Exam 8: Accounting for Long-Term Operational Assets

Give an example of a type of industry in which a company can be very successful with a relatively small amount of operational assets. Give an example of a type of industry that requires a very large amount of operational assets in order to be successful.

On January 6, 2013, the Mount Jackson Corporation purchased a tract of land for a factory site for $750,000. An existing building on the site was demolished and the new factory was completed on October 11, 2013. Additional cost data are shown below: Which of the following correctly states the capitalized cost of the (a) land and (b) the new building?

Which of the following statements is correct regarding accounting treatment of goodwill?

Diaz Company purchased a truck that cost $36,000. The company expected to drive the truck 100,000 miles over its 5-year useful life, and the truck had an estimated salvage value of $5,000. If the truck is driven 26,000 miles in the current accounting period, what would be the amount of depreciation expense for the year? (Use the Unit of Production Method to solve.)

Indicate whether each of the following statements is true or false. _____ a) Straight-line depreciation is the most widely used method in the U.S. _____ b) An accelerated depreciation method provides a lower depreciation charge in the early years of an asset's life cycle than does the straight-line method. _____ c) The units-of-production depreciation method allocates the cost of a plant asset in proportion to the asset's usage. _____ d) Total depreciation expense recognized over the asset's life is not affected by the choice of depreciation methods. _____ e) The entry to record depreciation affects the income statement and the statement of cash flows but not the balance sheet or statement of changes in stockholders' equity.

Which of the following statements is true with regard to depreciation expense?

Indicate whether each of the following statements is true or false. _____ a) MACRS is an accelerated depreciation method commonly used for tax purposes. _____ b) The half-year convention is a semi-annual meeting of accountants and educators. _____ c) MACRS requires that the taxpayer ignore the estimated salvage value. _____ d) The use of MACRS provides tax benefits in the early years of an asset's life, compared to use of the straight-line method. _____ e) Most companies use one depreciation method for financial reporting and another method for tax reporting.

On January 1, 2013, Frankfort Company made a basket purchase including land, a building and equipment for $760,000. The appraised values of the assets are $40,000 for the land, $680,000 for the building and $80,000 for equipment. Frankfort uses the double declining balance method of depreciation for the equipment which is estimated to have a useful life of four years and a salvage value of $10,000. The depreciation expense for 2013 for the equipment is:

Anchor Company purchased a manufacturing machine with a list price of $80,000 and received a 2% cash discount on the purchase. The machine was delivered under terms FOB shipping point, and freight costs amounted to $1,200. Anchor paid $1,500 to have the machine installed and tested. Insurance costs to protect the asset from fire and theft amounted to $1,800 for the first year of operations. Based on this information, the amount of cost recorded in the asset account would be:

The use of estimates and revision of estimates are uncommon in financial reporting.

On January 1, 2013, Goldberg Company purchased a new computer system for $60,000. Management estimates that the system will have a 5-year life and a salvage value of $5,000. Joan Goldberg, the company president, knows that the system can be depreciated using either the straight-line method or the double-declining method. She is concerned as to the possible effect on various financial statement analyses if the company uses one method versus the other. Required: a) In 2013 which method will have the larger negative effect (in other words, the less favorable effect) on each of the following ratios: Debt to equity ratio Return on sales (net income/sales) b) In 2016 which method will have the larger negative effect on each of the following ratios Debt to equity ratio Return on sales

Goodwill may be recorded in which of the following circumstances?

What term is used for the process of expense allocation of natural resources?

At the beginning of 2016, Furst revised the expected life to eight years. The annual amount of depreciation expense for each of the remaining years would be:

A machine with a book value of $19,000 is sold for $16,000. Which of the following answers would accurately represent the effects of the sale on the financial statements?

On January 1, 2013 Midwest Co. purchased a truck that cost $38,000. The truck had an expected useful life of 10 years and a $4,000 salvage value. The amount of depreciation expense recognized in 2014 assuming that Midwest uses the double declining-balance method is:

Old MacDonald Corporation purchased for $440,000 land and a building that will be used in farming operations. The appraised value of the land is $150,000 and the appraised value of the building is $350,000. What amount of the purchase price will be allocated to the land and what amount will be allocated to the building?

On September 10, 2013, Flagler Company sold a piece of equipment for $3,000. The equipment had an original cost of $17,000 and accumulated depreciation of $15,500 at the time of the sale. Which of the following correctly shows the effect of the sale on the 2013 financial statements?

What value will be recorded for the building?

If a business chooses to use the straight-line method for tax purposes, how will this affect their income tax in the first year of an asset's life, compared to MACRS?