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50 Cards in this Set

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The method prescribed in the Internal Revenue Code for calculating the depreciation deduction; applicable to the years 1981-1986.

Accelerated Cost Recovery System (ACRS)

A depreciation calculation method that results in greater depreciation expense in the early periods of an asset's life than in the later periods of its life.

accelerated depreciation method

The process of spreading the cost of an intangible asset over its useful life.

amortization

The receipt or payment of a constant amount over fixed periods of time, such as monthly, semiannually, or annually.

annuity

A lease, usually long-term, that has the effect of financing the acquisition of an asset. Sometimes called a financing lease.

capital lease

To record an expenditure as an asset as opposed to expensing the expenditure.

capitalizing

An amortizable intangible asset represented by the legally granted protection against unauthorized copying of creative work.

copyright

An accelerated depreciation method in which the declining net book value of the asset is multiplied by a constant rate.

declining-balance depreciation method

The accounting process recognizing that the cost of a natural resource asset is used up as the natural resource is consumed.

depletion

The interest rate used in a present value calculation.

discount rate

To record an expenditure as an expense, as opposed to capitalizing the expenditure.

expensing

The amount that a present investment will be worth at some point in the future, assuming a specified interest rate and the reinvestment of an interest in each period that is earned.

future value

A nonamortizable intangible asset arising from the purchase of a business for more than the fair value of the net assets acquired. This is the present value of the expected earnings of the acquired business in excess of the earnings that would represent an average return on investment, discounted at the investor's required rate of return for the expected duration of the excess earnings.

goodwill

A long-lived asset represented by a contractual right, or an asset that is not physically identifiable.

intangible asset

An amortizable intangible asset represented by the cost of improvements made to a leasehold by the lessee.

leasehold improvement

The method prescribed in the Internal Revenue Code for calculating the depreciation deduction; applicable to years after 1986.

Modified Accelerated Cost Recovery System (MACRS)

The difference between the cost of an asset and the accumulated depreciation related to the asset. Sometimes called carrying value.

net book value

A lease that does not involve any attributes of ownership.

operating lease

An amortizable intangible asset represented by a government-sanctioned monopoly over the use of a product or process.

patent

The value now of an amount to be received or paid at some future date, recognizing an interest (or discount) rate for the period from the present to the future date.

present value

The amount of cash (or equivalent value) received in a transaction.

proceeds

Calculation of periodic depreciation expense by dividing the amount to be depreciated by the number of periods over which the asset is to be depreciated.

straight-line depreciation method

An amortizable intangible asset represented by a right to the exclusive use of an identifying mark.

trademark

A depreciation method based on periodic use and life expressed in terms of asset utilization.

units-of-production depreciation method

What does it mean to capitalize an expenditure?

It means that expenditure is recorded as an asset rather than an expense. If the asset is a depreciable asset, depreciation expense will be recognized over the useful life - to the entity - of the asset.

What does it mean to state that balance sheet values do not represent current fair values of long-lived assets?

It means that the assets are reported at their original cost, less accumulated depreciation, if applicable. These net book values are likely to be less than fair values.

What does it mean to say that depreciation expense does not affect cash?

It means that cash is not paid out for depreciation expense. Depreciation expense results from spreading the cost of an asset to expense over the useful life - to the entity- of the asset. Cash is reduced when the asset is purchased or when payments are made on a loan that was obtained when the asset was purchased.

What does it mean to use an accelerated depreciation method?

It means that relative to straight-line depreciation, more depreciation expense is recognized in the early years of an asset's life and less is recognized in the later years of an asset's life.

What does it mean to refer to the tax benefit of depreciation expense?

It means that because depreciation expense is deducted to arrive at taxable income, income taxes are lowered by the tax rate multiplied by the amount of depreciation expense claimed for income tax purposes.

What does it mean to prefer expensing repair and maintenance expenditures rather than capitalizing them?

It means that, relative to a practice of capitalizing these expenditures, taxable income of the current year will be lower and less time will be spent making depreciation expense calculations than if the expenditures were capitalized.

What does it mean to acquire an asset with a capital lease?

It means that rather than paying cash for the asset when it is acquired, or instead of borrowing funds to pay for the asset, the entity agrees to make payments to the lessor, or a finance company, of specified amounts over a specified period. The agreement is called a lease, but it is really an installment loan agreement.

What does it mean when goodwill results from the acquisition of another firm?

It means that the acquiring firm paid more than the fair value of the net assets acquired because of the potential for earning an above-average return on its investment.

What does it mean to say that money has value over time?

It means that money could be invested to earn a return - as interest income - if it were invested for a period of time.

What does it mean to talk about the present value of an amount of money to be received or spent in the future?

It means that the future amount has a value today that is equal to the amount that would have to be invested at a given rate of return to grow to the future amount. Present value is less than future value.

What does it mean to receive an annuity?

It means that the same amount will be received each period for a number of periods. For example, large lottery winnings are frequently received as an annuity - that is, equal amounts over 20 years.

The Buildings account should be increased (debited) for the purchase or construction price of the building plus:




a. any ordinary and necessary costs incurred to get the building ready for use.


b. any interest costs incurred on amounts borrowed to finance the building during its construction.


c. any installation and inspection costs incurred to get the building ready for use.


d. any material, labor, and overhead costs incurred by an entity in the construction of its own building.


e. all of the above.

e. all of the above

A firm wishing to minimize the amount reported for taxable income and maximize the amount reported as net income for the year in which a long-term asset is placed in service would:

use straight-line depreciation on the books and an accelerated method for tax purposes

The entry to record depreciation on long-term assets:




a. decreases total assets and increases net income.


b. decreases current assets and increases net income.


c. decreases total assets and decreases net income.


d. increases total assets and increases net income.


e. increases total assets and decreases net income.

c. decreases total assets and decreases net income.

Which depreciation method results in equal depreciation expense amounts for each year of an asset's useful life?

straight-line

Expenditures incurred on long-term assets after they have been placed in service are either capitalized or expensed. Which of the following statements concerning such expenditures is true?




a. Capitalized amounts represent future economic benefits that extend beyond one year.


b. Expensed amounts benefit no more than three future years.


c. Capitalized amounts decrease net income for the entire amount in the year of the expenditure.


d. Expensed amounts are added to the net book value of the related asset.


e. Immaterial amounts should always be capitalized.

a. Capitalized amounts represent future economic benefits that extend beyond one year.

Depreciation on assets such as equipment and machinery is recorded because of the:

matching principle

All of the following are examples of intangible assets except:




a. leaseholds


b. goodwill


c. trademarks


d. oil reserves


e. patents

d. oil reserves

With some simple adjustments, an annuity table for present values can be used to compute the present value of a series of future payments, even if:




a. the amounts involved vary from year to year


b. the payment periods are quarterly rather then yearly


c. the payment periods are interrupted for a few years then later continued


d. the amounts involved are paid at different times during different years

the payment periods are quarterly rather than yearly

The lessee's entry to record a periodic cash lease payment on a capital lease results in:




a. an increase in total liabilities and an increase in net income.


b. an increase in total liabilities and a decrease in net income.


c. a decrease in total liabilities and a decrease in net income.


d. a decrease in total liabilities and an increase in net income.

c. a decrease in total liabilities and a decrease in net income.

If you were to win $1,000,000 in a lottery today, which of the following payment patterns would you find most attractive?




a. $1 per year for 1 million years.


b. $200,000 per year for 5 years.


c. $50,000 per year for 20 years.


d. $25,000 per quarter for 10 years.


e. $2,000 per week for 500 weeks.

b. $200,000 per year for 5 years.

Straight-Line Depreciation - formula

(Cost - Estimated Salvage Value) ÷ Estimated Useful Life

Units-of-Production Depreciation - Formula

(Cost - Estimated Salvage Value) ÷ Estimated total units to be made

Declining-Balance Depreciation - Formula

Double the straight-line depreciation rate x Asset's net book value at beginning of year

Sales price (of the fixed asset) - Net Book value (original cost - accumulated depreciation) = ?

=Gain (if the difference is positive) or loss (if negative)

Net Book Value - Formula

Cost - Accumulated Depreciation