Capital Assets Quiz

Capital expenditures refer to the funds spent by a company to acquire, upgrade, or maintain long-term assets such as property, equipment, or machinery. These expenditures are recorded on the balance sheet as assets and are expected to provide benefits over multiple accounting periods. Therefore, it is correct to say that capital expenditures are also called balance sheet expenditures, as they directly impact the company's financial position and are reflected in the balance sheet.

The cost of remodeling the store is considered an expense for SportsWorld, so it should be recognized as a debit to the Store Building account. This means that the value of the Store Building account will decrease by $17,000 to reflect the cost of the remodeling.

The explanation for the given correct answer is that the Income Tax Act indeed requires companies to use the declining-balance method of cost allocation, known as Capital Cost Allowance, to determine the maximum deduction for a taxation year. This method allows for the gradual depreciation of assets over time, reflecting their diminishing value. By using this method, companies can claim deductions for the wear and tear of their assets, ultimately reducing their taxable income and overall tax liability. Therefore, the statement "True" accurately reflects the requirement stated in the Income Tax Act.

The statement is true because the production method of depreciation charges a varying amount of expense for each period of an asset's useful life based on its usage. This method takes into account the asset's productivity or output level, and as the asset is used more, the depreciation expense increases. This is in contrast to other depreciation methods like straight-line, which allocate the same amount of expense evenly over the asset's useful life. The production method is commonly used for assets that are directly related to production or output, such as machinery or equipment.

An accelerated depreciation method is designed to allocate a larger portion of an asset's cost as depreciation expense in the early years of its life. This is based on the assumption that the asset will be more productive and generate higher income in its early years. As a result, the method reflects a higher depreciation expense in the early years and smaller charges in later years. Therefore, the correct answer is False, as the statement in the question is the opposite of the actual concept of accelerated depreciation.

The company should recognize a $1,000 loss on the disposal of the equipment because the selling price of $3,000 is less than the net book value of the equipment, which is $4,000 ($14,000 - $10,000). This indicates that the company sold the equipment at a loss, and according to accounting principles, losses on the disposal of assets should be recognized in the financial statements. Therefore, the statement is true.

The statement "All of these answers are correct" is the correct answer because it accurately summarizes the information provided in the question. The straight-line method and the declining-balance method of depreciation both produce the same total depreciation over an asset's useful life and allocate the asset's cost in a systematic and rational manner. However, they do not produce the same book value each year. Additionally, both methods are acceptable for GAAP (Generally Accepted Accounting Principles).

The units-of-production method calculates depreciation based on the number of units produced. To calculate the depreciation expense for each year, we need to determine the depreciation per unit.

First, we calculate the depreciable cost of the machine by subtracting the residual value from the original cost: $190,000 - $10,000 = $180,000.

Next, we divide the depreciable cost by the estimated number of units the machine can produce over its useful life: $180,000 / 750,000 units = $0.24 per unit.

In the second year, 111,000 units were produced. Multiplying the number of units produced by the depreciation per unit gives us the depreciation expense for the second year: 111,000 units * $0.24 per unit = $26,640.

Therefore, the amount of depreciation that should be recorded for the second year is $26,640.

The annual amortization using the straight-line method can be calculated by subtracting the residual value from the initial cost of the equipment and then dividing that amount by the estimated useful life in units. In this case, the initial cost is $10,000 and the residual value is $1,000. The estimated useful life is given as 36,000 shoes, but since the actual units produced during the year were 7,000 units, we can calculate the annual amortization by dividing the difference in cost by the number of units produced, which is ($10,000 - $1,000) / 7,000 = $1,285.71. However, since the answer choices are given in whole numbers, we can round up to the nearest whole number, which gives us $1,800.

The correct answer is a gain of $2,000. This is because the proceeds from the insurance company ($20,000) exceed the accumulated depreciation recorded to the date of loss ($20,000). As a result, Creek Construction will recognize a gain equal to the difference between the original cost of the bulldozer ($38,000) and the proceeds from the insurance company ($20,000), which is $2,000.