated useful life
-estimated residual(or salvage) value

Question 25

the expected service life of the asset

Answer 25

estimated useful life

Question 26

estimated amount to be recovered by the company at the end of the assets estimated useful life

Answer 26

estimated residual

Question 27

important note: with all of the method, the net book value should not be ____ below the ____

Answer 27

depreciated residual value

Question 28

What are three methods to calculate depreciation

Answer 28

-straight line (used by > 98% of companies) -units of production -declining balance(conceptually)

Question 29

allocates the cost of an asset in equal periodic amounts over its useful life. So depreciation expense is a ________

Answer 29

straight line method -constant amount each year

Question 30

straight line formula:

Answer 30

depreciation expense= (cost-residual value)/useful life

Question 31

allocates the cost of an asset over its useful life based on the relation of its periodic output to its total estimated output

Answer 31

units-of-production method

Question 32

units-of-production formula:

Answer 32

depreciation expense= (cost-residual expense)-estimated total production *actual production

Question 33

allocates the cost of an asset over its useful life based on a multiple of the straight-line rate (often two times).

Answer 33

declining-balance method

Question 34

if the asset is more efficient or productive when it is newer, matches higher depreciation expense with higher revenues in the early years of an assets life and lower depreciation expense with lower revenues in the later years

Answer 34

accelerated depreciation method

Question 35

double-declining balance formula

Answer 35

depreciation expense=(cost-accumulated depreciation)/ useful life *2

Question 36

companies recognize a loss for the difference between the assets book value and its fair value

Answer 36

asset impairment

Question 37

what is step 1 in asset impairment

Answer 37

test for impairment -if net book value > estimated future cash flows, then the asset is impaired

Question 38

what is step 2 in asset impairment

Answer 38

computation of impairment loss impairment loss= net book value - fair value

Question 39

what two entires does the disposal of a depreciable asset usually require?

Answer 39

-an adjusting entry, this updates the depreciation expense and accumulated depreciation accounts -an entry to record the disposal; the cost of the asset and any accumulated depreciation at the date of disposal must be removed from the accounts

Question 40

any difference between any resources received on disposal of an asset and its book value at the date of disposal is treated as a.....

Answer 40

gain or loss on the disposal of the asset

Question 41

these are rights, priviledges, and competitive advantages that result from ownership of long-lived assets that do not possess physical substance

Answer 41

intangible assets and amortization

Question 42

intangible assets are capitalized and recorded at historical cost only if they have been purchased

Answer 42

acquisition -if developed internally by the company, they are expensed when inccured

Question 43

upon acquisition, managers determine whether the separate intangibles have:

Answer 43

definite or indefinite lives

Question 44

-intangible assets with indefinite lives are not amortized -instead, these assets are to be test at least annually for possible impairment, and the asset's book value is written down (decreased) to its fair value if impaired

Answer 44

indefinite life (goodwill)

Question 45

impairment loss formula

Answer 45

impairment loss= Book value - fair value

Question 46

types of intangible assets:

Answer 46

-goodwill -trademark -copyright -technology -patenets -franchises -license and operating rights - gaap

Question 47

-The favorable reputation that a company has with its customers. It arises from factors such as customer confidence, reputation, and financial standing. company builds ___ over time -calculated as the excess of the purchase price of a business over the fair market value of the business assets and liabilities -reported as an asset only if another business is purchased(if this is not internally generated it is not recorded as an asset) considered to have an indefinite life; must be reviewed at least annually for possible impairment

Answer 47

Goodwill, goodwill

Question 48

When was AOL time warner merger created

Answer 48

when AOL purchased time warner for US $147bn -at this time, the fair market value of time warner was much less than that($65bn) -in the first quarter of 2002, AOL time warner incurred a $54 billion goodwill impairment loss

Question 49

an exclusive legal right to use a special name, image, slogan

Answer 49

Trademark

Question 50

the exclusive right to publish, use, and sell a literary, musical, artistic work

Answer 50

copyright

Question 51

includes costs for computer software and web development

Answer 51

technology

Question 52

An exclusive right granted by the federal government for a period of 20 years, typically granted to a person who invents a new product or discovers a new process

Answer 52

patents

Question 53

a contractual right to sell certain products or services, use certain trademarks, or perform activities in a geographical region

Answer 53

franchises

Question 54

obtained through agreements with governmental units or agencies, permit owners to use public property in performing their service

Answer 54

licenses and operating rights

Question 55

Not an intangible assets under US GAAP. intangible assets are capitalized when acquired

Answer 55

Research and development expense

Question 56

-cost of an intangible asset with a definite life is allocated on a straight line basis over a period over its useful life in a process called amortize (similar to depreciation) -most companies do not estimate a residual value for their intangible assets -amortization expense is included on the income statement each period -intangible assets are reported at cost less accumulated amortization on the balance sheet the amortization period of an intangible asset is the lower between its useful life and legal life

Answer 56

definite life (patent, copyright, trademark)