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by: Sarah Pugh

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# Study Guide for Test 4 ACCT 2110 - 002

Marketplace > Auburn University > Accounting > ACCT 2110 - 002 > Study Guide for Test 4
Sarah Pugh
AU
GPA 4.0

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Contains Chapter 7 Material because the test will mostly cover this!
COURSE
Principles of Financial Accounting
PROF.
Elizabeth G Miller
TYPE
Study Guide
PAGES
8
WORDS
KARMA
50 ?

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This 8 page Study Guide was uploaded by Sarah Pugh on Wednesday November 4, 2015. The Study Guide belongs to ACCT 2110 - 002 at Auburn University taught by Elizabeth G Miller in Summer 2015. Since its upload, it has received 168 views. For similar materials see Principles of Financial Accounting in Accounting at Auburn University.

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Date Created: 11/04/15
Test 4 Study Guide Answers Chapter 7 Chapter 8 is not included in this study guide, as Test 4 focuses more on Chapter 7. The information in this study guide is a collection of class notes and notes from the textbook. Vocabulary b. Amount of cash/trade in a company expects to get when an asset is __e__Depreciation Expense retired/sold. _g_Amoritization Expense c. Cost – residual value / recoverable _h__ Obtaining Intangible Assets units _b___Residual Life d. Cost – residual Value / expected use __j__Units of Production Method of asset _l___Natural Resources e. Put in the income statement. This is __d__Depreciation Cost Per Unit a deferred expense as what has been acquired is being used. This follows _f__Straight Line Method the matching principle. __a_Fixed Asset Turnover Ratio f. Even depreciation expense each __i__Average age of assets year. Cost – residual value / expected useful life. _k__Depletion Expense g. Cost / Useful life __c__Depletion rate h. Internal development or purchasing asset from another company. i. Accumulated depreciation / Depreciation expense j. Useage is gauged by the measure of an assets productive capability. Cost- Residual life / hours the asset is used. Rate X # of hours of actual use = depreciation cost. k. depletion rate X units recovered l. Assets that are physically consumed as used and replaced and restored by nature. Expense is known as a. Net Sales / Average net fixed assets. depletion. (average net fixed assets = beginning assets – ending assets / 2) Multiple Choice Operating Assets can be split into three different categories- Property, Plant and Equipment, Intangible Assets, and Natural Resources. 1. What type of expense is associated with each category of asset? _B_ PPE A. Amortization Expense _A_Intangible Assets B. Depreciation Expense _C_Natural Resources C. Depletion Expense 2. What are the three types of Depreciation Methods? a. Straight-line, Declining balance, Units of Production b. Impairment, Units of production, Straight-line c. Fixed Asset, Straight-line, and Declining Balance 3. How does one measure the cost of a fixed asset? Circle all that apply Capitalization Expense Depreciation Improvement 4. Label each category when it comes to the costs of acquiring PPE with the following titles: Land, Land Improvement, Building, Equipment Land Equipment Land Improvement Building Purchase price, Purchase price, Purchase price, Purchase price, real estate sales taxes, sales taxes, closing costs, cost commissions, transportation installations costs. of building delinquent costs, insurance permits, property taxes, during architectural fees, closing costs, transportation, evacuation costs, demolition of installation costs, remodeling fees unwanted cost of trial runs. buildings. ***Some things that CANNOT be factored into cost: additional inventory, interest on debt used to purchase equipment, ordinary repairs to equipment, cost of training employees to run equipment. 5. Which of the following Intangible assets are amortized? Which are not? Trademark, Franchise, Patent, Copyright, Goodwill Amortized Not Amortized 6. The cost principle requires that companies record fixed assets at: a. Fair value b. book value c. historical cost d. market value 7. What is the difference between an intangible asset with an indefinite life and one with a finite life? a. Indefinite allocates cost to the accounting period, finite does not b. Indefinite reviews trademarks, copyrights, and patents, finite reviews goodwill and franchises c. Indefinite reviews for impairments under the conservation method, finite uses amortization to allocate cost 8. When recording typical depreciation, which accounts are affected and what are their normal balances? a. Amortization expense is debited, depreciation expense is credited b. Accumulated depreciation expense is debited and depreciation expense is credited c. Depreciation expense and amortization expense are debited and accumulated depreciation is credited d. Depreciation expense is debited and accumulation expense is credited 9. What is the cost of a fixed asset? a. Acquiring an asset b. Acquiring an asset and preparing it for use c. Acquiring an asset, preparing it for use, and paying interest on a loan associated with it. d. Acquiring an asset, preparing it for use, and reviewing it for impairment. 10.What is needed to calculate depreciation expense? a. Cost of the fixed asset, useful life, and residual life b. Cost of the fixed asset, useful life, and book value c. Useful life, book value, and number of years asset will be used over True or False __T_ Intangible assets include things like patents, copyrights, and franchises. The expense associated with these is amortization expense __F- financing decision so it isn’t included_ Interest paid on a debt is viewed as resulting from a decision to acquire an asset so it is included in the purchase price. __F- CANNOT_ The accumulated depreciation over the life of an asset can exceed depreciable cost. __T_ Depreciation can be defined as the cost of a tangible asset to expense over the asset’s useful life. __T_ measuring a fixed asset expenditure, ex. rebuilding a truck’s engine, is called capitalization. __F- falls in the Other expenditures category. Expense is not included as a part of the asset’s cost_ Measuring a fixed asset expenditure, ex. Changing the oil in a truck, is called capitalization. __F- beginning- before the month is halfway over_When recording partial th depreciation on the 12 of the month, the purchase is recorded at the end of the month in the journal entry when determining depreciation. __T_Book Value = Cost – Accumulated Depreciation. _T__ Natural Resources include things like oil, timber, and coal. The expense associated with the purchase of these is known as depletion. __T_ Recording assets at cost is based on what it cost to acquire the asset and what it cost to prepare it for use. _T__ Straight line has a constant depreciation, declining balance has an accelerated cost to depreciation expense, and units of production is only measured by the asset’s use. __F- units of production doesn’t make a difference because it’s based on machine use_ When determining partial year depreciation, the straight-line and units of production methods have to recalculate, declining balance method does not. _F- loss__A gain is when the book value is less than what a company sells an asset for. _F-gain_A loss is when the book value is greater than what a company sells an asset for. __T_Operating Assets are long lived assets that are used for normal operating expenses and are not sold to customers. __T__The useful life of an asset is the period of time over which the company anticipates benefiting from the use of an asset. Problems: A company acquired a new machine for operating use. They paid \$20,000 cash and signed a 1 year 10% note for \$80,000. Freight charges were incurred on account of \$2,900 and \$5,300 cash was paid for installation. Supplies and labor cost \$800 and \$1,500 respectively. 1. What is the cost of the machine? 20,000 + 80,000 + 2900 + 5300 + 800 + 1500= 110500 2. What will the journal entry look like for this purchase? Equipment 110,500 Cash 25300 (20,000 + 5300) Notes payable 80,000 Accs payable 2900 Supplies 800 Wages Payable 1500 A company purchases a machine for 50,000 on Jan 1. The expected worth is 5,000 at the end of 5 years. 1. Using the straight line method, calculate the rate of depreciation of this machine. 1/5= 20% depreciation rate over the next five years 2. Compute the annual amount of depreciation expense using the straight-line method. Cost- 50,000 Residual value – 5,000 Useful life – 5 years Cost- residual / useful life 50,000-5000/5 = \$9,000 depreciation expense 3. What will be the amount of accumulated depreciation of this machine if it has used up 4 of it’s five years of useful life? 9,000 X 4 = 36,000 4. If the machine had been bought in June and not January, how would the Depreciation expense differ in it’s first year of use? Difference between Jan and June is 6 months. So (Depreciation cost / 5) X (6/12) ( ( 50,000 – 5,000) / 5) X (6/12) 4,500 PPE, net 12/31/10 87711 PPE, net 12/31/11 88434 Acc Depr 127192 Net Sales 110875 Depr Exp 14991 1. Calculate the fixed asset turnover ratio. Net sales / average net fixed assets 110,875/( (87711 + 88434)/2) = 1.26 times 2. Calculate the average age of the fixed asset Acc Depr / Depr expense 127192 / 14991 = 8.48 years A patent was acquired for 40,000 and is expected to have a 10 year useful life span. Calculate the amortization expense for this intangible asset. 40,000 / 10 = 4,000 A trademark was acquired for 50,000 and is expected to have a 30 year useful life span. Calculate the amortization expense for this intangible asset. No amortization expense can be calculated because trademarks do not have a legal life. More Vocab __declining Balance Method a. Selling/ retiring an asset __a__Voluntary Expenditure b. larger depreciation expense in early years. Double declining rate and uses this to determine the depreciation expense. _c__Involuntary Expenditure c. destroyed, lost asset __d__ Units of Production depreciation expense d. depreciation cost per unit / actual use of asset

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