Exam 6: Acquisition and Use of Long-Term Assets

Required: Put an X in the appropriate box to indicate the proper accounting treatment for each of the following payments:

The Modified Accelerated Cost Recovery system (MACRS)can be used to calculate depreciation for company's annual report,but not for its Federal tax return.

Amortization is the ________.

Timber,Inc.purchased land for $500,000.It is expected to produce a total of 200,000 cords of wood over 5 years,after which it will be sold for $100,000.In 2011,39,000 cords of wood were cut.In 2012,41,000 cords of wood were cut. 1.What is depletion expense per cord of wood? $__________________ 2.How much depletion should be recorded in 2011? $_______________________ 3.How much depletion should be recorded in 2012? $_______________________

Asset turnover is a ratio used to evaluate how effectively assets generate income.

Waylon Company has a 25% marginal tax rate.The company reports depreciation expense of $10,000 on its annual report for shareholders,which is based on GAAP.For its federal income tax return,the company chooses a tax depreciation method that results in a depreciation deduction of $12,000.What is the difference in taxes for the two different depreciation methods?

Depreciation is the ________.

Which of the following is NOT an intangible asset?

On January 1, 2011, the Pine River Paper Company purchased manufacturing equipment for $80,000. The equipment has a 4-year estimated useful life and a salvage value of $5,000. The company expects to use the equipment for 300,000 hours. Actual hours the equipment was used are provided in the table below: Required: Calculate the depreciation expense for each year of the asset's life using: 1. the straight-line method, 2. the double-declining balance method, and 3. the activity (units of production) method.

Under U.S.GAAP,when assets are written down because of impairment,the impairment losses cannot be reversed even if conditions change.

Which assets are depleted?

A machine was purchased for $100,000 in 2011 and used for four years,during which $40,000 of depreciation accumulated.The machine was then sold for $60,000 cash.What is the gain or loss on this transaction? Assume depreciation is up to date at the time of the sale.

IFRS sets accounting rules,including depreciation,used to prepare Federal tax returns.

The Modified Accelerated Cost Recovery system (MACRS)allows a company to report more depreciation expense in the early years of an asset's life.

A client has asked you to review the following situations related to long-term assets: a.Ana,an inexperienced accountant,has calculated depreciation expense of $14,000 for the year ended December 31,2009,on an asset that was acquired on March 1,2009.The asset cost $150,000,has an estimated salvage value of $10,000 and a 10-year estimated useful life.Ana used the straight-line method to depreciate the asset. b.Ana also calculated depreciation expense of $2,000 on a patent that has a historical cost of $5,000 and a 5-year estimated useful life.The patent has been used all year. c.A client asked Ana if he could use the double-declining balance method to depreciate assets for the external financial statements.Ana said,"No," because she is pretty sure that the double-declining balance method applies only to tax reporting. d.Ana determined that the cost of equipment purchased in January was $18,000.The equipment had an invoice price of $11,000,$1,500 of shipping charges,$1,000 of installation costs,and $1,500 of testing,moving,and handling costs.During the first month the equipment was owned,it used $2,000 of power and required a $1,000 tune-up to keep it running.Ana entered $18,000 as the original cost of the equipment. e.Ana calculated a $4,000 gain on an asset that was sold on the last day of the year.The asset had an original cost of $120,000,an estimated useful life of 8 years and a $10,000 salvage value.The asset was depreciated using the straight-line method and had been owned for 6 full years.The asset was sold for $30,000 cash. Required: For each of these items,decide if the accounting treatment described is correct or not. If the treatment is correct,write "Correct".If the current treatment is incorrect,provide the correct answer.

Physical controls to safeguard assets are always complicated and expensive.

WDS Company owns a patent with an estimated useful life of 15 years,a zero salvage value,and a historical cost of $42,000.Net income is $200,000 BEFORE the year-end adjustment related to the patent.What will net income be AFTER the proper year-end adjustment has been made?

The TOTAL amount of depreciation recorded over the life of a long-term asset depends on the method used to depreciate that asset.

A machine was purchased for $100,000 in 2011 and used for four years,during which $60,000 of depreciation accumulated.The machine was then sold for $60,000 cash.What is the gain or loss on this transaction? Assume depreciation is up to date at the time of the sale.

DFS Company sold an asset for $8,500 in cash.The asset had an historical cost of $30,000 and accumulated depreciation of $20,000 on the day it was sold.How much is the gain or loss on the sale?