87. Advertising costs that increase the value of trademarks are recorded to the asset account
entitled Trademarks.
88. We expense internally generated intangible assets, such as research and development and
advertising costs, as we incur them.
89. A patent is an exclusive right to a published work such as a song, film, or painting.
90. A copyright is an exclusive right of protection given to the creator of a published work
91. A trademark is a word, slogan, or symbol that distinctively identifies a company, product,
or service.
92. When a firm develops a trademark internally through advertising, it does not record the
advertising costs as an intangible asset, but rather expenses them in the income statement.
93. The franchisee’s initial fee is recorded as an expense on the income statement.
94. We record goodwill as an intangible asset in the balance sheet only when we purchase it
as part of the acquisition of another company.
95. The acquiring company records goodwill equal to the purchase price less the book value
of the net assets acquired.
96. We capitalize repairs and maintenance expenditures because they maintain a given level
of benefits.
97. If a firm successfully defends an intangible right, it should expense the litigation costs as
incurred.
98. If the defense of an intangible right is unsuccessful, then the firm should expense the
litigation costs as incurred because they provide no future benefit.
99. Depreciation in accounting is the process of allocating to expense the cost of an asset over
its service life.
100. Depreciation in accounting records the decrease in value of an asset.
101. Accumulated Depreciation is a liability account that is increased by credits.
102. Book value is equal to the original cost of the asset minus the current balance in
Accumulated Depreciation.
103. The Accumulated Depreciation account allows us to reduce the carrying value of assets
through depreciation, while maintaining the original cost of each asset in the accounting
records.
104. The service life of an asset is always equal to the full life of the asset.
105. Residual value, also referred to as salvage value, is the amount the company expects to
receive from selling the asset at the end of its service life.
106. With the straight-line depreciation method, we allocate an equal amount of the
depreciable cost to each year of the asset’s service life.
107. When a change in estimate is required, the company changes depreciation in prior,
current and future years.
108. Straight-line depreciation assumes that the benefits we derive from the use of an asset are
the same each year.
109. Declining-balance depreciation will be lower than straight-line depreciation in earlier
years, but higher in later years.
110. In an activity-based depreciation method, we allocate an asset’s cost based on its use.
111. We allocate natural resources to expense through a process known as “depletion.”
112. Straight-line produces a lower net income than accelerated methods in the earlier years
of an asset’s life.
113. Straight-line, declining-balance, and activity-based depreciation all are acceptable
depreciation methods for both financial reporting and tax reporting.
114. Most companies use straight-line amortization for intangibles and credit the amount of
amortization to the intangible asset account itself rather than to Accumulated Amortization.
115. Goodwill is amortized over its estimated useful life.
116. Intangible assets with an indefinite useful life (goodwill and most trademarks) are not
amortized.
117. We record a gain if we sell an asset for less than book value.
118. We record a loss if we sell an asset for less than book value.
119. A more comparable measure of profitability than income is return on assets, which
equals net income divided by average total assets.
120. Profit margin is net income divided by net sales.
121. Asset turnover is net sales divided by ending total assets.
122. Management must review long-term assets for impairment when events or changes in
circumstances indicate that book value might not be recoverable.
123. Impairment occurs when the future cash flows generated for a long-term asset fall below
its fair value.
124. An impairment loss is equal to the amount by which book value exceeds the fair value of
a long-term asset.
125. Taking a “big bath” is recording all losses in one year to make a bad year even worse.
126. Listed below are five terms followed by a list of phrases that describe or characterize the
terms. Match each phrase with the best term placing the number designating the term in the
space provided.
1. Franchise
2. Trademark
3. Copyright
4. Patent
5. Goodwill
(A) An exclusive right of protection given to the creator of a
published work such as a song, film, painting, photograph, book,
or computer software.
(B) Payment for the exclusive right to use the company’s name
and to sell its products within a specified geographical area.
(C) The purchase price of a company less the fair value of the
net assets acquired.
(D) An exclusive right to manufacture a product or to use a
process.
(E) A word, slogan, or symbol that distinctively identifies a
company, product, or service.
127. Listed below are five terms followed by a list of phrases that describe or characterize the
terms. Match each phrase with the best term placing the number designating the term in the
space provided.
1. Addition
2. Improvement
3. Materiality
4. Repairs and
maintenance
5. Capitalize
(A) Occurs when we add a new major component
to an existing asset.
(B) The cost of replacing a major component of an
asset.
(C) Large enough to influence an investor or
creditor’s decision.
(D) Recording an expenditure as an asset.
(E) Expenses after acquisition that maintain a given
level of benefits.
128. Listed below are five terms followed by a list of phrases that describe or characterize the
terms. Match each phrase with the best term placing the number designating the term in the
space provided.
1. Book value
2. Service life
3. Residual value
4. Depreciation
5. Accumulated
depreciation
(A)Also referred to as salvage value, is the amount the
company expects to receive from selling the asset at the
end of its service life.
(B) Allocating the cost of a tangible asset over its
service life.
(C) Equal to the original cost of the asset minus the
current balance in accumulated depreciation.
(D) A contra-asset account representing the total
depreciation taken to date.
(E) How long the company expects to receive benefits
from the asset before disposing of it.
129. Listed below are five terms followed by a list of phrases that describe or characterize the
terms. Match each phrase with the best term placing the number designating the term in the
space provided.
1. Straight-line method
2. Depletion
3. Declining-balance
method
4. Activity-based
method
5. Amortization
(A)The process of recording expense for natural
resources.
(B) Allocates an asset’s cost based on its use.
(C)An accelerated depreciation method that records
more depreciation in earlier years and less depreciation
in later years.
(D)Allocating the cost of an intangible asset over its
service life.
(E)Allocates an equal amount of depreciation to
each year of the asset’s service life.
130. Listed below are five terms followed by a list of phrases that describe or characterize the
terms. Match each phrase with the best term placing the number designating the term in the
space provided.
(A) Net sales divided by average total assets; which
measures the sales per dollar of assets invested.
(B) Net income divided by net sales; indicates the earnings
per dollar of sales.
(C) Net income divided by average total assets; measures
the amount of net income generated for each dollar invested in
assets.
(D) Recording all losses in one year to make a bad year
even worse.
(E) Occurs when the future cash flows (future benefits)
generated for a long-term asset fall below its book value (cost
minus accumulated depreciation).
131. Soccer Wholesale purchased land and a warehouse for $800,000. In addition to the
purchase price, Soccer Wholesale makes the following expenditures related to the acquisition:
broker’s commission, $48,000; title insurance, $3,000; and miscellaneous closing costs,
$8,000. The warehouse is immediately demolished at a cost of $80,000 in anticipation of
building a new warehouse. Determine the amount Soccer Wholesale should record as the cost
of the land.
132. Holiday Laboratories purchased a high speed industrial centrifuge at a cost of $420,000.
Shipping costs totaled $15,000. Foundation work to house the centrifuge cost $8,000. An
additional water line had to be run to the equipment at a cost of $3,000. Labor and testing
costs totaled $6,000. Materials used up in testing cost $3,000. What is the total cost of the
equipment? How much of this amount should be expensed immediately?
133. If a company initially records an expense incorrectly as an asset, explain how this
mistake affects the income statement and the balance sheet.