ACCT 302 Ch 11 Depreciation, Impairments, & Depletion

A principal objection to the straight-line method of depreciation is that it

ignores variations in the rate of asset use. and assumes that the asset's economic usefulness is the same each year.

Lamar Printing Company determines that a printing press used in its operations has suffered a permanent impairment in value because of technological changes. An entry to record the impairment should

include a credit to the equipment accumulated depreciation account.

An asset impairment occurs when the asset's carrying amount exceeds the:

expected future net cash flows.

Mains Corporation owns equipment with a cost of $290,000 and accumulated depreciation at December 31, 2014 of $150,000. It is estimated that the machinery will generate future cash flows of $165,000. The machinery has a fair value of $115,000. Mains should recognize a loss on impairment of

$0

Marigold Corp. owns machinery with a book value of $562000. It is estimated that the machinery will generate future cash flows of $600000. The machinery has a fair value of $428000. Marigold should recognize a loss on impairment of

$0

Flannery Corporation owns machinery with a book value of $520,000. It is estimated that the machinery will generate future cash flows of $465,000. The machinery has a fair value of $415,000. Florence should recognize a loss on impairment of

$105,000 520000 - 415000

Lundy Company purchased a depreciable asset for $99,000. The estimated salvage value is $18,000, and the estimated useful life is 9 years. The double-declining balance method will be used for depreciation. What is the depreciation expense for the second year on this asset? Round depreciation rate to nearest percentage.

$16,988 The first year's depreciation is (22% of $99,000) $21,780. The second year's depreciation is [22% of ($99,000 − $21,780)] or $16,988.

Sheffield Corp. purchased a depreciable asset for $604000 on January 1, 2015. The estimated salvage value is $64000, and the estimated useful life is 9 years. The straight-line method is used for depreciation. In 2018, Sheffield changed its estimates to a total useful life of 5 years with a salvage value of $81000. What is 2018 depreciation expense?

$171500 $604000 - [($604000 - $64000) × 3/9] = $424000 ($424000 - $81000) ÷ (5 - 3) = $171500.

In January, 2017, Coronado Industries purchased a mineral mine for $5500000 with removable ore estimated by geological surveys at 1600000 tons. The property has an estimated value of $320000 after the ore has been extracted. The company incurred $1500000 of development costs preparing the mine for production. During 2017, 580000 tons were removed and 520000 tons were sold. What is the amount of depletion that Coronado should expense for 2017?

$2171000 [($5500000 - $320000 + $1500000) ÷ 1600000] × 520000 = $2171000.

Chattanooga Company purchased a depreciable asset for $80,000 on January 1, 2015. The estimated salvage value is $20,000, and the estimated useful life is 5 years. The straight-line method is used for depreciation. On January 1, 2017, the company made a capital expenditure of $16,000 for an addition to the asset. What is depreciation expense for 2017?

$24,000 $80,000 − $24,000 + 16,000 = $72,000 and divide by 3 years = $24,000.

On April 1, 2016, Oriole Company purchased new machinery for $462000. The machinery has an estimated useful life of five years, and depreciation is computed by the sum-of-the-years'-digits method. The accumulated depreciation on this machinery at March 31, 2018, should be

$277200 $462000 × (5/15 + 4/15) = $277200.

Antigua Company purchased a depreciable asset for $45,000 on October 1, 2012. The estimated salvage value is $9,000, and the estimated useful life is 6 years. The straight-line method is used for depreciation. What is the book value on July 1, 2017 when the asset is sold?

$34,500 ($45,000 − $9,000) / 72 months results in a monthly depreciation of $500. After 21 months, the balance in accumulated depreciation is $10,500 and the book value of the asset is $34,500.

On January 1, 2017, Sunland Company purchased a machine costing $361000. The machine is in the MACRS 5-year recovery class for tax purposes and has an estimated $75000 salvage value at the end of its economic life. Assuming the company uses the optional straight-line method, the amount of MACRS deduction for tax purposes for the year 2017 is

$36,100 $361000 ÷ 5 ÷ 2 = $36100.

Lebanon Corporation owns equipment with a cost of $320,000 and accumulated depreciation at December 31, 2017 of $120,000. It is estimated that the machinery will generate future cash flows of $175,000. The machinery has a fair value of $155,000. If Lebanon uses IFRS, the company should recognize a loss on impairment of

$45,000 $200000 - $155000

Cambodian Import Company purchased a depreciable asset for $160,000 on April 1, 2014. The estimated salvage value is $40,000, and the estimated useful life is 5 years. The straight-line method is used for depreciation. What is the balance in accumulated depreciation on March 1, 2017 when the asset is sold?

$70,000 ($160,000 − $40,000) / 60 months results in a monthly depreciation of $2,000. For 35 months the accumulated depreciation is $70,000.

Dixon Company purchased a depreciable asset for $32,000. The estimated salvage value is $4,000, and the estimated useful life is 4 years. The double-declining balance method will be used for depreciation. What is the depreciation expense for the second year on this asset?

$8,000 The first year's depreciation is (50% of $32,000) $16,000. The second year's depreciation is [50% of ($32,000 − $16,000)] or $8,000.

For 2017, Lassiter Company reports beginning of the year total assets of $900,000, end of the year total assets of $1,100,000, net sales of $1,250,000, and net income of $250,000. Lassiter's 2017 asset turnover ratio is

1.25 $1,250,000 / [($900,000 + $1,100,000) / 2] is 1.25 times.

For 2017, Bonita Industries reports beginning of the year total assets of $906000, end of the year total assets of $1060000, net sales of $930000, and net income of $137620. The rate of return on assets for Bonita in 2017 is

14% $137620 ÷ [($906000 + $1060000) ÷ 2] = 14.0%

In 2017, Coronado Industries reported net income of $4.8 billion, net sales of $190 billion, and average total assets of $75 billion. What is Coronado Industries's asset turnover?

2.5 times $190 ÷ $75 = 2.5 times.

The total cost of natural resources includes all of the following except:

exploration costs. intangible development costs. restoration costs.

Oriole Company acquires a coal mine at a cost of $1520000. Intangible development costs total $363000. After extraction has occurred, Oriole must restore the property (estimated fair value of the obligation is $187000), after which it can be sold for $520000. Oriole estimates that 6200 tons of coal can be extracted. If 900 tons are extracted the first year, which of the following would be included in the journal entry to record depletion?

Debit to Inventory for $225000 ($1520000 + $363000 + $187000 - $520000) ÷ 6200 = $250; 900 × $250 = $225000

Which of the following is not true of depreciation accounting?

Depreciation lowers the book value of the asset as it ages and its fair value declines.

Which of the following disclosures is not required in the financial statements regarding depreciation?

Details demonstrating how depreciation was calculated.

Obsolescence is the replacement of one asset with another more efficient and economical asset. (T/F)

False

IFRS accounting for impairments differs from GAAP in which of the following ways?

IFRS permits recoveries of impairment to be recorded for all tangible assets.

Depreciation is normally computed on the basis of the nearest

full month and to the nearest dollar

Oriole Company purchased equipment in 2016 at a cost of $891000. Two years later it became apparent to Oriole Company that this equipment had suffered an impairment of value. In early 2018, the book value of the asset is $585000 and it is estimated that the fair value is now only $356000. The entry to record the impairment is

Loss on Impairment of Equipment 229000 Accumulated Depreciation—Equipment 229000 $585000 - $356000 = $229000.

When is the restoration of an impairment loss permitted?

On assets being held for disposal.

Under MACRS, which one of the following is not considered in determining depreciation?

Salvage value

Which of the following principles best describes the conceptual rationale for the methods of matching depreciation expense with revenues?

Systematic and rational allocation

Of the following costs related to the development of natural resources, which one is not a part of depletion cost?

Tangible equipment costs associated with machinery used to extract the natural resource.

Depletion is normally calculated using the straight-line method. (T/F)

True

Total depreciation over an asset's life cannot exceed an amount equal to cost minus estimated salvage value. (T/F)

True

Which of the following is not a way in which MACRS differs from GAAP depreciation?

Useful life must be shorter than legal life.

A change in estimate should

be handled in current and future periods

Erie Corporation owns machinery with a book value of $2,200,000. It is estimated that the machinery will generate future cash flows of $1,995,000. The machinery has a fair value of $1,915,000. The journal entry to record the impairment loss will

increase the asset's Accumulated Depreciation account by $285,000.

Depletion expense

is usually part of cost of goods sold.

For the composite method, the composite

life is the total depreciable cost divided by the total annual depreciation.

IFRS uses a fair value test to measure impairment loss. However, IFRS does not use the first-stage recoverability test under GAAP - comparing the undiscounted cash flow to the carrying amount. As a result, the IFRS test is

more strict than GAAP.

Economic factors that shorten the service life of an asset include

obsolescence. supersession. inadequacy.

Ignoring income tax effects, accelerated depreciation methods can

offset the effect of increasing repair and maintenance costs as the asset ages.

The major difference between the service life of an asset and its physical life is that

service life refers to the time an asset will be used by a company and physical life refers to how long the asset will last.

A general description of the depreciation methods applicable to major classes of depreciable assets

should be included in corporate financial statements or notes thereto

A general description of the depreciation methods applicable to major classes of depreciate assets

should be included in corporate financial statements or notes thereto.

The accounting exchanges of nonmonetary assets has recently converged between IFRS and GAAP, now requires

that gains on exchanges of nonmonetary assets be recognized if the exchange has commercial substance.

The computation of depreciation under MACRS differs from the GAAP computation except for

the determination of asset cost.

An impairment of property, plant, or equipment has occurred if

the expected future net cash flows is less than the asset's carrying value.

In computing partial-year depreciation, depreciation is normally computed on the basis of:

the nearest full month.

All of the following statements are true regarding IFRS accounting for property, plant, and equipment except:

under IFRS, units-of-production depreciation is not permitted.