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Exam 8: Accounting for Long-Term Assets

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Question 21

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Crestfield leases office space for $7,000 per month. On January 3, the company incurs $12,000 to improve the leased office space. These improvements are expected to yield benefits for 10 years. Crestfield has 4 years remaining on its lease. What journal entry would be needed to record the expense for the first year related to the improvements?

A) Debit Amortization Expense $1,200; credit Accumulated Amortization $1,200.
B) Debit Depletion Expense $3,000; credit Accumulated Depletion $3,000.
C) Debit Depreciation Expense $1,200; credit Accumulated Depreciation $1,200.
D) Debit Depletion Expense $12,000; credit Accumulated Depletion $12,000.
E) Debit Amortization Expense $3,000; credit Accumulated Amortization $3,000.Amortization Expense = $12,000/4 = $3,000

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Question 22

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Revising an estimate of the useful life or salvage value of a plant asset is referred to as a change in accounting estimate and is reflected in the current, and future financial statements.

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Question 23

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The depreciation method that allocates an equal portion of the total depreciable cost for a plant asset to each unit produced is called:

A company purchased a tract of land for its natural resources at a cost of $1,500,000. It expects to mine 2,000,000 tons of ore from this land. The salvage value of the land is expected to be $250,000. The depletion expense per ton of ore is:

Owning a patent:

An asset's book value is $18,000 on December 31, Year 5. The asset has been depreciated at an annual rate of $3,000 on the straight-line method. Assuming the asset is sold on December 31, Year 5 for $15,000, the company should record:

Merchant Company purchased property for a building site. The costs associated with the property were: $\begin{array} { | l | r | } \hline \text { Purchase price } & \$ 185,000 \\\hline \text { Real estate commissions } & 15,000 \\\hline \text { Legal fees } & 700 \\\hline \text { Expenses of clearing the land } & 2,000 \\\hline \text { Expenses to remove old building } & 4,000 \\\hline\end{array}$ What portion of these costs should be allocated to the cost of the land and what portion should be allocated to the cost of the new building?

The depreciation method that charges the same amount of expense to each period of the asset's useful life is called:

A company purchased a delivery van for $28,000 with a salvage value of $3,000 on September 1, Year 1. It has an estimated useful life of 5 years. Using the straight-line method, how much depreciation expense should the company recognize on December 31, Year 1?

A change in an accounting estimate is:

Natural resources are assets that include standing timber, mineral deposits, and oil and gas fields.

Extraordinary repairs:

Obsolescence refers to the insufficient capacity of a company's plant assets to meet the company's growing productive demands.

The following information is available on a depreciable asset owned by Mutual Savings Bank: $\begin{array}{|l|r|}\hline \text { Purchase date } & \text { June 1, Year } \\\hline \text { Purchase price } & \$ 85,000 \\\hline \text { Salvage value } & \$ 10,000 \\\hline \text { Useful life } & 10 \text { years } \\\hline \text { Depredation method } & \text { straight-line } \\\hline\end{array}$ The asset's book value is $70,000 on June 1, Year 3. On that date, management determines that the asset's salvage value should be $5,000 rather than the original estimate of $10,000. Based on this information, the amount of depreciation expense the company should recognize during the last six months of Year 3 would be:

Describe the accounting for natural resources, including their acquisition, cost allocation, and account titles.

A copyright gives its owner the exclusive right to publish and sell a musical, literary, or artistic work during the life of the creator plus 17 years.

Decision makers and other users of financial statements are especially interested in evaluating a company's ability to use its assets in generating sales.

If an asset is sold above its book value, the selling company records a loss.

Depreciation is higher in earlier years and income is lower in the later years when using straight-line versus accelerated methods.

Gain or loss on the disposal of assets is determined by comparing the disposed asset's book value to the value of any assets received.