Chapter 7 Review Questions

Chapter 7 Review Questions • The purchase price and all costs to bring an asset to its desired condition and location for use should be Capitalized • An asset that has no physical substance is called an intangible asset. • The types of expenditures that can occur subsequent to an asset's acquisition are additions, repairs and maintenance, and improvements. • Depreciation -Allocation of the cost of a tangible fixed asset • Depletion -Allocation of the cost of natural resources • Amortization -Allocation of the cost of an intangible asset • Long-term tangible assets include Equipment, buildings, and land (property) • The initial cost of property, plant, and equipment includes the purchase price and all expenditures necessary to bring the asset to its desired condition and location for use. o All costs should be capitalized to bring the asset to its intended and useful state. • The allocation of the cost of a tangible asset over its service life is referred to as depreciation • An asset that has no physical substance is referred to as an intangible asset. • The original cost of the asset less the accumulated depreciation is the book value of the asset. • Repairs and maintenance, additions, and improvements are expenditures for assets subsequent to acquisition • The estimated use the company expects to obtain from an asset before disposing of it is referred to as the service life of the asset • The term used to describe the amount the company expects to receive for an asset at the end of its service life is Residual value • Straight-line, declining-balance, and activity-based refer to methods commonly used to depreciate property, plant, and equipment. • For accounting purposes, depreciation is an allocation of a cost of an asset. • Straight line method of depreciation allocates an equal amount of depreciation to each year the asset is used. • The depreciable cost is the cost of the asset minus the residual value. • The service life or useful life of an asset is the estimated use that the company expects to obtain from the asset before disposing of it. • The formula for straight-line depreciation is (cost – residual value)/service life. • Residual value is the amount the company expects to receive for the asset at the end of its service life. • Total depreciation recorded over an asset's service life is the same regardless of the depreciation method used • Commonly used depreciation methods: Activity-based, Decliningbalance, Straight-line • The formula for calculating the double-declining-balance method is book value at beginning of year x 2/estimated service life • The depreciation method that allocates an equal amount of the depreciable base to each year of the asset's service life is the straightline method. • An asset retirement occurs when an asset is no longer useful but cannot be sold. • When selling a fixed asset, the seller recognizes a gain or loss for the difference between the amount received and the book value of the asset sold. • Total depreciation recognized over the asset's service life does not differ among the different depreciation methods • The formula for calculating declining balance depreciation is the depreciation rate per year times the book value at the beginning of the year. • A retirement or abandonment of an asset is different from a sale of an asset because no cash is received, and a loss must be recognized for the remaining book value • Formula for the profit margin ratio: Net income divided by net sales. • The gain or loss on disposal of an asset is calculated as: Amount received less the book value of asset sold • In accounting, the term impairment refers to an asset's significant decline in value. • The journal entry to retire old equipment that is not fully depreciated includes a: debit to loss, credit to equipment, and debit to accumulated depreciation