Accounting 201 - Chapter 7

An intangible asset refers to an asset that does not have a physical form but holds special rights to current and expected future benefits. This can include things like patents, trademarks, copyrights, and goodwill. Unlike natural resources, plant assets, and fixed assets, which all have physical forms, intangible assets are characterized by their non-physical nature and their ability to generate economic value for the owner.

The correct answer is the sum of all of the costs incurred to bring the asset to its intended use. This means that all costs associated with acquiring, preparing, and getting the plant asset ready for its intended purpose should be included. This includes not only the purchase price, but also any costs for transportation, installation, testing, and any other costs necessary to make the asset ready for use.

The straight-line method is a depreciation method where an equal amount of depreciation expense is allocated to each year of the asset's use. This means that the asset's value decreases by the same amount each year. It is a commonly used method as it is simple to calculate and provides a consistent and predictable expense over the asset's useful life. This method is especially useful for assets that have a steady and predictable decline in value over time.

Land is the only plant asset that does not depreciate because its value does not decrease over time. Unlike other plant assets such as furniture or patents, land is considered to have an indefinite useful life and its value is expected to remain stable or even appreciate over time. Therefore, it is not subject to depreciation, which is the systematic allocation of the cost of an asset over its useful life.

A capital expenditure refers to an expense made by a company to acquire, upgrade, or improve an asset. In this case, the expenditure mentioned in the question is one that increases the asset's capacity or efficiency or extends its useful life. Such expenditures are typically categorized as capital expenditures because they contribute to the long-term value and productivity of the asset.

The estimated useful life refers to the length of service that a business expects to get from an asset, expressed in years, units of output, miles, or other measures. It is a measure used to determine the depreciation expense of an asset over its useful life. Depreciable cost refers to the cost of an asset that can be depreciated, salvage value is the estimated residual value of an asset at the end of its useful life, and accelerated depreciation method is a depreciation method that allows for larger deductions in the early years of an asset's life.

Most companies use straight-line depreciation for financial reporting purposes because it is the simplest and most widely accepted method. Straight-line depreciation evenly allocates the cost of an asset over its useful life, resulting in a consistent expense each year. This method is easy to calculate and provides a clear and consistent picture of an asset's value and depreciation over time. It is also in line with Generally Accepted Accounting Principles (GAAP) and International Financial Reporting Standards (IFRS), making it the preferred choice for financial reporting.

Accumulated Depreciation is a contra-asset account because it is used to record the decrease in value of an asset over time. Contra-asset accounts have a credit balance which offsets the debit balance of the related asset account. In the case of Accumulated Depreciation, it is used to reduce the carrying value of the asset on the balance sheet.

The cost of equipment should include freight costs to deliver the equipment, installation costs for the equipment, and testing costs to get the equipment ready for use. These costs are directly associated with acquiring and preparing the equipment for use, and therefore should be included in the overall cost.

Using an accelerated depreciation method allows a company to deduct a larger portion of the asset's cost in the early years of its use. This results in lower taxable income and therefore less taxes paid in the early years. As the asset gets older, the amount that can be deducted decreases, leading to higher taxable income and more taxes paid in the later years. Therefore, the correct answer is that a profitable company will incur less taxes in the early years of the asset's use compared to later years when using an accelerated depreciation method.

Land is not classified as a natural resource that can be depleted because it is a fixed and finite resource that cannot be exhausted or used up. While timber, minerals, and oil are all natural resources that can be depleted over time through extraction and consumption, land itself remains constant and cannot be exhausted.

Plant assets are long-lived tangible assets that are used in the operation of a business. These assets include land, buildings, machinery, equipment, vehicles, and furniture. They are used to generate revenue and are expected to provide benefits to the company for more than one year. Intangible assets, on the other hand, are non-physical assets such as patents, trademarks, and copyrights. Natural resources refer to assets like oil, gas, minerals, and timber. Goodwill represents the value of a business's reputation, customer relationships, and brand recognition.

The costs of grading and clearing the land and the costs of removing an unwanted building should be included in the cost of land. These activities are necessary to prepare the land for use and enhance its value. The cost of fencing, although a land improvement, is not directly related to the acquisition of the land itself and should be treated separately. Therefore, the correct answer is both A and B.

Accumulated Depletion is a contra-asset account. A contra-asset account is used to offset the balance of a related asset account. In the case of Accumulated Depletion, it is used to record the reduction in the value of natural resources, such as oil reserves or timber, over time. By subtracting the Accumulated Depletion from the original asset account, the net value of the natural resources can be determined. Therefore, Accumulated Depletion acts as a contra-asset account that reduces the value of the related asset account.

The cost of transporting the machinery to its setup location should be included in the Machinery account because it directly relates to the acquisition and installation of the machinery. It is a necessary expense incurred in getting the machinery to its intended location and ready for use.

Expenses are costs that are incurred in order to maintain or restore an asset to its working order, without extending its capacity or useful life. These costs are typically recurring and do not result in any significant increase in the value or functionality of the asset. On the other hand, capital expenditures refer to costs that are incurred to acquire, improve, or extend the capacity or useful life of an asset. Therefore, the correct answer is expenses.

The book value of a plant asset refers to the value of the asset on the company's balance sheet. It is calculated by subtracting the accumulated depreciation from the original cost of the asset. Accumulated depreciation represents the total depreciation expense that has been recorded over the asset's useful life. Therefore, the correct answer is "cost less accumulated depreciation."

Calculations: 62,500+7,500+11,000=81,000 Lighting and fencing are land improvements

When a major expenditure is made to upgrade equipment and extend its useful life beyond the original estimate, the journal entry would include a debit to the Equipment account. This is because the expenditure is considered a capital expenditure and should be recorded as an addition to the asset account. The credit to Depreciation Expense is not necessary as the useful life of the equipment has been extended, and there is no need to recognize additional depreciation expense at this time. The debit to Depreciation Expense and debit to Repair Expense are not applicable in this situation.

If an asset is scrapped before being fully depreciated, all of the above will occur. This means that the company will incur a loss on the disposal, the equipment account will be credited, and the accumulated depreciation account will be debited.

The double-declining-balance method of depreciation is an accelerated method, which means that it assigns a higher depreciation expense in the earlier periods of an asset's life. This is because the method assumes that an asset will generate more revenue and be more productive in its early years, therefore it allocates a larger portion of the asset's cost as an expense during those years. As the asset gets older, the depreciation expense decreases because the assumption is that its productivity and revenue generation will decline over time. Therefore, the correct answer is that the depreciation expense is more in the earlier periods.

A capital expenditure refers to the purchase or acquisition of a long-term asset that benefits the business over multiple accounting periods. Since assets are resources owned by a company that have future economic value, a capital expenditure is debited to an asset account to record the increase in the company's assets. This helps to accurately reflect the value of the company's resources and ensures that the expenditure is properly accounted for.

When a loss is recorded on the sale of a plant asset, it means that the amount of cash received from the sale is less than the asset's book value. This indicates that the asset is being sold for less than its recorded value on the company's books. This can happen when the asset has depreciated in value or if there are other factors that have reduced its worth. In such cases, the company incurs a loss on the sale because it is receiving less cash than the asset is worth according to its book value.

Land improvements refer to enhancements made to land that increase its value, such as adding sidewalks, fences, or landscaping. Although located on the land, these improvements are subject to decay and their cost is depreciated over time. This is different from buildings or plant and equipment, which are separate assets that are also located on the land but have different characteristics and depreciation methods. Therefore, the correct answer is land improvement.

The cost of land typically includes the purchase price of the land itself, as well as any additional costs directly related to acquiring the land. Real estate brokerage commission is a cost that is directly related to acquiring the land, as it is a fee paid to a real estate agent or broker for their services in facilitating the purchase of the land. Therefore, it should be included in the cost of land. The other options listed, such as the construction cost of a parking lot, landscaping, and lighting, are not directly related to acquiring the land and would typically be considered separate costs.

Calculations: 17,000 depreciation for year x 6/12 = 8,500 depreciation for 2013
2010 depreciation = 17,000
2011 depreciation = 17,000
2012 depreciation= 17,000
2013 depreciation = 8,500
Total depreciation 59,500

When recording amortization, an expense is recognized and deducted from the total assets. This decreases the total assets. At the same time, since the expense reduces the company's overall equity, the total equity is also decreased. Therefore, the correct answer is that recording amortization decreases both total assets and total equity.

Calculations: (300,000/1,000,000)*875,000= 262,500

The process of allocating the cost of a plant asset to expense over its life is called depreciation. Depreciation is the systematic allocation of the cost of a plant asset over its useful life. This is done to reflect the gradual wear and tear, obsolescence, or decrease in value of the asset over time. By spreading the cost of the asset over its useful life, the company can accurately match the expense with the revenue generated by the asset, resulting in more accurate financial statements.

Managers prefer accelerated depreciation over straight-line depreciation for income tax purposes because it provides the fastest tax deductions, decreases immediate tax payments, and allows the company to reinvest the tax savings back in the business. By using accelerated depreciation, companies can deduct a larger portion of the asset's cost in the early years, resulting in higher tax deductions. This reduces the amount of taxable income and decreases immediate tax payments. The tax savings can then be reinvested in the business, promoting growth and expansion. Therefore, the correct answer is that accelerated depreciation does all of the above.

Calculations: 46,000+1,200+850=48,050

Capital expenditures are not immediately expensed because they increase the asset's capacity. This means that the expenditures are made to improve or enhance the asset's ability to produce or perform. By increasing the asset's capacity, it becomes more valuable and can generate higher returns over its extended lifespan. Therefore, these expenditures are capitalized and recorded as an asset on the balance sheet, rather than being immediately expensed on the income statement.

When repairs are made to equipment as part of a yearly maintenance project, it is considered an expense rather than a capital expenditure. Therefore, the repairs would be recorded in the journal by debiting the Repair Expense account. This reflects the decrease in the company's assets (equipment) and the corresponding increase in expenses. Accumulated Depreciation is not applicable in this case as it represents the cumulative depreciation of the equipment over its useful life. Depreciation Expense is also not relevant as it pertains to the systematic allocation of the cost of the equipment over its useful life.

The computation of depletion expense is most closely related to the units-of-production method for computing depreciation. This method calculates depreciation based on the actual usage or output of the asset. Since depletion expense is typically associated with natural resources, such as oil or minerals, the units-of-production method is the most appropriate as it matches the expense to the amount of resource extracted or used. This method allows for a more accurate reflection of the depletion of the natural resource over time.

The correct answer is a debit to Depletion Expense and a credit to Accumulated Depletion. Depletion is the process of allocating the cost of natural resources over their useful life. Depletion Expense is debited to recognize the expense incurred in depleting the natural resources, and Accumulated Depletion is credited to track the total amount of depletion over time. This journal entry follows the general rule of debiting expenses and crediting contra-asset accounts.

The expected cash value of a plant asset at the end of its useful life is commonly referred to as its scrap value, salvage value, or residual value. These terms are used interchangeably to describe the estimated amount of money that can be obtained from selling or disposing of the asset after it is no longer useful. Therefore, any of the above options can be used to describe the expected cash value of a plant asset at the end of its useful life.

When a company purchases a building with the intention of renovating it for its operations, all expenditures incurred to repair and renovate the existing building are charged to the "building" account. This is because the company is investing in improving the building itself, not the land on which it is situated. The land account is typically used for the initial purchase of the land, while the building account is used for any subsequent improvements or renovations made to the building structure.

Research and development costs are considered as expenses rather than assets because they do not have a physical substance and their future benefits are uncertain. Therefore, these costs should be expensed on the current year's income statement rather than capitalized and depreciated or amortized over a period of time. This treatment reflects the matching principle in accounting, which states that expenses should be recognized in the same period as the revenues they help generate.

The depreciation process attempts to match the revenues earned by the asset and the cost of the asset. Depreciation is the allocation of the cost of an asset over its useful life, and it is used to reflect the decrease in value of the asset over time. By matching the revenues earned by the asset with its cost, depreciation helps to accurately represent the financial impact of the asset on the company's income statement. This ensures that the expenses associated with the asset are properly accounted for and that the financial statements accurately reflect the asset's contribution to the company's revenue generation.