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    which depreciation method generally results in the lowest net income for the first year a plant asset is utilized?

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    Final Exam Accounting Flashcards

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    Final Exam Accounting

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    Q 9.1: When can interest be included in the acquisition cost of a plant asset?

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    during the construction period of a self-constructed asset

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    Q 9.2: ________ are the costs incurred to increase the operating efficiency or useful life of a plant asset.

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    Capital expenditures

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    Terms in this set (32)

    Q 9.1: When can interest be included in the acquisition cost of a plant asset?

    during the construction period of a self-constructed asset

    Q 9.2: ________ are the costs incurred to increase the operating efficiency or useful life of a plant asset.

    Capital expenditures

    Q 9.3: Pat's Garage installed a new parking lot. The paving cost $10,000 and the lights to illuminate the new parking area cost $5,000. These additions require that

    $15,000 should be included in land improvements account

    Q 9.4: A company purchased land for $70,000 cash. Real estate brokers' commission was $5,000 and $7,000 was spent for demolishing an old building on the land before construction of a new building could start. Under the historical cost principle, the cost of land would be recorded at

    not 77,00

    Q 9.5: To find the book value of a plant asset, you find the difference between the

    cost of the asset and the accumulated depreciation to date.

    Q 9.6: In selecting a depreciation method, a company should choose the method that

    best measures the plant asset's contribution to revenue over its useful life.

    Q 9.7: If the estimated useful life of equipment changes, then this change requires

    that the amount of periodic depreciation be changed in the current year and in future years.

    Q 9.8: To find the book value of a plant asset, you find the difference between the

    cost of the asset and the accumulated depreciation to date.

    Q 9.9: Where is the loss on disposal of a plant asset reported in the financial statements?

    in the Other Expenses and Losses section of the income statement

    Q 9.10: Where is the loss on disposal of a plant asset reported in the financial statements?

    in the Other Expenses and Losses section of the income statement

    Q 9.11: How is depreciation accounted for if disposal of a plant asset occurs during the year?

    It is recorded for the fraction of the year to the date of the disposal.

    Q 9.12: Wells Company's delivery truck, with a cost of $56,000 was destroyed by fire. At the time of the fire, the balance of the Accumulated Depreciation account amounted to $38,000. The company received $32,000 reimbursement from its insurance company. The gain or loss as a result of the fire was

    Not 14,000 loss

    Q 9.13: Companies can amortize a patent for a period that cannot exceed ________ years.

    20

    Q 9.14: A patent that has a legal life of 20 years and a useful life of less than 20 years should

    be amortized over its useful life.

    Q 9.15: A computer company has $3,000,000 in research and development costs. Before accounting for these costs, the net income of the company is $2,400,000. What is the amount of net income or loss after these R & D costs are accounted for?

    6,000 loss

    Wilmington Sports has the following account balances at year end. What are the total intangible assets on the balance sheet?

    Not the 31ooooo one

    Q 9.17: Martha Beyerlein Company incurred $150,000 of research and development costs in its laboratory to develop a patent granted on January 2nd, 2017. On July 31st, 2017, Beyerlein paid $35,000 for legal fees in a successful defense of the patent. The total amount debited to Patents through July 31st, 2017, should be

    $35,000

    Q 9.18: To find the asset turnover ratio, divide net ________ total assets.

    sales by average

    Q 9.19: Which of the following should be disclosed in the balance sheet or the notes to the financial statements?

    all of the choices are correct

    Q 9.22: ______ will be recorded if a plant asset is retired and is fully depreciated.

    No gain or loss on disposal

    Q 9.23: What is the relationship between net sales and asset turnover?

    An increase in net sales will cause an increase in asset turnover.

    Q 9.24: When land is acquired, expenditures for paving, fencing, and lighting a new company parking lot should be charged to the ________ account.

    land improvement

    Q 9.25: What is the purchase price of an asset if it is depreciated using the straight-line method and annual depreciation is $24,000 per year for six years with an estimated salvage value of $3,000?

    147,000

    Q 9.26: How does the journal entry for a retired asset differ from the journal entry for an asset that is sold?

    The entry for the retired asset does not include a debit to Cash, but the entry for the sold asset does.

    Q 9.27: Your friend Pete owns a small business, and he's not sure how he should treat fully depreciated assets on his company's balance sheet. What advice should you offer to Pete?

    Source : quizlet.com

    The Best Method of Calculating Depreciation for Tax Reporting Purposes

    Learn the best method for calculating depreciation for tax reporting purposes according to generally accepted accounting principles, or GAAP.

    SMALL BUSINESS TAXES

    The Best Method of Calculating Depreciation for Tax Reporting Purposes

    By THE INVESTOPEDIA TEAM Updated September 16, 2021

    Fact checked by PETE RATHBURN

    When you buy a tangible asset, its value decreases over time. Some decrease more quickly than others. This is something you'll probably come to realize when you try to re-sell the item—in most cases, you won't get the same price you originally paid. This is called depreciation. If you run a business, you can claim the value of depreciation of an asset as a tax deduction. In this article, we outline the basics of depreciation and the best way to calculate this value for tax purposes.

    KEY TAKEAWAYS

    Depreciation refers to how much of an asset's value is left over the course of time.

    Businesses can recover the cost of an eligible asset by writing off the expense over the course of its useful life.

    The straight-line method is the simplest and most commonly used way to calculate depreciation under generally accepted accounting principles.

    Subtract the salvage value from the asset's purchase price, then divide that figure by the projected useful life of the asset.

    What Is Depreciation?

    Depreciation refers to how much of an asset's value is left over the course of time. This value is the result of the asset being used or because it becomes obsolete. These include—but may not be limited to—vehicles, plants, equipment, machinery, and property. So if you purchase a vehicle, it immediately depreciates or loses value once it leaves the lot. It loses a certain percentage of that remaining value over time because of how it's driven, its condition, and other factors.

    Depreciation is a tax-deductible business expense. It offers businesses a way to recover the cost of an eligible asset by writing off the expense over the course of its useful life. A business can expect a big impact on its profits if it doesn't account for the depreciation of its assets.

    A business that doesn't account for the depreciation of its assets can expect a big impact on its profits.

    To account for a tax deduction, a company has several different options available under generally accepted accounting principles (GAAP) to calculate how much an asset depreciates:

    Declining Balance: In this method, larger depreciation expenses are recorded during the earlier years of an asset’s life while smaller expenses are accounted for in its later years.

    Double-Declining: Using this method means that assets depreciate twice as fast as the traditional declining balance method. It also accounts for larger depreciation expenses during the earlier years of an asset’s life and smaller ones in its later years.

    Sum-of-the-Years’ Digits: To calculate depreciation using this method, the asset's expected life is added together. Each year is then divided by that figure starting with the higher number in the first year.

    Units of Production: Companies benefit from greater deductions when they use this method. That's because the value of an asset is related to the number of units it produces rather than how many years it's used.

    Straight-Line Method: This is the most commonly used method for calculating depreciation. In order to calculate the value, the difference between the asset's cost and the expected salvage value is divided by the total number of years a company expects to use it.

    The Straight-Line Method

    As mentioned above, the straight-line method or straight-line basis is the most commonly used method to calculate depreciation under GAAP. This method is also the simplest way to calculate depreciation. It results in fewer errors, is the most consistent method, and transitions well from company-prepared statements to tax returns.

    Depreciation using the straight-line method reflects the consumption of the asset over time and is calculated by subtracting the salvage value from the asset's purchase price. That figure is then divided by the projected useful life of the asset.

    Here's an example. Say a catering company purchases a delivery van for $35,000. The expected salvage value is $10,000 and the company expects to use the van for five years. By using the formula for the straight-line method, the annual depreciation is calculated as:

    ($35,000 - 10,000) ÷ 5 = $5,000.

    This means the van depreciates at a rate of $5,000 per year for the next five years.

    In the event the asset is purchased on a date other than the beginning of the year, the straight-line method formula is multiplied by the fraction of months remaining in the year of purchase. Using the example above, if the van was purchased on October 1, depreciation is calculated as:

    (3 months / 12 months) x {($35,000 - 10,000) / 5} = $1,250.

    In the first year, the catering company writes off $1,250.

    ADVISOR INSIGHT

    Morris Armstrong, Enrolled Agent

    Armstrong Financial Strategies, Cheshire, CT

    The "best method" is the one appropriate for your business and situation. That may sound snarky, but I don’t intend it to be. I just mean that sometimes people want to write something off as quickly as possible, even if they do not have the annual income to warrant it. So they accelerate the deduction schedule, only to realize later on that they would have been better off taking the depreciation at a slower, more consistent pace.

    That is why, if given the choice, you should run the various depreciation-calculation scenarios through the tax program with an eye not only on the current return but on returns down the road, and the condition of your company in future years as well.

    Source : www.investopedia.com

    Depreciation of Assets

    Depreciation of Assets

    Depreciation of Assets What Is Depreciation?

    Depreciation is defined as the expensing of the cost of an asset involved in producing revenues throughout its useful life.

    LEARNING OBJECTIVES

    Summarize the purpose of depreciating an asset

    KEY TAKEAWAYS

    Key Points

    Depreciation expense reduces the book value of an asset and reduces an accounting period’s earnings. The expense is recognized throughout an asset’s useful life.

    The calculation of depreciation expense follows the matching principle, which requires that revenues earned in an accounting period be matched with related expenses.

    Depreciation expense can be calculated in a variety of ways; the method chosen should be appropriate to the asset type, the asset’s expected business use, and its estimated useful life.

    Key Terms

    residual value: In accounting, residual value is another name for salvage value, the remaining value of an asset after it has been fully depreciated.accrual accounting: refers to the concept of recognizing and reporting revenues when earned and expenses when incurred, regardless of the effect on cash.

    Definition of Depreciation

    Depreciation is defined as the expensing of an asset involved in producing revenues throughout its useful life. Depreciation for accounting purposes refers the allocation of the cost of assets to periods in which the assets are used (depreciation with the matching of revenues to expenses principle). Depreciation expense affects the values of businesses and entities because the accumulated depreciation disclosed for each asset will reduce its book value on the balance sheet. Depreciation expense also affects net income. Generally the cost is allocated as depreciation expense among the periods in which the asset is expected to be used. Such expense is recognized by businesses for financial reporting and tax purposes.

    Depreciation reflects the wear and tear experienced by an asset in use.: Cars depreciate in value throughout their useful life.

    Depreciation and the Matching Principle

    Depreciation expense reduces an accounting period’s income even though the expense does not require a cash or credit payment. The reason for the expense is to comply with the matching principle required by accrual accounting. According to the principle, expenses are recognized regardless of cash payment when obligations are:

    incurred (usually when goods are transferred (sold) or services rendered),

    generated by expenses involved in the earning of the accounting period’s revenues.

    Depreciation Expense Calculation

    Depreciation expense can be calculated using a variety of methods. The depreciation method chosen should be appropriate to the asset type, its expected business use, its estimated useful life, and the asset’s residual value. The expense is recognized and reported when the asset is placed into use and is calculated for each accounting period and reported under Accumulated Depreciation on the balance sheet and Depreciation Expense on the income statement. The amount reduces both the asset’s value and the accounting period’s income. A depreciation method commonly used to calculate depreciation expense is the straight line method.

    Factors for Calculating Depreciation

    There are four main factors that affect the calculation of depreciation expense: asset cost, salvage value, useful life, and obsolescence.

    LEARNING OBJECTIVES

    Summarize how a company would determine the appropriate depreciation method to use

    KEY TAKEAWAYS

    Key Points

    A company is free to adopt the most appropriate depreciation method for its business operations.

    Companies can choose a method that allocates asset cost to accounting periods according to benefits received from the use of the asset.

    The depreciation method used should allocate asset cost to accounting periods in a systematic and rational manner.

    Key Terms

    obsolescence: The process of becoming obsolete, outmoded, or out of date.

    Factors Affecting Depreciation Expense

    There are four main factors to consider when calculating depreciation expense:

    The cost of the asset

    The estimated salvage value of the asset. Salvage value (or residual value ) is the amount of money the company expects to recover, less disposal costs, on the date the asset is scrapped, sold, or traded in.

    Estimated useful life of the asset. Useful life refers to the window of time that a company plans to use an asset. Useful life can be expressed in years, months, working hours, or units produced.

    Obsolescence should be considered when determining an asset’s useful life and will affect the calculation of depreciation. For example, a machine capable of producing units for 20 years may be obsolete in six years; therefore, the asset’s useful life is six years.

    Factors Affecting the Depreciation Method

    A company is free to adopt the most appropriate depreciation method for its business operations. Accounting theory suggests that companies use a depreciation method that closely reflects the operations’ economic circumstances. So, companies can choose a method that allocates asset cost to accounting periods according to benefits received from the use of the asset. Most companies use the straight-line method for financial reporting purposes, but they may also use different methods for different assets. The most important criteria to follow: Use a depreciation method that allocates asset cost to accounting periods in a systematic and rational manner.

    Source : courses.lumenlearning.com

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