MGMT 200: Purdue University- Chapter 7

tangible assets (property, plant, equipment)

physical substance

land, land improvements, buildings, equipment, property, plant

Tangible assets

property, plant, equipment (cost of intended use) recorded at

the original cost of the asset + all expenditure necessary to get the asset ready for use

land

includes the cost of the land and all expenditures necessary to get the land ready for its intended use

costs to get the land ready for use include items such as:

real estate commissions and fees,

back property taxes or other obligations,

clearing, filling, and leveling the land

land improvements

are amounts spent to improve the land

parking lots, sidewalks, driveways, landscaping, lighting systems, fences, and irrigation systems

land improvements

buildings

administrative offices, retail stores, manufacturing facilities, and storage warehouses

costs of getting a building ready for use include items such as:

real estate commissions and fees,

inspection costs,

remodeling costs

recurring costs such as utilities and insurance are

expensed as incurred

equipment

machinery used in manufacturing, computers and other office equipment, vehicles, furniture, and fixtures

the cost of equipment might include

sales tax, shipping, assembly, and any other costs to prepare the asset for use

recurring costs such as maintenance are

expensed as incurred

basket purchases

purchase of more than one asset at the same time for one purchase price,

allocate the total purchase price based on the relative fair values of the individual assets

intangible assets

lack of physical substance,

existence often based on legal contract,

acquired by purchase or developed internally

patents,

trademarks,

copyrights,

franchises,

goodwill

intangible assets

trademarks

word, slogan, or symbol that distinctively identifies a company, product, or service,

renewed for an indefinite number o 10-year periods (generally not amortized if supported by advertising),

capitalize legal, registration, and design fees (advertising costs expensed as incurred)

amortizable

intangible assets

patents

exclusive right to manufacture a product or to use a process,

granted for a period of 20 years

when patents are purchased:

capitalize the purchase price plus legal and filing fees

when patents are developed internally

capitalize legal and filing fees only,

R&D costs are expensed as incurred

franchises

local outlets that pay for the exclusive right to use the franchisor's name and to sell its products within a specified geographical area,

the franchisee records the initial fee as an intangible asset,

additional periodic payments to the franchisor are usually expensed as incurred

copyrights

exclusive right of protection given to the creator of a published work,

granted for the life of the creator plus 70 years,

allows holder to pursue legal action against anyone who attempts to infringe the copyright,

accounting is virtually identical to that of patents

goodwill

recorded only when one company acquires another company, net assets = assets acquired less liabilities assumed,

goodwill is portion of purchase price that exceeds the fair value of identifiable net assets

purchase price - fair value of the identifiable net assets acquired =

goodwill

expenditures after acquisition

repairs and maintenance,

additions,

improvements,

litigation costs

for all expenditures after acquisition:

expense

if they benefit only the current period

for all expenditures after acquisition:

capitalize (record an asset)

if they benefit future periods

calculate depreciation of property, plant, and equipment

straight-line depreciation

depreciation

allocation of an asset's cost to expense over time

depreciation methods

how much of an asset's original cost is allocated to each year of the asset's useful life?

Three methods of depreciation:

straight-line,

declining-balance,

activity-based

The acquisition cost of a plant asset is equal to the

asset's cash price and the reasonable and necessary

costs incurred to prepare the asset for its intended use.

A. True

B. False

a

Reilly Company purchased a $500,000 tract of land that is

intended to be the site of a new office complex. Reilly incurred

additional costs and realized salvage proceeds as follows:

Demolition of existing building on site $75,000

Legal and other fees to close escrow 15,000

Proceeds from sale of demolition scrap 10,000

What would be the capitalized cost of the land?

A. $500,000

B. $600,000

C. $580,000 (see following)

D. $515,000

c

Meadowcroft Construction purchased a 3‐acre tract of land for a

building site for $300,000. The company demolished the old

building at a cost of $10,000, but was able to sell scrap from the

building for $1,000. The cost of title insurance was $500 and

attorney fees for reviewing the contract was $500. Property

taxes paid were $3,000, of which $500 covered the period after

the purchase date. The capitalized cost of the land is:

A. $300,000

B. $310,000

C. $312,500 (see following)

D. $313,000

c

Which of the following would be recorded as land

improvements?

A. Land taxes.

B. New building facade.

C. Adding a parking lot.

D. Real estate commissions.

c

A building is offered for sale at $600,000 but is

currently assessed at $500,000. The purchaser of the

building believes the building is worth $575,000, but

ultimately purchases the building for $550,000. The

purchaser records the building at

A. $50,000

B. $575,000

C. $500,000

D. $550,000

E. $600,000

d

Which of the following expenditures incurred in

connection with acquiring machinery is a proper

addition to the asset account?

A. Freight

B. Installation costs

C. Both A and B

D. Neither A or B

c

Bahama Catering purchased a commercial

dishwasher by paying cash of $8,000. The

dishwasher's fair value on the date of the purchase

was $10,000. The company incurred $600 in

transportation costs, $500 installation fees, and

paid $300 annual insurance of the equipment. For

what amount will Bahama record the dishwasher?

A. $10,000.

B. $9,400.

C. $9,100.

D. $8,000.

c

Beverly Company purchased land, a building, and equipment for

$800,000. The estimated fair values of the land, building, and

equipment are $100,000, $700,000, and $200,000, respectively.

At what amount would Beverly record the land?

A. $800,000

B. $100,000

C. $ 90,000

D. $ 80,000

d

Hillsborough, Inc. makes a basket purchase of land,

buildings, and equipment with estimated fair values of

$50,000, $150,000, and $50,000, respectively. The

purchase price is $200,000. How much should be

recorded to the Equipment account?

A. $ 200,000

B. $ 40,000

C. $ 25,000

D. $ 20,000

b

straight-line depreciation

depreciation=(asset's cost - Residual value)/service life = depreciable cost/service life

accelerated depreciation methods

calculate depreciation of property, plant, and equipment

activity based

depreciation rate per hour = (depreciable cost/ total hours equipment is expected to be used) x actual hours

amortization of intangible assets

allocating the cost of intangible assets over their service life to expense is called

intangible assets subject to amortization (those with finite useful life)

patents,

copyrights,

trademarks (with finite life),

franchises

intangible asses not subject to amortization (those with indefinite useful life)

goodwill,

trademarks (with indefinite life)

most common method to dispose of a long-term asset

sale

occurs when a long-term asset is no longer useful but cannot be sold

retirement

occurs when two companies trade long-term assets

exchange

three methods of asset disposal

sale,

retirement,

exchange

Research and development costs should be:

A. Expensed in the period they are determined to

be unsuccessful

B. Expensed in the period incurred

C. Deferred pending determination of success

D. Expensed if unsuccessful, capitalized if

successful

b

Many intangible assets are not recorded on the

balance sheet at their estimated market values

A. True

B. False

a

Genco Pharmaceutical, Inc. spends $100,000 this year in

research and development for a new drug to cure liver

damage. By the end of the year, management feels

confident that the new drug will gain FDA approval and

lead to higher future sales. What impact will the $100,000

spending have on this year's financial statements?

A. Increase Assets

B. Decrease Revenues

C. Increase Revenues

D. Increase Expenses

d

In accounting, goodwill

A. May be recorded whenever a company achieves

a level of net income that exceeds the industry

average.

B. Is amortized over its useful life.

C. Must be expensed in the period it is recorded

because benefits from goodwill are difficult to

identify.

D. May be recorded when a company purchases

another business.

d

Royce, Inc. purchased the entire business of JW Enterprises, Inc.

including all its assets and liabilities for $600,000. Below is

information related to the two companies:

Royce JW Enterprises

Fair value of assets $1,050,000 $800,000

Fair value of liabilities 575,000 300,000

Reported assets 800,000 650,000

Reported liabilities 500,000 250,000

Net Income for the year 60,000 50,000

How much goodwill did Royce pay for acquiring JW Enterprises?

A. $100,000. (see following)

B. $300,000

C. $200,000

D. $150,000

a

We capitalize repairs and maintenance expenditures

because they maintain a given level of benefits

A. True

B. False

b

Which of the following costs would be expensed?

A. Performing a tune‐up on the delivery truck.

B. Adding a refrigeration unit to a delivery truck.

C. Adding a new suspension system to a delivery

truck that will allow for heavier loads.

D. Adding a new transmission to a delivery truck,

which will increase its life and future benefits.

a

Depreciation in accounting is recording the physical

deterioration or loss in value of a long‐term asset.

A. True

B. False

b

Hillsborough Corporation purchased equipment for

$50,000 on January 1, 2017. The equipment is

expected to have a five‐year life, with a residual value

of $10,000 at the end of five years. Using the straight‐

line method, depreciation expense for 2017 would be:

A. $10,000

B. $ 8,000

C. $ 6,000

D. $ 4,000

b

What is the amount of depreciation, using the double‐

declining balance method, for the first year of use for

equipment costing $9,000, with an estimated residual

value of $600 and an estimated life of three years?

A. $6,000

B. $3,000

C. $2,000

D. $400

a

JW Publishing Co., Inc. purchases a copyright for $50,000.

The copyright has a remaining legal life of 25 years, but

only an expected useful life of five years with no residual

value. Assuming the company uses the straight‐line

method, what is the carrying value at the end of the first

year?

A. $0

B. $10,000

C. $40,000

D. $50,000

c

Losses on the sale of long‐term assets for cash:

A. Are the excess of the book value over the cash

received

B. Are recorded as a credit

C. Are reported on a net‐of‐tax basis if material

D. Are the excess of the cash received over the

book value

a

A company sold a machine that originally cost $250,000 for

$120,000 when accumulated depreciation on the machine was

$100,000. The gain or loss recorded on the sale of this machine

is

A. $0 gain or loss

B. $120,000 gain

C. $30,000 loss

D. $30,000 gain

E. $150,000 loss

c

Gulf Resources, Inc. sold one of its drilling platforms purchased

on January 1, 2010, for $50,000 and was depreciated on a

straight‐line basis over a 5‐year life. There was no salvage value

associated with the drilling platform. If the drilling platform was

held for four years and sold for $14,000 what was the amount of

gain or loss recorded at the time of the sale?

A. $4,000 loss

B. $14,000 gain

C. $4,000 gain

D. $6,000 loss

c