978-1337276337 Test Bank Chapter 8 Part 6

Chapter 8

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227. Racer Company acquired patent rights on January 1, 2014, for $1,080,000. The patent has a useful life equal to its

legal life of 15 years. On January 2, 2017, Racer successfully defended the patent in a lawsuit at a cost of $78,000.

Required

(1) Determine the patent amortization expense for the current year ended December 31, 2017.

(2) Analyze the impact of the adjusting entry to recognize the amortization.

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228. For each of the following intangible assets, indicate the amount of amortization expense that should be recorded for

the year 2017 and the amount of accumulated amortization on the balance sheet as of December 31, 2017.

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229. Fill in the table shown below indicating the period of time over which each intangible asset should be amortized, and

indicate the amount of amortization expense that should be reported for 2017.

Goodwill Trademark

Cost $80,000 $55,000

Date of purchase June 30, 2017 January 1, 2017

Legal life Forever 20 years

Useful life 60 years 10 years

2017 Amortization expense

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230. Refer to the information for Hu Corporation.

Required

Calculate the following ratios for Hu for 2018.

A. Average life of property, plant, and equipment

B. Average age of property, plant, and equipment

C. What information do these ratios provide to investors and creditors?

231. Refer to the information for Hu Corporation.

Required

(1) Determine the book value of Hu’s property, plant and equipment at December 31, 2018 and 2017.

(2) What types of transaction(s) could have caused the change in book value of property, plant, and equipment during

2018?

232. Refer to the information for Hu Corporation.

Chapter 8

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Required

(1) Which items on Hu’s balance sheet could be considered intangible assets? Explain the nature of each of these.

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233. Refer to the information for Hu Corporation.

Required

(1) Explain the impact on net income and cash flows of Hu using straight-line depreciation for financial reporting and

accelerated depreciation methods for income tax purposes.

(2) In the notes to the financial statements, Hu indicates that it uses different depreciation methods for different types of

plant and equipment assets. Explain why Hu might follow this policy.

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1. What amount of income will Music report in 2017?

2. What is the amount of cash on hand at December 31, 2017?

3. Explain how the cash balance increased from zero at the beginning of the year to its year-end balance. Why does the

increase in cash not equal the income?

2. Cash on hand, December 31, 2017 = $510,000 – $62,500 = $447,500

3. Cash increased from revenue and decreased by cash expenses. The amount is different than income for 2017 because

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235. Gallery Manufacturing purchased, for cash, three large pieces of equipment. Based on recent sales of similar

equipment, the fair market values are as follows:

2. How does the purchase of the equipment affect total assets?

23.8% 33.3% 42.9%

2. The purchase does not affect total assets; it affects only the composition of the assets. Cash is a current asset;

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236. Hawk Company purchased an asset on January 1, 2015, for $10,000. The asset was expected to have a ten-year life

and a $1,000 salvage value. The company uses the straight-line method of depreciation. On January 1, 2017, the company

made a major repair to the asset of $5,000, extending its life. The asset is expected to last ten years from January 1, 2017.

Calculate the amount of depreciation for 2017.

237. Burgess Company purchased an asset on January 1, 2015, for $10,000. The asset was expected to have a ten-year life

and a $1,000 salvage value. The company uses the straight-line method of depreciation. On January 1, 2017, the company

determines that the asset will last only five more years. Calculate the amount of depreciation for 2017.

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238. At December 31, 2017, Ashland Company has the following amounts on its financial statements:

Property, plant, and equipment $10,000

Accumulated depreciation 5,000

Total assets at January 1, 2017 30,000

Total assets at December 31, 2017 40,000

Net sales 62,000

Depreciation expense 1,000

Based on this information, calculate the following ratios:

(1) Average life of the assets

(2) Average age of the assets

(3) Asset turnover

239. Distinguish between current assets and operating assets.

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240. Distinguish between tangible and intangible operating assets.

241. Explain how the costs associated with operating assets are reported on the balance sheet.

242. Explain what costs are included in the acquisition cost of operating assets.

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243. You have just received an email from the new staff person, Jennifer Lark. She has just started working in the Fixed

Assets Department of your company. She would like to know under what circumstances she should capitalize interest as

part of the cost of an asset. In a brief memo, explain the issues to Ms. Lark.

244. What is the relationship between the depreciation method chosen and income taxes paid in the early years? Explain.

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245. Marrow Company has a large portion of its plant assets concentrated in an area where technology is changing

rapidly. Marrow wants to minimize taxable income and maximize net income reported to stockholders. Recommend a

course of action for Marrow. Support your recommendation.

246. River Company wants to minimize the amount of time and effort its bookkeepers spend on calculating depreciation.

Since River has not been profitable, taxes are not an issue, but maximizing the profit and minimizing reported losses are

major concerns. Recommend a course of action for River. Support your recommendation.

247. What is the relationship between the book value of a plant asset, the market value of the plant asset, and the salvage

value of a plant asset? Explain.

248. Why do many companies use one method to calculate depreciation for the income statement developed for

stockholders and another method for income tax purposes?

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251. What impact does materiality have on the determination of how a cost related to a plant asset is reported on the

financial statements?

252. How are research and development costs reported in the financial statements? Why is this treatment required?

253. How does goodwill arise? How is it accounted for and reported on the financial statements?

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254. Mega Industries has an intangible asset that is being amortized over a ten-year time period. However, a competitor

has just introduced a new product that will have a serious negative impact on the asset’s value. Should the company

continue to amortize the intangible asset over the ten-year life? Explain.

255. Relative to plant assets, how can a company report a net loss for a period and yet still have positive cash flows from

operating activities?

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256. A statement of cash flows reports property, plant, and equipment transactions.

A.

What are the effects of acquisitions of plant assets on the statement of cash flows?

B.

In which section of the statement of cash flows are cash flows from sales of plant assets reported?

C.

How is depreciation reported on the statement of cash flows? Why?

257. Explain the meaning or significance of the following ratios:

A.

Average life of property, plant, and equipment

B. Average age of property, plant, and equipment

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