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business
principles financial accounting

Questions and Answers of Principles Financial Accounting

Define the terms inadequacy and obsolescence as used in accounting for depreciable plant assets.
What four factors must be known to compute depreciation on a plant asset? How objective is the calculation of depreciation?
A friend, Mindy Jacobs, tells you her car depreciated \(\$ 5,000\) last year. Explain whether her concept of depreciation is the same as the accountant's concept.
What does the term accelerated depreciation mean? Give an example showing how depreciation is accelerated.
Provide a theoretical reason to support using an accelerated depreciation method.
If a machine has an estimated useful life of nine years, what will be the total digits to use in calculating depreciation under the sum-of-the-years'-digits method? How is this figure used in the
Nancy Company purchased a machine that originally had an estimated eight years of useful life. At the end of the third year, Nancy determined that the machine would last only three more years. Does
What does the balance in the accumulated depreciation account represent? Does this balance represent cash that can be used to replace the related plant asset when it is completely depreciated?
What is the justification for reporting plant assets on the balance sheet at undepreciated cost (book value) rather than market value?
Distinguish between capital expenditures and revenue expenditures.
For each of the following, state whether the expenditure made should be charged to an expense, an asset, or an accumulated depreciation account:a. Cost of installing air-conditioning equipment in a
Indicate which type of account (asset, accumulated depreciation, or expense) would be debited for each of the following expenditures:a. Painting an office building at a cost of \(\$ 1,000\). The
How do subsidiary records provide control over a company's plant assets?
What advantages can accrue to a company that maintains plant asset subsidiary records?
Real World Question From the consolidated balance sheet of The Coca-Cola Company in the annual report booklet, identify the 1996 gross property, plant, and equipment and the net property, plant, and
Real World Question Based on the financial statements of Maytag Corporation contained in the annual report booklet, what was the 1996 ending balance in the Land account? Did the company acquire any
Real World Question Based on the financial statements and the notes to those statements of The Limited, Inc., contained in the annual report booklet, what was the 1996 ending net property and
Real World Question Based on the financial statements and the notes of John H. Harland Company contained in the annual report booklet, what was the 1996 ending balance of accumulated depreciation and
Stephon Company paid \(\$ 640,000\) cash for a tract of land on which it plans to erect a new warehouse, and paid \(\$ 8,000\) in legal fees related to the purchase. Stephon also agreed to assume
Laural Company paid \(\$ 840,000\) cash for real property consisting of a tract of land and a building. The company intended to remodel and use the old building. To allocate the cost of the property
A machine is acquired in exchange for 50 shares of Marley Corporation capital stock. The stock recently traded at \(\$ 400\) per share. The machine cost \(\$ 30,000\) three years ago. At what amount
Keely Company purchased some office furniture for \(\$ 29,760\) cash on March 1, 1998. It also paid \(\$ 480\) cash for freight costs incurred. The furniture is being depreciated over four years
On January 2,1998 , a new machine was acquired for \(\$ 900,000\). The machine has an estimated salvage value of \(\$ 100,000\) and an estimated useful life of 10 years. The machine is expected to
Terrill Company finds its records are incomplete concerning a piece of machinery used in its plant. According to the company records, the machinery has an estimated useful life of 10 years and an
Katherine Company purchased a machine on April 1, 1998, for \(\$ 72,000\). The machine has an estimated useful life of five years with no expected salvage value. The company's accounting year ends on
Australia Company purchased a machine for \(\$ 3,200\) and incurred installation costs of \(\$ 800\). The estimated salvage value of the machine is \(\$ 200\). The machine has an estimated useful
Regal Company acquired a delivery truck on January 2, 1998, for \(\$ 107,200\). The truck had an estimated salvage value of \(\$ 4,800\) and an estimated useful life of eight years. At the beginning
Assume that the truck described in Exercise 10-10 was used \(40 \%\) of the time in 1999 to haul materials used in the construction of a building by Regal Company for its own use. (Remember that 1999
Vineland Company purchased a computer for \(\$ 60,000\) and placed it in operation on January 2, 1997. Depreciation was recorded for 1997 and 1998 using the straight-line method, a sixyear life, and
On January 2, 1998, a company purchased and placed in operation a new machine at a total cost of \(\$ 60,000\). Depreciation was recorded on the machine for 1998 and 1999 under the straight-line
Lasky Company purchased a machine on January 3, 1998, at a cost of \(\$ 50,000\). It debited freight and installation charges of \(\$ 10,000\) to Repairs Expense. It recorded straight-line
Bragg Company owns a plant asset that originally cost \(\$ 240,000\) in 1995. The asset has been depreciated for three years assuming an eight-year useful life and no salvage value. During 1998,
Brite Company purchased a machine that had an invoice price of \(\$ 400,000\) excluding sales tax. Terms were net 30 . A \(4 \%\) sales tax was levied on the sale. The company incurred and paid
Maxwell Company purchased 2 square miles of farmland under the following terms: \(\$ 968,000\) cash; and liability assumed on mortgage note of \(\$ 320,000\) and interest accrued on mortgage note
Dawson Towing Company purchased a used panel truck for \(\$ 28,800\) cash. The next day the company's name and business were painted on the truck at a total cost of \(\$ 1,488\). The truck was then
You are the new controller for Jayson Company, which began operations on October 1, 1998, after a start-up period that ran from the middle of 1997 . While reviewing the accounts, you find an account
Land Company acquired and put into use a machine on January 1, 1998, at a cash cost of \(\$ 120,000\) and immediately spent \(\$ 5,000\) to install it. The machine had an estimated useful life of
Crawford Company paid \(\$ 60,000\) for a machine on April 1, 1998, and placed it in use on that same date. The machine has an estimated life of 10 years and an estimated salvage value of \(\$
Bolt Company purchased a machine for use in its operations that had an invoice price of \(\$ 80,000\) excluding sales tax. A \(4 \%\) sales tax was levied on the sale. Terms were net 30 . The company
Timothy Company acquired and placed into use a heavy factory machine on October 1, 1998. The machine had an invoice price of \(\$ 360,000\), but the company received a \(3 \%\) cash discount by
Peach Company has the following entries in its Building account:Peach acquired the original property on May 5, 1998. Orange immediately engaged a contractor to construct a new wing on the south end
Pressler Company planned to erect a new factory building and a new office building in Atlanta, Georgia. A report on a suitable site showed an appraised value of \(\$ 180,000\) for land and orchard
Cardine Company acquired and placed into use equipment on January 2, 1998, at a cash cost of \(\$ 935,000\). Transportation charges amounted to \(\$ 7,500\), and installation and testing costs
Goodrich Company purchased a machine on October 1,1998 , for \(\$ 100,000\). The machine has an estimated salvage value of \(\$ 30,000\) and an estimated useful life of eight years.
You are a new staff auditor assigned to audit Cray Company's Buildings account. You determine that Cray Company made the following entries in its Buildings account in 1998:Using all of this
On October 1, 1999, Besler Company acquired and placed into use new equipment costing \(\$ 504,000\). The equipment has an estimated useful life of five years and an estimated salvage value of \(\$
Double-declining-balance.b. Prepare a written report describing the conditions in which each of these four methods would be most appropriate.3. The notes to the financial statements of Anthony
The following footnote excerpted from the 1996 annual report of John H. Harland Company describes the company's accounting policies for property, plant, and equipment: Property, plant, and equipment
In a group of two or three students, visit a large company in your community and inquire about the subsidiary records it maintains to establish accounting control over its plant assets. Also inquire
With a team of two or three students, visit two companies in your community to inquire about why they use certain depreciation methods. Try to locate companies that use several depreciation methods
In a small group of students, visit a large company in your community to determine how it decides to account for expenditures on fixed assets made after the assets have been in use for some time. In
Visit the Becker CPA Review site at:\section*{http://www.beckercpa/careers.htm}Study the descriptions of accounting careers at this site. Identify the major types of employers. Identify the types of
\section*{Visit the Best Software website at:}\section*{http://www.bestsoftware.com}Click on "Fixed Asset Management Systems." Investigate what types of information the system tracks on a particular
When a plant asset is still being used after it has been fully depreciated, depreciation can be taken in excess of its cost.
In an exchange of dissimilar assets, the new asset is recorded at the fair market value of the asset received or the fair market value of the asset given up plus cash paid, whichever is more clearly
In calculating depletion, the residual value of acquired land containing an ore deposit is included in total costs subject to depletion.
All recorded intangible assets are subject to amortization.
When a fully depreciated asset is still in use:a. Prior years' depreciation should be adjusted.b. The cost should be adjusted to market value.c. Part of the depreciation should be reversed.d. The
A truck costing \(\$ 45,000\) and having an estimated salvage value of \(\$ 4,500\) and an original life of five years is exchanged for a new truck. The cash price of the new truck is \(\$ 57,000\),
Land containing a mine having an estimated \(1,000,000\) tons of economically extractable ore is purchased for \(\$ 375,000\). After the ore deposit is removed, the land will be worth \(\$ 75,000\).
Bren Company purchased a patent for \(\$ 36,000\). The patent is expected to have value for 10 years even though its legal life is 17 years. The amortization for the first year is:a. \(\$ 36,000\).b.
When depreciable plant assets are sold for cash, how is the gain or loss measured?
A plant asset that cost \(\$ 27,000\) and has a related accumulated depreciation account balance of \(\$ 27,000\) is still being used in business operations. Would it be appropriate to continue
A machine and \(\$ 22,500\) cash were exchanged for a delivery truck. How should the cost basis of the delivery truck be measured?
A plant asset was exchanged for a new asset of a similar type. How is the cost of the new asset determined?
When similar assets are exchanged, a resulting gain is not recognized. Justify this.
What is the proper accounting treatment for the costs of removing or dismantling a company's old plant assets?
a. Distinguish between depreciation, depletion, and amortization. Name two assets that are subject to depreciation, to depletion, and to amortization.b. Distinguish between tangible and intangible
A building with an estimated physical life of 40 years was constructed at the site of a coal mine. The coal mine is expected to be completely exhausted within 20 years. Over what length of time
What are the characteristics of intangible assets? Give an example of an asset that has no physical existence but is not classified as an intangible asset.
What reasons justify the immediate expensing of most research and development costs?
Over what length of time should intangible assets be amortized?
Should costs incurred on internally generated intangible assets be capitalized in asset accounts?
Describe the typical accounting for a patent.
During 1999, Hardy Company incurred \(\$ 123,000\) of research and development costs in its laboratory to develop a patent that was granted on December 29, 1999. Legal fees (outside counsel) and
What is a capital lease? What features may characterize a capital lease?
What is the difference between a leasehold (under an operating lease contract) and a leasehold improvement? Is there any difference in the accounting procedures applicable to each?
Walt Company leased a tract of land for 40 years at an agreed annual rental fee of \(\$ 18,000\). The effective date of the lease was July 1, 1998. During the last six months of 1998, Walt
You note that a certain store seems to have a steady stream of regular customers, a favorable location, courteous employees, high-quality merchandise, and a reputation for fairness in dealing with
Real World Question From the consolidated balance sheet of The Coca-Cola Company in the annual report booklet, identify the 1996 intangible assets ending balance. What percentage increase does this
Real World Question Based on the financial statements of Maytag Corporation contained in the annual report booklet, what was the 1996 allowance for amortization of intangibles? What percentage change
The accounts of Stackhouse Company as of December 31, 1999, show Accounts Receivable, \(\$ 190,000\); Allowance for Uncollectible Accounts, \(\$ 950\) (credit balance); Sales, \(\$ 920,000\); and
Compute the required balance of the Allowance for Uncollectible Accounts for the following receivables: Accounts Receivable Age (months) Probability of Collection $180,000. Less than 1 95% 90,000.
On April 1, 1998, Kelley Company, which uses the allowance method of accounting for uncollectible accounts, wrote off Bob Dyer's \(\$ 400\) account. On December 14, 1998, the company received a check
Jamestown Furniture Mart, Inc., sold \(\$ 80,000\) of furniture in May to customers who used their Carte Blanche credit cards. Such sales are subject to a \(3 \%\) discount by Carte Blanche (a
Dunwoody Discount Toys, Inc., sells merchandise in a state that has a 5\% sales tax. Rather than record sales taxes collected in a separate account, the company records both the sales revenue and the
Assume the following note appeared in the annual report of a company:In 1998, two small retail customers filed separate suits against the company alleging misrepresentation, breach of contract,
Determine the maturity date for each of the following notes: Issue Date Life January 13, 1999. January 31, 1999 30 days 90 days June 4, 1999 1 year December 2, 1999. 1 month
Crawford, Inc., gave a \(\$ 20,000,120\)-day, \(12 \%\) note to Dunston, Inc., in exchange for merchandise. Crawford uses periodic inventory procedure. Prepare journal entries to record the issuance
Based on the facts in the previous exercise, prepare the entries that Crawford, Inc., and Dunston, Inc., would make at the maturity date, assuming Crawford defaults.
John Wood is negotiating a bank loan for his company, Wood, Inc., of \(\$ 16,000\) for 90 days. The bank's current interest rate is \(10 \%\). Prepare Wood's entries to record the loan under each of
Based on the previous exercise, prepare the entry or entries that would be made at maturity date for each alternative, assuming the loan is paid before the end of the accounting period.
AT\&T provides communication services and products, as well as network equipment and computer systems, to businesses, consumers, communications services providers, and government agencies. The
The following selected accounts are for Keystone, Inc., a name brand shoe wholesale store, as of December 31, 1998. Prior to closing the accounts and making allowance for uncollectible accounts
The cash register at Frank's Restaurant at the close of business showed cash sales of \(\$ 7,500\) and credit card sales of \(\$ 10,000\) ( \(\$ 6,000\) VISA and \(\$ 4,000\) American Express). The
Beacham Hardware, Inc., sells merchandise in a state that has a 6\% sales tax. On July 1, 1999, it sold goods with a sales price of \(\$ 20,000\) on credit. Sales taxes collected are recorded in a
Quick Wheels, Inc., sells racing bicycles and warrants all parts for one year. The average price per bicycle is \(\$ 560\), and the company sold 4,000 in 1998 . The company expects \(20 \%\) of the
Vance Commercial Properties, Inc., has an accounting period of one year, ending on July 31. On July 1, 1998, the balances of certain ledger accounts are Notes Receivable, \(\$ 654,000\); and Notes
On November 1, 1999, Grand Strand Property Management, Inc., discounted its own \(\$ 50,000\), 180-day, noninterest-bearing note at its bank at \(18 \%\). The note was paid on its maturity date. The
As of December 31, 1998, Fargo Company's accounts prior to adjustment show:Fargo Company estimates uncollectible accounts at \(1 \%\) of sales.On February 23, 1999, the account of Dan Hall in the

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