Acc 340 Exam 3

Front 1

Assets are valued on the basis of their original costs, which includes

Back 1

the purchase price and all expenditures necessary to bring the asset to its desired condition and location for use

Front 2

People must pay all back taxes (or mortgages, or other types of obligations) before they

Back 2

have a clear title and can use the property

Front 3

________ is not depreciated

Back 3

land

Front 4

True or false: land improvements are capitalized and depreciated

Back 4

true

Front 5

expenditures that produce future benefits should be

Back 5

Capitalized

Front 6

Expenditures that produce benefits only in the current period should be

Back 6

expensed

Front 7

When natural resources are expected to provide long-term benefits, they are classified as

Back 7

plant, property, and equipment

Front 8

__________ are the amounts paid to acquire the rights to explore for undiscovered natural resources or to extract proven resources

Back 8

Acquisition costs

Front 9

________ are expenditures when searching for natural resources

Back 9

Exploration costs

Front 10

____________ are incurred after the resource has been discovered but before production begins

Back 10

Development costs

Front 11

___________ are costs to restore land or other property to its original condition after extraction—it’s a type of asset retirement obligation

Back 11

Restoration costs

Front 12

Asset retirement obligation is a

Back 12

liability

Front 13

When you retire an asset, you must pay additional costs (like teardown costs), which are technically incurred

Back 13

before the asset is retired

Front 14

_________ are intellectual property (exclusive rights that provide benefits to the owner)—they lack physical substance and the extent and timing of their future benefits is highly uncertain. Includes trademarks, patents, copyrights, franchises, and goodwill

Back 14

Intangible assets

Front 15

_________ is an exclusive right to manufacture a product or use a process for 20 years. It can be developed internally, in which case the R & D costs are expensed and legal and filing fees are capitalized.

Back 15

A patent

Front 16

__________ is an exclusive right of protection given to a work’s creator for the life of the creators plus 70 years. R & D costs are expensed and legal and filing fees are capitalized

Back 16

A copyright

Front 17

______________ is an exclusive right to display a word, slogan, symbol, or emblem that distinctively identified a company, product, or service. Lifetime is 10 years with indefinite renewals—thus they have indefinite lives

Back 17

A trademark—or tradename

Front 18

___________ is a contractual agreement under which the franchisor grants the franchisee the exclusive right to use the franchisor’s trademark or tradename and may include product and formula rights, within a geographical area, for a specified period of time

Back 18

A franchise

Front 19

____________ is a unique intangible asset that only appears on the balance sheet when purchased in connection with the acquisition of another company. It’s a residual asset—the amount left over after other assets are identified and valued

Back 19

Goodwill

Front 20

While goodwill can be internally developed, the costs of doing so are expensed—_____________ overshadows relevance

Back 20

faithful representation

Front 21

_________is not amortized

Back 21

Goodwill

Front 22

An intangible asset must be recognized as an asset apart from goodwill if it arises from

Back 22

contractual or legal rights or is separable

Front 23

When buying a business, part of the purchase price goes toward net ______________, part covers identifiable intangible assets, and the rest is goodwill

Back 23

tangible assets

Front 24

Assets acquired in noncash transactions are valued at the fair value of the assets given or received, whichever is more clearly evident (example is ________________)

Back 24

an issuance of equity securities

Front 25

Donated assets are usually given as enticements to do something that benefits the donor. They are valued at their __________, and ________is credited

Back 25

fair value, revenue

Front 26

Retirements (abandonments) are accounted for by recording a loss for the ______________

Back 26

remaining book value of the asset

Front 27

When assets are going to be disposed of by sale, they are classified as held for sale and measured at the lower of

Back 27

book value or fair value less cost to sell

Front 28

Goodwill = purchase price - _______, which equals _________ - _________

Back 28

fair value, FV assets - FV liabilities

Front 29

FV of asset given - cash received =

or

FV of asset given + cash given =

Back 29

FV of asset received

Front 30

FV new asset - BV old asset =

Back 30

gain (loss)

Front 31

The basic principle used for nonmonetary exchanges is to value the asset(s) received based on the fair value of the

Back 31

asset(s) given up

Front 32

______________, valuation of the asset(s) received is based on the book value of the asset(s) given up plus (or minus) any cash given or received

Back 32

When fair value is not determinable

Front 33

The amount of cash given or received has no effect on

Back 33

the loss or gain recognized

Front 34

the two difficulties in determining costs of self-constructed assets are

Back 34

determining overhead allocation and determining treatment of interest

Front 35

Overhead can be allocated to self-constructed assets either ________ or ___________

Back 35

incrementally, using the full-cost approach (a portion just like a regular project would receive)

Front 36

_________ is the more common overhead allocation approach

Back 36

Full-cost approach

Front 37

Discrete projects are (a) ___________ and (b) assets constructed as discrete projects for sale or lease

Back 37

assets built for a company’s own use

Front 38

Interest is capitalized for ____________ during the construction period

Back 38

discrete projects

Front 39

The interest capitalization period begins __________________ as long as interest costs are actually being incurred

Back 39

when construction begins and the first expenditure is made

Front 40

We only __________ during construction that could have been avoided if the asset wasn’t made

Back 40

capitalize interest costs

Front 41

We determine average accumulated expenditures by

Back 41

time-weighting individual expenditures made during the period

Front 42

Both the total amount of interest costs incurred and the amount that has been capitalized should be

Back 42

disclosed

Front 43

__________ is planned search or critical investigation aimed at discovery of new knowledge with the hope that such knowledge will be useful in developing a new product or service or process or technique or in bringing about a significant improvement to an existing product or process

Back 43

Research

Front 44

_________ is the translation of research findings or other knowledge into a plan or design for a new product or process or for a significant improvement to an existing product or process whether intended for sale or use

Back 44

Development

Front 45

Costs that occur after commercial production begins would be either

Back 45

expensed or included in cost of inventory

Front 46

Expensing all R & D costs means that

Back 46

assets are understated and current expenses are overstated

Front 47

Total R & D expense during the period must be

Back 47

disclosed

Front 48

Depreciation is a process of

Back 48

cost allocation, not valuation

Front 49

Depreciation, depletion, and amortization are processes that attempt to satisfy

Back 49

the matching principle

Front 50

Depreciation, depletion, and amortization for an asset used to manufacture a product are included in ____________ and expensed if not used in production

Back 50

the cost of inventory

Front 51

____________ is the estimated use that the company expects to receive from the asset

Back 51

Service life

Front 52

Service life, or useful life, can be expressed in

Back 52

units of time or in units of activity

Front 53

____________ provides the upper bound for service life of tangible, long-lived assets

Back 53

Physical life

Front 54

Expected obsolescence can shorten service life below

Back 54

physical life

Front 55

_______ is the value of the usefulness that is expected to be consumed

Back 55

Allocation base

Front 56

_____________ is the difference between the cost of the asset and its anticipated residual or salvage value

Back 56

Allocation base

Front 57

Estimating residual value for many assets can be very difficult due to the uncertainty about the future, and residual values are often immaterial. Thus,

Back 57

many companies simply assume a residual value of zero

Front 58

_________ usually aren’t disclosed

Back 58

Residual values

Front 59

_____________ is the pattern in which the asset's usefulness is expected to be consumed

Back 59

Allocation method

Front 60

Allocation method used should be

Back 60

systematic and rational and correspond to the pattern of asset use

Front 61

_________________ method multiplies depreciable base by a declining fraction and has no logical foundation other than the fact that it accomplishes the objective of accelerating depreciation in a systematic manner

Back 61

The sum-of-the-years’-digits (SYD)

Front 62

Declining balance depreciation methods multiply ______________ by an annual rate that is a multiple of the straight-line rate

Back 62

beginning-of-year book value, not depreciable base

Front 63

It’s not uncommon for a company to switch from _____________ approximately halfway through an asset’s useful life as part of the company’s planned depreciation approach

Back 63

accelerated to straight-line

Front 64

Activity-based depreciation methods estimate service life in terms of some measure of productivity—either ___________

Back 64

input or output

Front 65

Under units of production, average depreciation rate per unit is computed by dividing __________ by the number of units expected to be produced

Back 65

depreciable base

Front 66

Under units of production, the last year’s depreciation expense is a ________ that reduces book value to the expected residual value

Back 66

plug value

Front 67

Activity-based methods are theoretically superior to _________ but often are impractical to apply in practice

Back 67

time-based methods

Front 68

A company ________ use the same depreciation method for both financial reporting and income tax purposes

Back 68

does not have to

Front 69

__________ defines the collection as depreciable assets that share similar service lives and other attributes

Back 69

Group depreciation method

Front 70

_______ is used when assets are physically dissimilar but are aggregated anyway to gain the convenience of a collective depreciation calculation

Back 70

Composite depreciation method

Front 71

Group/composite approaches involve applying a ___________ based on the average service lives of the assets in the group or composite

Back 71

single straight-line rate

Front 72

Once the group or composite rate and the average service life are determined, they normally are continued despite

Back 72

the addition and disposition of individual assets

Front 73

_________ is recorded when a group or composite asset is retired or sold

Back 73

No gain or loss

Front 74

Activity-based units-of-production method is widely used to calculate periodic depletion, so service life is

Back 74

the estimated amount of natural resources to be extracted

Front 75

The expected residual value of an intangible is usually

Back 75

zero

Front 76

Most companies use the ________ to amortize their intangibles

Back 76

straight-line method

Front 77

For intangibles in the manufacture of a product, amortization is a ________ and is included in the cost of inventory

Back 77

product cost

Front 78

Trademarks and tradenames often are considered to have

Back 78

indefinite useful live

Front 79

Partial year depreciation presents a problem only when

Back 79

time-based methods are used

Front 80

Under the ___________, we record on half of a full year’s depreciation in the year of acquisition and another half year in the year of disposal

Back 80

half-year convention

Front 81

A change in estimate should be treated

Back 81

prospectively

Front 82

True or false: A disclosure note should describe the effect of a change in estimate on income before extraordinary items, net income, and related pershare amounts for the current period

Back 82

true

Front 83

_____________ are accounted for the same way as a change in accounting estimate but are technically a change in estimate as a result of changing an accounting principle and therefore requires a clear justification as to why the new method is preferable

Back 83

Changes in depreciation, amortization, or depletion methods

Front 84

If material error is discovered in an accounting period subsequent to the period in which the error is made, it’s treated

Back 84

retrospectively, meaning that financial statements are restated, account balances are corrected via prior period adjustments, and the nature of the error and its effects on income are disclosed

Front 85

An asset held for use should be written down if there has been a ____________ impairment of value

Back 85

significant

Front 86

Property, plant, and equip and finite-life intangibles are tested for impairment only if circumstances indicate book value may not be recoverable:

Back 86

• A significant decrease in price
• A significant adverse change in how the asset is being used or in its physical condition
• A significant adverse change in legal factors or in the business climate
• An accumulation of costs significantly higher than the amount originally expected for the acquisition or construction of an asset
• A current-period loss combined with a history of losses or a projection of continuing losses associated with the asset
• A realization that the asset will be disposed of significantly before the end of its estimated useful life

Front 87

Via the recovery test, an impairment loss is only required when the

Back 87

undiscounted sum of future cash flows is less than book value

Front 88

Via the measurement step when recoverability fails, the impairment loss is the

Back 88

excess of book value over fair value

Front 89

Fair value equals

Back 89

discounted cash flows (the present value of future cash flows)

Front 90

Impairment losses should be

Back 90

disclosed

Front 91

Intangible assets with indefinite lives should be tested for impairment

Back 91

at least annually

Front 92

A goodwill impairment loss is indicated when the fair value of the reporting unit (company) is less than its

Back 92

book value

Front 93

A goodwill impairment loss is measured as the excess of the

Back 93

book value of the goodwill over goodwill's implied fair value

Front 94

The implied fair value of goodwill is a residual amount measured by subtracting

Back 94

the fair value of all identifiable net assets from the unit’s fair value (its purchase price)

Front 95

For assets held for sale, book value should not exceed

Back 95

fair value less cost to sell

Front 96

If future net cash flows are underestimated, fair value is understated. Ultimately, this makes impairment loss ________, _______current income, and _______ future income because depreciation/amortization/etc are understated

Back 96

bigger, lowers, raises

Front 97

Most companies do not capitalize any expenditure unless it exceeds

Back 97

a predetermined amount that is considered material

Front 98

Expenditures and repairs simply maintain current benefits and

Back 98

are expensed

Front 99

_________ involve adding a new major component to an existing asset and should be capitalized

Back 99

Additions

Front 100

_________ involve replacement of a component and are capitalized. There are three ways to record costs of improvements:
1. Substitution—dispose of old component and acquire a new one
2. Capitalization of new cost—add cost minus salvage of component to asset account. Only appropriate if the value of old component was immaterial after being depreciated
3. Reduction of accumulated depreciation

Back 100

Improvements

Front 101

_________ do not add, replace, or improve an asset but rather create a new capability and should be capitalized if they clearly increase future benefits

Back 101

Rearrangements

Front 102

Costs of successfully defending an intangible right should be __________

Back 102

captalized

Front 103

Double decline balance method uses

Back 103

the current book value

Front 104

A note payable and a note receivable are

Back 104

two sides of the same coin

Front 105

___ is the effective interest rate times the amount of the debt outstanding during the interest period

Back 105

Periodic interest

Front 106

___ divides a large liability into many smaller liabilities

Back 106

A bond issue

Front 107

Corporations issuing bonds are obligated to repay

Back 107

a stated amount at a specified maturity date and periodic interest between the issue date and maturity

Front 108

___ describes the specific promises made to bondholders

Back 108

A bond indenture

Front 109

The present value of a liability is the PV of its related cash flows (principal and/or interest payments), discounted at the

Back 109

effective rate of interest at issuance

Front 110

The most common form of corporate debt is

Back 110

bonds

Front 111

Principal, __, ___, or ___ are all synonymous terms

Back 111

par value, face amount, maturity value

Front 112

Periodic interest rate is also referred to as ___, ___, or __

Back 112

stated rate, coupon rate, nominal rate

Front 113

A bond indenture is held by a

Back 113

trustee

Front 114

Most corporate bonds are __ bonds

Back 114

debenture

Front 115

A debenture bond is secured only by

Back 115

the full faith and credit of the issuing corporation with no assets pledged

Front 116

Investors in debentures have the same standing as ___ with regards to the company’s liquidation; however, a ___ is not entitled to receive any liquidation payments until the claims of other specified debt issues are satisfied

Back 116

other general creditors, subordinated debenture

Front 117

__ bonds are backed by real estate and typically commands a lower interest rate

Back 117

Mortgage

Front 118

Most corporate bonds are __ bonds, meaning interest checks are mailed directly to the bond’s owner

Back 118

registered

Front 119

Coupon, or bearer, bonds were common before ___ bonds

Back 119

registered

Front 120

Most corporate bonds are ___ (or ___), which allows companies to avoid being stuck paying interest rates higher than the market rate

Back 120

callable, redeemable

Front 121

___ are pre-specified and often exceeds the bond’s face amount

Back 121

Call prices

Front 122

Often, calling bonds is mandatory, requiring sinking fund redemptions and earning these bonds the name

Back 122

sinking fund debentures

Front 123

___ are retired in installments during all or part of the life of the issue

Back 123

Serial bonds

Front 124

Convertible bonds are retired as a consequence of

Back 124

bondholders deciding to convert them into a share of stock

Front 125

Most bonds are issued on the day they are dated, but if there is a delay, ___ is added to the bond’s price

Back 125

interest that has accrued since the day they are dated

Front 126

Bonds that sell for more than their face amount (which happens when stated interest rate is higher than market rate) are sold at

Back 126

a premium

Front 127

Bonds that sell for less than their face amount (which happens when stated interest rate is lower than market rate) are sold at

Back 127

a discount

Front 128

The lower the perceived riskiness of the corporation issuing the bonds, the ___ the price those bonds will command

Back 128

higher

Front 129

A bond issue will be priced by the marketplace to yield the ___ for securities of similar risk and maturity

Back 129

market rate of interest

Front 130

A bond’s price will be

Back 130

the present value of the periodic cash interest payments (face amount x stated rate) plus the present value of the principal payable at maturity, both discounted at the market rate

Front 131

The ___ on debt is the market rate of interest multiplied by the outstanding balance of the debt

Back 131

effective interest

Front 132

The difference between the effective interest and the interest paid ___ the existing liability

Back 132

increases

Front 133

A ___ pays no interest but rather offers a deep discount from the face amount

Back 133

zero-coupon bond

Front 134

We accrue interest expense or revenue each period at the ___ rate regardless of how much cash is actually paid

Back 134

effective

Front 135

An advantage of issuing zero-coupon bonds is that ___ but has no related cash outflow until the bonds mature; conversely, investors must ___ although they have not yet received it

Back 135

the corporation can deduct for tax purposes the annual interest expense, report interest earned

Front 136

The outstanding amount of debt each period is the

Back 136

present value of the remaining cash flows, discounted at the original rate

Front 137

Since more cash is paid for a premium each period than the effective interest, the debt outstanding is __ by the overpayment

Back 137

reduced

Front 138

Whether bonds are issued at a premium or discount, the outstanding balance becomes __ at maturity

Back 138

zero

Front 139

Any interest accrued since the last interest date must be recorded by an adjusting entry

Back 139

prior to preparing the financial statements

Front 140

By the ___, interest (expense and revenue) is a plug figure, resulting from calculating the amount of discount reduction

Back 140

straight-line method

Front 141

Determining interest by allocating the discount or premium on a straight-line basis is a practical expediency permitted in some situations by the

Back 141

materiality concept

Front 142

Corporations usually sell an entire issue of bonds to an ___ rather than the public

Back 142

underwriter

Front 143

If an issuing company sells their debt securities directly to a single investor, this is called

Back 143

private placement

Front 144

Costs of issuing debt securities are recorded as a debit to an asset account (__) and amortized to __ over the term to maturity

Back 144

debt issue costs, expense

Front 145

The premium or discount is unaffected by debt issue costs because

Back 145

they are recorded in a separate account

Front 146

The interest rate stated in a __ is likely to be equal to the market rate because the rate usually is negotiated at the time of the loan; thus discounts and premiums are less likely for

Back 146

note, notes than on bonds

Front 147

A basic concept of accounting is

Back 147

substance over form

Front 148

The __ rate of interest is the rate implicit in the agreement

Back 148

implicit

Front 149

Deciding what the appropriate interest rate should be is called __ an interest rate

Back 149

imputing

Front 150

The effective interest (expense to issuer, revenue to investor) is calculated each period as the __ times the ___

Back 150

effective rate, amount of the debt outstanding during the interest period

Front 151

When less cash is paid each period than the effective interest, the unpaid difference ___ the outstanding balance (carrying value) of the note

Back 151

increases

Front 152

___ are equal amounts each period; these payments include both an amount that represents interest and an amount that represents a reduction of the outstanding balance

Back 152

Installment payments

Front 153

___ is required of the fair value of bonds, notes, and other financial instruments

Back 153

Supplemental disclosure

Front 154

Borrowing is __ activity, lending is ___ activity, and paying or receiving interest is ___ activity

Back 154

a financing, an investing, an operating

Front 155

Long-term debt is usually reported in the balance sheet as

Back 155

a single amount, net of any discount or increased by any premium

Front 156

Any portion of debt to be paid or received during the upcoming year should be reported as

Back 156

a current amount

Front 157

Debt paid in installments has an outstanding balance of __ at its maturity date

Back 157

zero

Front 158

Any difference between the outstanding debt and the amount paid to retire that debt represents

Back 158

either a gain or a loss

Front 159

Even when bonds are not callable, the issuing company can retire bonds early by

Back 159

purchasing them on the open market

Front 160

When debt of any type is retired prior to its scheduled maturity date, the transaction is referred to as

Back 160

extinguishment of debt

Front 161

Convertible bonds can be exchanged for ___ at the option of the investor

Back 161

stock

Front 162

Reasons for ___ include: to sell the bonds at a higher price and get a lower effective interest cost, to use as a medium of exchange for mergers and acquisitions, and to enable smaller firms or debt-heavy companies to obtain access to the bond market

Back 162

issuing convertible bonds

Front 163

Conversion is

Back 163

attractive to investors

Front 164

Convertible bonds have features of both

Back 164

debt and equity

Front 165

Because of the inseparability of their debt and equity features, the entire issue price of convertible bonds is recorded as ___, as if they are nonconvertible bonds

Back 165

debt

Front 166

The value of the conversion feature is

Back 166

not recorded separately

Front 167

Any additional consideration provided to induce conversion of convertible debt is recorded as

Back 167

an expense of the period