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Chapter 8 principle of accounting LO8-8/9/10
Terms in this set (20)
All costs associated with a machine after it is operational are expensed in the period they are incurred. This statement is
Costs that make the machine better or that extend its useful life are capitalized and expensed over the machine's remaining useful life. Only maintenance costs (costs that do not affect the quality or the useful life of the asset) are expensed in the period incurred.
On January 1, Year 1, Marino Moving Company paid $48,000 cash to purchase a truck. The truck was expected to have a four year useful life and an $8,000 salvage value. Marino uses the straight-line method. On January 1, Year 3, Marino's accounting records contained the balances shown in the following financial statements model.
Also, on January 1, Year 3 the company paid $10,000 to replace the engine to make the truck better by enabling it to operate using less expensive natural gas. Which of the following shows how the engine replacement will affect the Company's financial statements on January 1, Year 3?
Same as 2
Which of the following shows the journal entry that would be necessary to replace the engine on January 1, Year 3?
Same as 2
Based on this information, the balance in the accumulated depreciation shown on the Year 3 balance sheet is
Year 3 Balance in accumulated depreciation = Beginning balance January 1, Year 3 + Year 3 Dep. exp.Year 3 Balance in accumulated depreciation = $20,000 + $15,000 = $35,000
Same as 2
Also, on January 1, Year 3 the company paid $10,000 to replace an engine that would extend the useful life of the truck from a total of four years to a total of seven years. Which of the following shows how the engine replacement will affect the Company's financial statements on January 1, Year 3?
same as 5
Which of the following journal entries would be required to record the capital expenditure on January 1, Year 3?
Accumulated Depreciation10,000 Cash 10,000
Also, on January 1, Year 3 the company paid $10,000 to replace an engine that extended the useful life of the asset from a total of four years to a total of seven years. Based on this information, the balance in the amount of depreciation expense shown on the Year 3 income statement is
Dep. exp. for Year 3 = (Book value - Salvage value) ÷ Remaining useful lifeDep. exp. for Year 3 = ($38,000 Book value - $8,000 Salvage value) ÷ 5 years = $6,000
Depletion is the term used to recognize expense associated with
The amount of depletion expense is accumulated in a contra asset account at the end of each accounting period. This statement is
When depletion expense is recorded, the balance in the associated natural resource asset account is directly reduced. To illustrate, assume a company recognizes $500,000 of depletion expense on oil rights that is shown with a $4,000,000 account balance. Immediately after the recognition of the depletion expense, the balance of the oil rights account would be $3,500,000. The accounting records would not contain a contra asset account.
On January 1, Year 1, Gemstone Mining Company (GMC) paid $10,500,000 cash to purchase the rights to extract raw stone from a surface pit estimated to hold 50,000 tons of useable material. GMC extracted 10,000 tons of stone in Year 1, 20,000 tons of stone in Year 2, and 25,000 tons of stone in Year 3. The rights to the surface pit were expected to have a $500,000 salvage value at the end of Year 3. Which of the following statements models shows how the purchase will affect GMC's financial statements?
cash-10500000/stone re 10500000/-10500000 IA
same as 10
Which of the following statements models shows how recognizing depletion expense will affect GMC's Year 1 financial statements?
same as 10
Based on this information, the amount of depletion expense shown on the Year 3 income statement is
Number of tons of stone is used as the measure of productionDepletion expense per ton = ($10,500,000 cost − $500,000 salvage) ÷ 50,000 tons = $200 per tonYear 1 Depletion expense = 10,000 tons × $200 per ton = $2,000,000Year 2 Depletion expense = 20,000 tons × $200 per ton = $4,000,000Year 3 Depletion expense = 25,000 tons × $200 per ton = $5,000,000
Regardless of the amount of depletion expense computed using the units-of-production formula, you cannot depreciate an asset below its salvage value. In this case, the maximum amount of depletion expense that can be recognized over the life of the asset is $10,000,000 ($10,500,000 cost − $500,000 salvage). The maximum depletion that can be recognized in Year 4 is $4,000,000 ($10,000,000 maximum depletion allowed − $2,000,000 recognized in Year 1 − $4,000,000 recognized in Year 2). As a result, $4,000,000 not $5,000,000 depletion expense will be recognized in Year 3.
same as 10
Based on this information, the journal entry necessary to recognize depletion expense for Year 1 is
Depletion Expense2,000,000 Stone Pit 2,000,000
Which of the following is not an intangible asset?
Which of the following conveys an exclusive right to produce and sell the content contained in a textbook?
The book value of most intangible assets is normally greater than the market value. This statement is
The book value of most intangible assets is based on their historical cost. The market value of an intangible asset frequently far exceeds its cost. For example, the cost of registering the McDonald's name may have been only a few thousand dollars while the company collects millions of dollars from franchisees who use the McDonald's name to promote the sale of hamburgers.
Goodwill is the mix of variables that are unique to a particular company that enables it to produce above average profits. This statement is
Goodwill is recognized only when it is purchased. This statement is
South Company purchased North Company. South Company paid $550,000 cash and assumed all of North Company's liabilities. On the date of purchase, North's books showed tangible assets of $500,000, liabilities of $20,000, and equity of $480,000. An appraiser assessed the fair market value of the tangible assets at $530,000 on the acquisition date. Which of the following statements models shows how this event will affect South Company's financial statements?
same as 19
Which of the following journal entries would be required to record the purchase of North Company on South Company's books?
Tangible Assets530,000 Goodwill40,000 Liabilities 20,000Cash 550,000
*last two are credit
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