Exam 8: Accounting for Long-Term Operational Assets

On January 1,2016,Golden Company purchased a new computer system for $50,000.Management estimates that the system will have a 5-year life and a salvage value of $7,500.Jane Golden,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)Determine which method will have the larger negative effect (in other words,the less favorable effect)on each of the following ratios in 2016: Debt to equity ratio Return on sales (net income/sales) b)Determine which method will have the larger negative effect on each of the following ratios in 2018: Debt to equity ratio Return on sales

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

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.

What is meant by a "basket purchase," and what method is normally used to determine the cost of individual assets?

Which method of depreciation generally allocates the largest amount of depreciation to the first year of the asset's life?

Goodwill may be recorded in which of the following circumstances?

Indicate how each event affects the elements of financial statements.Use the following letters to record your answer in the box shown below each element.You do not need to enter amounts.Enter only one letter for each element. -The Benitez Company purchased an asset for $50,000 on January 1,2016.The asset had a zero salvage value and an 8-year estimated useful life.On January 1,2018,the company spent $2,400 cash on routine repairs and maintenance.What effect will the 2018 expenditure have on the company's financial statements?

On January 1,2016 Ballard Company spent $12,000 on an asset to improve its quality.The asset had been purchased on January 1,2015 for $52,000.The asset had a $4,000 salvage value and a 6-year life.Ballard uses straight-line depreciation.What would be the book value of the asset on January 1,2019?

Accumulated Depreciation is a temporary account that is closed each year.

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

Gains and losses are reported as non-operating items on the income statement.

Which of the following should be the main determinant for selection of the allocation method for long-term operational assets?

On January 1,2016,Milwaukee Company purchased Minneapolis Company,paying $1,200,000 cash.The fair value of Minneapolis's assets was $1,080,000,and it had liabilities of $100,000.The book value of the company's assets was $980,000. Required: a)Prepare Milwaukee's journal entry to record the acquisition of Minneapolis Company. b)At the end of 2018,Milwaukee concluded that the value of its goodwill (associated with the acquisition of Minneapolis)had declined by $30,000.Prepare the journal entry to record this decrease in value.

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

Give an example of an intangible asset with an identifiable useful life.

Scott Company purchased a new machine on January 1,2016,at a cost of $220,000.The machine is expected to have an eight-year life and a $20,000 salvage value.The machine is expected to produce 800,000 finished products during its eight-year life.Production during 2016 was 70,000 units and during 2017 was 110,000 units. Required: Determine the amount of depreciation expense to be recorded on the machine for the years 2016 and 2017 under each of the following methods: 1)Straight-line 2)Units of production 3)Double-declining balance

Alaska Energy Corporation paid cash to acquire land to be used for oil production.The costs incurred by Alaska Energy were the following: Estimates were made that 3,885,000 gallons of crude oil can be extracted from the site over the life of the asset. Required: a)Prepare the journal entry(ies)to record the purchase of the oil field. b)Given that Alaska Energy was able to extract 230,000 gallons in the first year, 675,000 gallons in the second year,and 554,000 gallons in the third year Calculate the depletion charge for each year.