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Exam 6: Accounting for Long-Term Operational Assets

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Question 71

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On January 1, Year 1, Eller Company purchased an asset that had cost $24,000. The asset had an 8-year useful life and an estimated salvage value of $1,000. Eller depreciates its assets on the straight-line basis. On January 1, Year 5, the company spent $6,000 to improve the quality of the asset. Based on this information, the recognition of depreciation expense in Year 5 would:

A) increase total assets by $4,375.
B) reduce total stockholders' equity by $4,375.
C) reduce total assets by $4,625.
D) increase total stockholders' equity by $4,625.

E) A) and C)
F) B) and C)

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Question 72

Multiple Choice

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Farmer Company purchased equipment on January 1, Year 1 for $82,000. The equipment is estimated to have a 5-year life and a salvage value of $4,000. The company uses the straight-line depreciation method. At the beginning of Year 4, Farmer revised the expected life to eight years. The annual amount of depreciation expense for each of the remaining years would be:

A) $6,240.
B) $4,400.
C) $7,040.
D) $3,900.

E) None of the above
F) A) and B)

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Question 73

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On January 1, Year 1, Stiller Company paid $288,000 to obtain a patent. Stiller expected to use the patent for 5 years before it became technologically obsolete. The remaining legal life of the patent was 8 years. Based on this information, the amount of amortization expense on the December 31, Year 3 income statement and the book value of the patent on the December 31, Year 3, balance sheet, respectively, would be:

Indicate how each event affects the horizontal financial statements model. Use the following letters to record your answer in the box shown below. If an event increases one account and decreases another account equally within the same element, record I/D. If an event has no impact on the element, record NA. You do not need to enter amounts.Increase = IDecrease = DNot Affected = NAThe Jenkins Company purchased equipment for $25,000 on January 1, Year 1. The equipment had an estimated useful life of four years and an estimated salvage value of $5,000. At the beginning of Year 3, the equipment was sold for $8,000. Show how the sale affected the financial statements for Year 3, assuming Jenkins uses straight-line depreciation.

Chubb Company paid cash to purchase equipment on January 1, Year 1. Select the answer that shows how the recognition of depreciation expense in Year 2 would affect the financial statements (+ means increase, − decrease, and NA not affected) .

On January 1, Year 1, Stewart Corporation purchased equipment for $120,000. A discount of 2% was granted on the equipment; the shipping terms were Free On Board shipping point, and the freight cost was $3,000. Installation and testing costs amounted to $4,000. The equipment had an estimated useful life of 4 years and salvage value of $10,000. At the beginning of Year 3, Stewart revised the expected life of the asset to six years and the salvage value to $12,000. Required: Compute the depreciation expense using straight-line method for each of the six years.

A substantial amount spent to improve the quality or extend the life of a long-term asset is called a revenue expenditure.

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

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

What term is used to describe the situation where there is a permanent decline in the value of an intangible asset?

With an accelerated depreciation method, an asset can be depreciated below its salvage value.

Which of the following is considered an accelerated depreciation method?

Describe what is meant by the term "goodwill."

The recognition of depletion expense:

On January 1, Year 1, Stiller Company paid $80,000 to obtain a patent. Stiller expected to use the patent for 5 years before it became technologically obsolete. The remaining legal life of the patent was 8 years. Based on this information, the amount of amortization expense on the December 31, Year 3 income statement and the book value of the patent on the December 31, Year 3, balance sheet, respectively, would be:

On January 1, Year 1, Missouri Company purchased a truck that cost $47,000. The truck had an expected useful life of 10 years and a $5,000 salvage value. The amount of depreciation expense recognized in Year 2 assuming that Missouri uses the double declining-balance method is:

The purchase of a new delivery truck for cash is an asset use transaction.

When Company X purchases Company Y, X should record Y's assets at their fair market value at the time of the acquisition.

The depreciable cost of a long-term asset is the difference between the amount paid for the asset and its salvage value.

On January 1, Year 1, Friedman Company purchased a truck that cost $29,000. The truck had an expected useful life of 8 years and a $7,000 salvage value. The company uses the double-declining balance method. The book value of the truck at the end of Year 1 is: (Do not round intermediate calculations.)