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This chapter will look at the topic of accounting for long-term assets which includes both tangible and
intangible assets. We will be looking at how to record the purchase of such assets, how to allocate their
cost over their useful lives, and how to record the sale or disposal of the assets. After you have finished
this chapter, you should be able to:
1. Compute the total cost of long-term assets and record their purchase.
2. Define depreciation, compute depreciation under the three methods covered in the text, and
record the annual depreciation entries.
3. Distinguish between capital and revenue expenditures.
4. Account for the disposal of depreciable assets by sale.
5. Identify the issues related to accounting for intangible assets, including research and development
costs and goodwill.
6. Discuss the process required each year to determine appropriate recording of the imparement of
long-term assets.
c. Declining-balance method – results in higher depreciation in the early years of the assets’ life
and lower depreciation each of the following years.
(Remember -Year 1 use Cost – 0)
2
Years in assets life * (Cost - Accum. Deprec.) = Depreciation for the year
7. Impairment of assets –
Each year, companies are required to determine the fair market value of their long-term assets to
determine if the carrying value of the long-term assets exceeds the present value of the fair
market value of the assets. (Fair market value is the amount for which the asset could be reasonably
expect to be bought/sold for at that time.) If necessary, a journal entry is made to record a loss
and to reduce the carrying value of the asset.
CHAPTER 9 REVIEW
I. VOCABULARY (Complete each of the following statement by filling in the appropriate word or words)
1. An expenditure for repairs, maintenance, or other services needed to maintain or operate plant
assets is a(n) _____________________ expenditure.
3. _________________ is the periodic allocation of the cost of a tangible long-term assets (other
than land, natural resources, or intangible assets) over its estimated useful life.
4. The allocation of the cost of a natural resource to those periods in which the firm receives the
resource's benefits is called ____________________, and the similar allocation of the cost of an
intangible is called ____________________.
6. The __________________ method of depreciation assumes that depreciation depends only on the
passage of time and this method allocates an equal amount of depreciation to each period of time.
7. The estimated net scrap, salvage, or trade-in value of a tangible assets at the estimated date of
disposal is the ___________________ of the asset.
II. MULTIPLE CHOICE (Circle the letter that best completes each of the following statements)
1. Which of the following would not be classified as property, plant and equipment?
a. a warehouse that is no longer in use
b. a building containing the administrative offices
c. equipment on the floor of the main production facility
d. land on which the production facility is built
6. Which of the following methods ignores residual value initially but eventually considers it in the
calculation of depreciation?
a. Straight-line
b. Units-of-activity
c. Double-declining-balance
d. MACRS
7. Marshall Company has just purchased a depreciable asset with a useful life of six years. The
company will be choosing either the straight-line (SL) or double-declining-balance (DDB)
method of depreciation. Which one of the following statements correctly describes what will
happen under the SL or DDB depreciation?
a. DDB will result in a higher net income figure in the first year than will SL.
b. Depreciation expense in the second year will be higher under SL than under DDB.
c. Net income in the fifth year will be higher under SL than DDB.
d. Depreciation expense will be lower in the sixth year under DDB than SL.
III. QUESTIONS/PROBLEMS
1. Why must the cost of long-term assets be allocated to futures accounting period? What are some
of the problems with this allocation process?
2. Explain the meaning of capital expenditures. How does it differ from revenue expenditures?
From an accounting perspective, describe the consequences of recording a capital expenditure as
a revenue expenditure.
4. Briefly describe the accounting procedures for the sale or retirement of plant assets. How is the
gain or loss on the sale or retirement of plant assets determined?
5. The Empire Corporation purchased a new machine at a cost of $11,000 on January 1, 20X1. The
expected useful life of the new machine is 5 years and a salvage value of $1,000. If the useful life
was measured in units, it is expected that a total of 50,000 units will be produced by the machine
over its life. Empire has an accounting year ending December 31. Complete the following table
assuming the machine produced a total of 15,000 units in year 20X1, 22,000 units in year 20X2,
and 13,000 units in year 20X3.
Straight-line
Units-of-activity
Double-declining-balance
Assume Empire sells the machine on April 1, 20X4 for $4,200. Prepare the journal entry(ies)
necessary to record any depreciation up to the date of the sale (assuming Empire uses the straight-
line method of the depreciation) and to record the sale of the machine.
6. A truck that cost $10,000 and on which $7,500 of accumulated depreciation had been recorded
was disposed of on July 1, the first day of the new fiscal year. Prepare the general journal entry
to record the disposal under each of the following assumptions:
a. It was discarded as having no value.
b. It was sold for $1,800 cash.
c. It was sold for $2,900 cash.
ANSWERS
I. VOCABULARY
1. revenue 5. declining-balance
2. capital 6. straight-line
3. Depreciation 7. residual value
4. depletion...amortization
1. a 6. c
2. c 7. d
3. b 8. b
4. a 9. a
5. a
III. QUESTIONS/PROBLEMS
1. The cost of long-term assets must be allocated to future accounting periods because the firm
receives benefits in the future and the matching convention requires that allocations be made so
as to match the expired benefits with the resources they have helped to produce.
Problems inherent in the allocation process are distinguishing between a capital expenditures and
a revenue expenditure, measuring and recording the acquisition cost, estimating the useful life of
an asset, and estimating the value of the asset at the end of its useful life.
2. Capital expenditures are expenditures that produce an asset whose economic life extends beyond
the current period. Revenue expenditures are expenditures for services or assets whose economic
utility is completely consumed within the current period. IF a capital expenditure is classified in
error as a revenue expenditure, that period's expenses would be overstated and net income,
retained earnings, and total assets would be understated. In future periods expenses would be
understated and net income would be overstated.
3. Accountants view depreciation as an allocation of cost to the periods in which the enterprise
received benefits from the assets. Depreciation is the process that the cost of the asset is
gradually allocated to expense over the useful life of the asset. Depreciation is NOT done to
report the asset at its current market value. Asset impairment computations are reviewed annually
to adjust an assets value when the present value of the asset’s market value is lower than its
carrying value.
4. To record the sale or retirement of an asset, the asset account and the Accumulated Depreciation
account that relates to that asset are removed from (taken off) of the accounting records. Assets
received when the old asset is retired or sold are recognized and the appropriate gain or loss from
the sale or retirement should be recognized. The gain or loss on the disposal of the asset is
computed as the difference between the net proceeds from the sale or retirement and the book
value of the asset at the time of the sale or retirement. If the net proceeds exceed the book value,
a gain is recorded. If the book value exceeds the net proceeds, a loss is recorded.
5.