Acct 201 – financial accounting chapter 7 exercises

Chapter 7

Long-Term Assets

 

 

PART 1 – ACQUISITIONS

LO 1  Identify and record the major types of property, plant, and equipment.

 

  1. Property, Plant, and Equipment (PPE)
    1. __________record at)

                                                              i.      Cost

                                                            ii.      All expenditures necessary to get the asset ready to use

    1. How long will asset benefit company?

                                                              i.      WorldCom

Practice:  If a company initially records an expense incorrectly as an asset, explain how this mistake affects the income statement and the balance sheet. 

This mistake will overstate _________ on the income statement and overstate ________ on the balance sheet. If a company initially records an expense incorrectly as an asset, expenses are understated or too small.

  1. Land
    1. _________
    2. _____________

 

Practice:  Soccer Wholesale purchased land and a warehouse for $800,000. In addition to the purchase price, Soccer Wholesale incurred commissions of $48,000; property taxes of $10,000, title insurance, $3,000; and miscellaneous closing costs, $8,000. The warehouse is immediately demolished at a cost of $80,000. The $10,000 in property taxes includes $7,000 on behalf of the seller and $3,000 due for the current year after the purchase date.  Determine the amount Soccer Wholesale should record as the cost of the land.

  Land Improvements

    1. Parking lot
    2. Sidewalks
    3. Driveways
    4. Landscaping
    5. Lighting
    6. Fences
    7. Underground sprinklers
    8. ____________ limited lives
  1. Buildings
    1. Purchasing building

                                                              i.      Cost plus expenses to get it ___________

    1. New building construction

                                                              i.      Unique – ___________on construction loan is _________

 

  1. Equipment
    1. Cost plus expenses to get it ____________

F. Natural resources

a.       _depleted_ or used up.

                                                              i.      Oil & gas

                                                            ii.      Timber

 

Practice:  Holiday Laboratories purchased a high speed industrial centrifuge at a cost of $420,000. Shipping costs totaled $15,000. Foundation work to house the centrifuge cost $8,000. An additional water line had to be run to the equipment at a cost of $3,000. Labor and testing costs totaled $6,000. Materials used up in testing cost $3,000. What is the total cost of the equipment? How much of this amount should be expensed immediately? 

E7-4 Practice: Red Rock Bakery purchases land, building, and equipment for a single purchase price of $400,000.  Red Rock paid cash.  However, the estimated fair values of the land, building, and equipment are $150,000, $300,000, and $50,000, respectively, for a total estimated fair value of $500,000.  Prepare the journal entry to record the purchase.

                                   

LO 2  Identify and record the major types of intangible assets.

 

  1. Purchased intangible assets are __________
    1. At their purchase price
    2. Plus all costs necessary to get the asset ready for use.

                                                              i.      Legal fees

                                                            ii.      Filing fees

  1. Internally generated intangible assets, such as R&D and advertising costs, are ________ as those costs are incurred
    1. IFRS differs, Appendix E-7-
  2. ____________ debit patent for cost of purchase and other fees and credit cash
  3. ___________ provides protection to creator of original work, last for life of creator plus 70 years after that_
  4. ___________ slogans, symbols, logos, must be renewed every 10 years, theoretically can be owned forever as long as renewed_
  5. ___________ run a business under someone else’s name, pay initial franchise fee which I capitalize and expense it over the life of the agreement
  6. _______
    1. Recorded only when a company ____________
    2. ILLUSTRATION 7-6, p. 327           

Practice:  On March 31, 2012, the New Harvest Bakery acquired all the outstanding common stock of Red Rock Bakery for $68,000 in cash. The book values and market values of Red Rock’s assets and liabilities were as follows:

  

Calculate the amount paid for goodwill. 

LO 3  Discuss the accounting treatment of expenditures after acquisition.

 

  1. Capitalize expenditures if they benefit ________ periods.
    1. Additions
    2. Improvements
    3. Legal defense of intangible assets, if successful
  2. Expense expenditures if they benefit only the _______period.
    1. Repairs and maintenance
  3. Materiality
    1. Would the item influence an investor or creditor’s decision?

 

 

PART B – COST ALLOCATION

 

LO 4  Calculate depreciation of property, plant, and equipment.

 

  1. __________definition = Decrease in value (or selling price) of an asset
  2. __________ definition = Allocation of an asset’s cost to an expense over time
    1. Applying the __________ rule
  3. Adjusting entry – Chapter 3, page 116
    1. Accumulated Depreciation

                                                              i.      Contra asset account

    1. ____________________________

                                                              i.      Capitalized asset less accumulated depreciation

                                                            ii.      Does not refer to market value or selling price.

  1. Service life
    1. An ________
  2. Residual value or salvage value
    1. An _____________ of value when the company expects to sell the asset as the end of its service life
    2. Usually vehicles
  3. Land never depreciated!
  4. Straight-line method
    1. Most companies use straight-line depreciation for financial reporting

Cost – Residual Value  = _______________

Depreciable cost / Service life

    1. Partial years

                                                              i.      Purchased August 16 =

                                                            ii.      Purchased August 14 =

    1. Change in depreciation estimate allowable
    2. Read Ethical dilemma, page 334
  1. Declining-balance method
    1. An accelerated method (Greater depreciation expense in early years)
    2. _________ most common of the declining-balance methods

Cost – accumulated depreciation =

Book value x (2 / service life)

Book value x double the straight-line percentage

JRS real-world easy method:  (Book value / service life) x 2

    1. Have to watch last year(s).  Cannot depreciation below the ___________________
  1. Activity-based depreciation
    1. A method based on use

Cost – Residual Value  = ___________________

Depreciation rate per unit = Depreciable cost / Total units expected to be produced

Depreciation rate per unit x # of units of activity

    1. Natural resources depletion similar
  1. MACRS used for tax reporting
    1. An accelerated method similar to double-declining-balance method.

Practice:  Chicago Style Pizza purchases a delivery van at a cost of $30,000. On the date of purchase, the company estimates the van will have a residual value of $5,000. The company expects to use the van for five years or about 100,000 miles.

Required:

Prepare a depreciation schedule using each of the following methods:

1. Straight-line.
2. Double-declining-balance.
3. Activity-based. Actual use per year was as follows:

Year

 

Miles Used

1

 

22,000

2

 

24,000

3

 

18,000

4

 

21,000

5

 

20,000

Total

 

105,000

 

 

 

 

 

 

 

 

 

LO 5  Calculate amortization of intangible assets.

 

  1. Amortization is a process, similar to depreciation, in which we allocate the cost of intangible assets over their estimated service life.
  2. Intangible assets with an indefinite useful life (goodwill and most trademarks) are not amortized.

 

PART C – ASSET DISPOSITION:  SALE, RETIREMENT, OR EXCHANGE

 

LO 6  Account for the disposal of long-term assets.

 

  1. Sale of long-term assets
    1. Update depreciation for partial year, if necessary
    2. Calculate book value
    3. Compare to sale amount
    4. If we dispose of an asset for more than book value, we record a _____
    5. If we dispose of an asset for less than book value, we record a ________

 

Practice:  Strawberry Fields purchased a tractor at a cost of $38,000 and sold it two years later for $25,000. Strawberry Fields recorded depreciation using the straight-line method, a five-year service life, and an $8,000 residual value. What was the gain or loss on the sale? Record the sale. 

ANALYSIS

LO 7  Describe the relationship among return on assets, profit margin, and asset turnover.

 

  1. Return onassets (ROA) = _____________

a.        It shows how efficiently a company uses its assets to produce income.

  1. Return on assets can be separated to examine two important business strategies: profit margin and asset turnover.

a.       Profit margin equals _______________

                                                              i.      Shows the percentage of each sales dollar that results in net income.

                                                            ii.      A 12.5 percent profit margin, for example, means that 12.5 cents have been earned on each dollar of sales.

b.      Asset turnover equals ______________________________________

                                                              i.      It shows how efficiently assets are used to produce sales.

                                                            ii.      Profit Margin x Asset Turnover = Return on Assets

 

Practice:  Allied Construction and Axis Construction reported the following information in their annual financial statements ($ in millions):

  

  

1. Calculate Allied Construction’s return on assets, profit margin, and asset turnover ratio for 2012.
2. Calculate Axis Construction’s return on assets, profit margin, and asset turnover ratio for 2012.
3. Which company has the better profit margin and which company has the better asset turnover? 

 

APPENDIX – ASSET IMPAIRMENT

 

LO 8  Identify impairment situations and describe the two-step impairment process.

 

  1. Impairment is a two-step process.
    1. Step 1: __________ The long-term asset is impaired if future cash flows are less than book value.
    2. Step 2: If impaired, record loss: The impairment loss is the amount book value exceeds fair value.
  2. IFRS see difference from GAAP,  page 347

 

Practice:  Northwest Catering owns and operates several restaurant services in Oregon, Washington, and Idaho. One restaurant chain has experienced sharply declining profits. The company’s management has decided to test the operational assets of the restaurants for possible impairment. The relevant information for these assets is presented below:
  

Determine the amount of the impairment loss, if any. 

 

           

More Practice:  Listed below are five terms followed by a list of phrases that describe or characterize the terms. Match each phrase with the best term placing the number designating the term in the space provided. 

1. Big bath 

     Net sales divided by average total assets; which measures the sales per dollar of assets invested. 

 

2. Impairment 

     Net income divided by net sales; indicates the earnings per dollar of sales. 

 

3. Profit margin 

     Net income divided by average total assets; measures the amount of net income generated for each dollar invested in assets. 

 

4. Return on assets 

     Recording all losses in one year to make a bad year even worse. 

 

5. Asset turnover 

     Occurs when the future cash flows (future benefits) generated for a long-term asset fall below its book value (cost minus accumulated depreciation). 

 

 

 

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