Quiz Questions: [Go to bottom] <>Q12-1 Defining capital assets.

Explain the difference between (a) capital assets and current assets; (b) capital assets and inventory; and (c) capital assets and temporary investments.

<>Q12-2 Cost of capital assets. Starbuck Lanes installed automatic score-keeping equipment. The electrical work required to prepare for the installation was $18,000. The invoice price of the equipment was $180,000. Additional costs were $3,000 for delivery and $12,600, sales tax. During the installation a component of the equipment was damaged because it was carelessly left on a lane and hit by the automatic lane cleaning machine during a daily maintenance run. The cost of repairing the component was $2,250. What is the cost of the automatic score-keeping equipment?

<>Q12-3 Alternate amortization methods. On January 2, 19X1, Crossfire acquired sound equipment for concert performances at a cost of $55,900. The rock band estimated they would use this equipment for four years, during which time they anticipated performing about 12 concerts. They estimated that at that point they could sell the equipment for $1,900. During 19X1, the band performed four concerts. Compute the 19X1 amortization using (a) the straight-line method and (b) the units-of-production method.

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<>Q12-4 Computing revised amortization. Refer to the facts in Q12-3. Assume that Crossfire chose straight-line amortization but recognized during the second year that due to concert bookings beyond expectations, this equipment would only last a total of three years. The salvage value would remain unchanged. Compute the revised amortization for the second year and the third year.

<>Q12-5 Double-declining balance method. A fleet of refrigerated delivery trucks acquired on January 5, 19X1, at a cost of $930,000 had an estimated useful life of eight years and an estimated salvage value of $150,000. Compute the amortization expense for the first three years under the double-declining balance method for financial accounting purposes.

<>Q12-6 Revenue and capital expenditures. a. Classify the following expenditures as revenue or capital expenditures: 1. The cost of annual tune-ups for delivery trucks. 2. The cost of replacing a compressor for a meat packing firm's refrigeration system that extends the estimated life of the system for four years, $30,000. 3. The cost of $220,000 for an addition of a new wing on an office building. 4. The monthly replacement cost of filters on an air-conditioning system, $175. b. Prepare the journal entry to record each of the above.

<>Q12-7

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Dissimilar asset exchanges. Spectrum Flooring owned an automobile with a $15,000 cost and $13,500 accumulated amortization. In a transaction with a neighbouring computer retailer, Spectrum exchanged this auto for a computer with a fair market value of $4,500. Spectrum was required to pay an additional $3,750 cash. Prepare the entry to record this transaction for Spectrum.

<>Q12-8 Similar asset exchange. Mayes Co. owns an industrial machine that cost $38,400 and has been amortized $20,400. Mayes exchanged the machine for a newer model that has fair market value of $17,000. Record the exchange assuming that Mayers (a) paid $1,500 and (b) received $1,000.

<>Q12-9 Cash impacts from acquisitions and disposals. Identify the section in the cash flow statement where the following transactions are reported along with whether it is a source or use of cash. Key: A. Source of cash from investing activities B. Use of cash for investing activities. ___ 1. Cash purchase of machinery ___ 2. Sale of patents for cash ___ 3. Purchase of productive timberland for cash ___ 4. Cash sale of factory warehouse

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<>Q12-10 Computing total asset turnover. Photo Film Company reported the following facts in its 19X2 annual report: net sales of $13,557 million for 19X2 and $12,670 million for 19X1; total end-of-year assets of $14,968 million for 19X2 and $18,810 million for 19X1. Compute the total asset turnover for 19X2.

<>Q12-11 Natural resources and depletion. Sudbury Industries acquired an ore mine at cost of $1,300,000. It was necessary to incur $200,000 to access the mine. The mine is estimated to hold 500,000 tonnes of ore and the estimated value of the land after the ore is removed is $150,000. a. Prepare the entry to record the acquisition. b. Prepare the year-end adjusting entry assuming that 90,000 tonnes of ore were removed from the mine this year.

<>Q12-12 Intangible assets and natural resources. Which of the following assets should be reported on the balance sheet as intangible assets? Which should be reported as natural resources? (a) leasehold, (b) salt mine, (c) building, (d) oil well, (e) trademark.

<>Q12-13 Intangible assets and amortization.

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On January 4 of the current year, Amber's Boutique incurred a $95,000 cost to modernize its store. The improvements included new floors, lighting, and shelving for the merchandise. It was estimated that these improvements would last for 10 years. Amber's leases its retail space and has eight years remaining on the lease. Prepare the entry to record the modernization and the adjusting entry at the end of the current year.

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Answers: <>A12-1 a. The main difference between capital assets and current assets is that current assets are consumed or converted into cash within a short period of time while capital assets have a useful life of more than one accounting period. b. The main difference between capital assets and inventory is that inventory is held for resale and capital assets are not. c. The main difference between capital assets and temporary investments is that capital assets are used in the primary operation of the business and investments are not. [Return to question]

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<>A12-2 $18,000 + $180,000 + $3,000 + $12,600 = $213,600 The $2,250 repair is an expense because it is not a normal and reasonable expenditure necessary to get the asset in place and ready for use. [Return to question]

<>A12-3 a. Straight-line: ($55,900 - $1,900)/4 = $13,500 amortization per year b. Units of production: ($55,900 - $1,900)/12 = $ 4,500 x4 $18,000 [Return to question] per concert concerts in 19X1 amortization in 19X1

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<>A12-4 $ 55,900 - 13,500 $ 42,400 1,900 $ 40,500 /2 $ 20,250 cost accumulated amortization (one year) book value at point of revision salvage remaining amortizable cost years amortization per year for years 2 and 3

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<>A12-5 a. First year (100%/8) x 2 = 25% $930,000 x 25% = $232,500 (declining balance)

b.

Second year ($930,000 - $232,500) x 25% = $174, 375

c.

Third year ($930,000 - $232,500 - $174,375) x 25% = $130,781.25

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<>A12-6 a. 1. 2. 3. 4. b. (1) Repairs and Maintenance Accounts Payable xx.x xx.x revenue capital capital revenue

(2)

Refrigeration system Cash

30,000.00 30,000.00

(3)

Building Cash

220,000.00 220,000.00

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(4)

Repairs and Maintenance Accounts payable

175.00 175.00

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<>A12-7 Computer Equipment Accumulated Amortization Loss on Exchange of Assets Automobile Cash [Return to question] 4,500.00 13,500.00 750.00 15,000.00 3,750.00

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<>A12-8 a. Machines Accumulated Amortization Loss on exchange of machines Machines Cash 17,000.00 20,400.00 2,500.00 38,400.00 1,500.00

b.

Cash Machines Accumulated Amortization Machines

1,000.00 17,000.00 20,400.00 38,400.00

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<>A12-9 1. 2. 3. 4. B A B A

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<>A12-10 (in millions)
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$13,557 -------------------------- = ($14,968 + $18,810)/2 [Return to question] 0.8 times

<>A12-11 a. Ore Mine Cash To record acquisition of mine and prepare for intended use b. $1,500,000 - $150,000 Depletion per unit = ---------------------------- = 500,000
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1,500,000 1,500,000

$2.70/tonne

Depletion Expense, Ore Mine Accumulated Depletion, Ore Mine To record depletion of the ore deposit [Return to question]

243,000 243,000

<>A12-12 Intangible Assets: a) leasehold e) trademark Natural Resources: b) salt mine d) oil well [Return to question]

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<>A12-13 Leasehold Improvements Cash To record leasehold improvements 95,000 95,000

Rent Expense, Leasehold Improvements Leasehold Improvements To record the amortization of the leasehold over the remaining life of the lease [Return to question]

11,875 11,875

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Q12-1 What is a Capital Asset? What are the four main issues of dealing with Capital Assets?

Q12-2 What is the total capital cost of a new piece of machinery used in a soft drink manufacturing company based on the following data? Purchase price (including all taxes) Delivery cost of machine Special electrical wiring for machine Installation costs of machine Office supplies purchased for president's secretary Lease payment on president's car $50,000 $500 $1,200 $1,500 $350 $1,250

Q12-3 What is the definition of Amortization (Depreciation)?

Q12-4 Calculate the yearly amortization of a capital asset using the Straight-line method, Units-of-Production method and the Declining Balance method based on the following data:

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Total Cost of Machine Salvage value Useful life Maximum unit capacity Units made in first year

$15,000 $3,000 6 years 50,000 10,000

Q12-5 "You will always get the same amount of amortization expense per year no matter what method you use." State why this statement is incorrect.

Q12-6 What would the new yearly amortization expense be using the Straight-line method for the following situation? Asset – Machine Useful life when purchased on Jan 2/98 Salvage value when purchased Modifications made to machine on Jan 2/99 Useful life after modifications Company year-end $15,000 5 years $1,500 $5,000 2 extra years December 31st

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Q12-7 Briefly state the difference between Revenue Expenditures and Capital Expenditures.

Q12-8 What would the entry be if you sold your equipment, discarded your equipment or exchanged your equipment based on the data below? Equipment original cost Accumulated Amortization to date Sold equipment for cash Exchanged equipment for market value of a new unit (the new unit will expire at the same time the old one would) $25,000 $18,000 $5,000 $7,000

Q12-9 What is the entry for the current year's depletion of the coal mine your company owns based on the following data? Salvage value of mine Purchase price of mine Accumulated Depletion Mine's yield $50,000 $1,000,000 $25,545 4 million tons of coal

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Coal depleted in this year

1 million tons of coal

Q12-10 Name four types of "Intangible Assets". What would the entry be to record the yearly amortization of an Intangible Asset?

Q12-11 Match the correct completion for each statement from the following choices: Choices (A) use of cash (B) source of cash Statement #1 Acquisitions are a ______________. Statement #2 Disposals are a ________________.

Q12-12 What is the calculation for the Total Asset Turnover ratio? What does it measure?

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Answers:

A12-1 A Capital Asset is a tangible asset that is used in the operations of a company over a period of more than one year. The main issues of dealing with a Capital Asset are:
   

What is the actual cost of the asset? Allocating costs of the asset to the period in use. Accounting for subsequent expenditures. Recording the disposal of the asset.

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A12-2 Total cost that would be capitalized for machine is $53,200 50,000 + 500 + 1,200 + 1,500 [Return to question]

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A12-3 Amortization (Depreciation) is the systematic writing down of a capital asset over its useful life, leaving only the salvage value remaining in the company books when the asset's life is expired. [Return to question]

A12-4 Straight-line Method
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15,000 – 3,000 6

=

12,000 6

=

$2,000 per year

Units-of-Production Method 15,000 – 3,000 50,000 0.24 x 10,000 units

=

=

$2,400 for the first year

Declining Balance Method 15,000 x (2000/12000 x 2) [Return to question] 15,000 x (0.167 x 2) $5,010 for the first year

=

=

A12-5 Each method will yield a different yearly expense with the exception of the Straight-line method, which will remain the same every year of the asset's useful life. What will always remain the same is the cost of the depreciable asset, its salvage value and its useful life.
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A12-6 Amortization when purchased (15,000 – 1,500) / 5 = $2,700 per year After modifications Asset purchase value Less: Amortization to date Book value on Jan 2/99 Add: Modification New value of machine Less: salvage value Total value to depreciate $15,000 - 2,700 $12,300 + 5,000 $17,300 - 1,500 $15,800

One year has now passed on the original machine, leaving 4 years of useful life before the modification took place. The modification adds an additional 2 years of useful life to the machine; therefore, the machine is to be depreciated now over 6 years. $15,800 / 6 = $2,633.33 per year
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A12-7 Revenue Expenditures are expenses shown on the Income Statement that reflect the costs of earning revenue in a given period (Matching Principle). Capital Expenditures are normally a large outlay of cash to obtain an asset that will benefit the company's future operations (i.e. equipment, land, and investments). [Return to question]

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A12-8 Sell unit DR Loss on Disposal DR Accumulated Amortization DR Bank CR Equipment $2,000 $18,000 $5,000 $25,000

Discard unit DR Accumulated Amortization DR Loss on Disposal CR Equipment $18,000 $7,000 $25,000

Exchange unit No entry is required because the new unit's useful life expires at the same time as the old unit. The $7,000 represents the market value, not the amount paid for the unit; therefore, no change is made to the asset accounts (Cost Principle). [Return to question]

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A12-9 Cost – Salvage Value Units of Production 1,000,000 – 50,000 4,000,000
950,000 4,000,000 $0.2375 per ton

=
=

=

This year they mined a total of 1 million tons of coal, therefore: 1,000,000 x $0.2375 = $237,500 Entry would be: DR Depletion Expense CR Accumulated Depletion $237,500 $237,500

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A12-10 Intangible Assets can be:
      

Patents Goodwill Copyrights Trademarks Franchise Fees Leaseholds & Leasehold Improvements Incorporation Costs

Entry would be: DR Amortization Expense CR ______ (whatever intangible asset you are depreciating – i.e. Patents) [Return to question]

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A12-11 Statement #1 (A) Statement #2 (B) [Return to question]

A12-12 Calculation is:
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Net Sales Average Total Assets This ratio measures a company's ability to use its assets to generate sales. It is interpreted as the dollar of net sales for each dollar of assets. [Return to question]

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