ACCT 3210: Review Chapter 11: PP&E and Intangible Assets-Utilization and Disposition

Which of the following statements is true regarding a company's choice of depreciation method?

An accelerated method lowers taxes in the early years of an asset's life.

The gain or loss on disposal of an asset is calculated as

consideration received less the book value of asset sold.

For natural resources the depletion base is

cost less any anticipated residual value.

In the sum-of-the-years'-digits method of depreciation, the depreciation rate is multiplied by the depreciable base. The depreciable base is

cost less residual value.

The portion of a tangible asset's cost that is recognized as an expense in the current year is called

depreciation expense.

Accounting for impairment of value of assets with finite lives and those with indefinite lives

differs

Although activity-based depreciation methods are theoretically superior to time-based methods, activity-based methods are (Select all that apply.)

difficult to apply in practice. too costly to use.

Which of the following are characteristics of goodwill? (Select all that apply.)

Indefinite life Subject to impairment testing

Which of the following is true when an asset is disposed and group depreciation is used?

It is assumed that the book value of the asset is equal to the proceeds received.

An intangible asset that is measured as the consideration paid less the fair value of the net identifiable assets is called

goodwill.

When an asset has a significant decline in value and is written down, this is called ______.

impairment

Expenditures classified as ______ involve the replacement of a major component of an asset.

improvements

The types of expenditures that can occur subsequent to an asset's acquisition are (Select all that apply.)

improvements. additions. rearrangements. repairs and maintenance.

A subsequent expenditure for an asset increases the future benefits of the asset if it (Select all that apply.)

increases the operating efficiency of the asset. increases the quality of the goods or services produced by the asset. extends the asset's useful life.

No amortization is recorded for

intangible assets with indefinite lives.

Companies use accelerated depreciation for tax purposes because

it reduces taxable income in the early years of the asset's life.

The useful life of an intangible asset may be limited by what type of provisions? (Select all that apply.)

legal contractual regulatory

If obsolescence were expected to limit the longevity of a protected product, the useful life of a patent might be _________ its legal life.

less than

The amount of use that the company expects to obtain from an asset before disposing of it is referred to as the _____ life of the asset. (Enter only one word.)

service

The group depreciation method defines the collection of depreciable assets as those that

share similar service lives and attributes.

Smith Company calculates annual depreciation of equipment by using the following formula: [(cost-residual value)/useful life]. Smith is applying the depreciation method referred to as

straight-line

Which items are considered changes in estimates that would be treated on a prospective basis in the current period and future periods? (Select all that apply.)

change in useful life of an asset increasing the residual value of an asset

Declining balance depreciation methods multiply _____ by an annual rate that is a multiple of the straight-line rate.

cost less accumulated depreciation

On October 1, year 1, Johnson Corp. purchased equipment for $100,000. The equipment has a useful life of 5 years with no residual value. Johnson uses the double-declining-balance method of depreciation. The partial year depreciation for year 1 is

$10,000

TR Mining has a mineral mine with a depletion base of $5,000,000. It is estimated that 20,000,000 tons will be extracted over the mine's useful life. During year 1, TR extracted 400,000 tons of minerals. The depletion expense for year 1 is

$100,000.

Golden Company has a binding commitment from another company to purchase its copyright at the end of the asset's useful life. The agreed upon amount is $150,000. When calculating copyright amortization, Golden Company should utilize a residual value of

$150,000

At the beginning of year 1, Looby Corp. purchases equipment for $100,000. The equipment has a residual value of $20,000 and an expected useful life of 10 years. What is accumulated depreciation at the end of year 2 using straight-line depreciation?

$16,000

On January 1, year 1, Paisley Corp. purchases equipment for $200,000. Paisley uses the double-declining-balance method of depreciation. The asset has a 10-year useful life and a $10,000 residual value. What is the book value at the end of year 1?

$160,000

On January 1, year 1, Green Tractor Corp. purchased equipment for $100,000. The equipment has a useful life of 4 years, and a residual value of $20,000. Using the sum-of-the-years'-digits method, what is the depreciation expense for year 1?

$32,000

On January 1, year 1, Clem Corp. purchased equipment for $160,000. The equipment has a residual value of $10,000, and has a life of 100,000 hours. Clem uses the units-of-production method of depreciation. In year 1, Clem used the machine 2,000 hours, and in year 2, Clem used the machine 3,000 hours. What is the depreciation expense for year 2?

$4,500

On January 1, year 1, LaRose Corp. purchases equipment for $100,000. LaRose uses the double-declining-balance method of depreciation. The asset has a 5-year useful life and a $10,000 residual value. What is depreciation expense for year 1?

$40,000

JM Mining has a coal mine with a depletion base of $1,000,000. It is estimated that 500,000 tons will be extracted over the mine's useful life. During year 1, JM extracted 20,000 tons of coal. The depletion expense for year 1 is

$40,000.

On January 1, year 1, Roark Corp. purchased equipment for $120,000. The equipment has a residual value of $20,000, and has a life of 1,000,000 hours. Roark uses the units-of-production method of depreciation. In year 1, Roark used the machine 30,000 hours, and in year 2, Roark used the machine 50,000 hours. What is the depreciation expense for year 2?

$5,000

On January 1, year 1, Glasser Corp. purchased equipment for $120,000. The equipment has a useful life of 3 years, and a residual value of $20,000. Using the sum-of-the-years'-digits method, what is the depreciation expense for year 1?

$50,000

On January 1, year 1, Mark Corp. purchases equipment for $300,000. The equipment has a 10-year life and a $50,000 residual value. Mark uses the double-declining-balance method of depreciation. What is depreciation expense for year 1?

$60,000

On January 1, year 1, Glasser Corp. purchased equipment for $120,000. The equipment has a useful life of 3 years, and a residual value of $20,000. Using the sum-of-the-years'-digits method, what is the book value at the end of year 1?

$70,000

Which item qualifies as an addition and should be capitalized?

Adding a new computer-aided cutting device to an existing machine.

In Year 1, Orange Company determines that it will depreciate its equipment using the group method. The cost of equipment purchased, along with its residual values and estimated lives by type of equipment are as follows: Asset Cost Residual Value Depreciable Base Estimated Life Mowers $ 55,000 $ 5,000 $ 50,000 5 Planters 190,000 10,000 180,000 6 Loaders 75,000 15,000 60,000 4 Total $ 320,000 $ 30,000 $ 290,000 Over what term will the group be depreciated?

5.27 years

The journal entry to record an impairment loss on goodwill includes which of the following entries? (Select all that apply.)

A debit to loss on impairment of goodwill A credit to goodwill

The cost of a natural resource less its anticipated residual value is called the _____ _____. (Enter one word per blank.)

Blank 1: depletion Blank 2: base

The allocation of the cost of a tangible fixed asset is referred to as _____, whereas the allocation of the cost of an intangible asset is referred to as _____. (Enter one word per blank.)

Blank 1: depreciation Blank 2: amortization

Which of the following accounting changes must be justified in the notes to the financial statements?

Changes in depreciation methods

Which of the following would be included in a journal entry to record the allocation of the cost of a natural resource for the period? (Select all that apply.)

Credit the natural resource. Debit depletion expense.

At the beginning of Year 1, Mitchell Company purchased office equipment for $15,000. The machine has an estimated residual value of $1,000 and an estimated service life of 5 years. If Mitchell uses straight-line depreciation, it will make which of the following entries related to depreciation at the end of Year 1?

Debit to depreciation expense for $2,800

Match each term with its definition. Instructions

Depreciation - Allocation of the cost of a tangible fixed asset Depletion - Allocation of the cost of natural resources Amortization - Allocation of the cost of an intangible asset

True or false: Expenditures that qualify as an addition should be expensed in the period incurred.

False

True or false: Repairs and maintenance expenditures should be capitalized in the period incurred.

False

True or false: When accounting for impairments, the two categories for recognizing and measuring the loss are tangible and intangible assets.

False

Which of the following assets cannot be directly associated with any specific identifiable right and is not separable from the company as a whole?

Goodwill

Identify accounting standards that permit intangible assets to be reported at fair value subsequent to acquisition.

IFRS only

The revaluation method is allowed for property, plant, and equipment under

IFRS only.

What is the accounting treatment for the discovery of a material error in a previous year?

Previous years' financial statements are restated.

Which methods are acceptable for recording the cost of improvements to an asset? (Select all that apply.)

Record a disposition of the old component and an acquisition of the new component. Reduce the accumulated depreciation account. Capitalize the cost of the new component.

Which of the following would be considered "expenditures subsequent to acquisition" for a building? (Select all that apply.)

Repairing a major roof leak three years after use Cost of installing solar panels after three months of use of the building

When group depreciation is used, and an asset is sold, which of the following occurs? (Select all that apply.)

The asset's cost is removed from the books. No gain or loss is recorded.

What is the purpose of group or composite depreciation?

To reduce the record-keeping costs of determining depreciation.

Which of the following intangible assets are usually considered to have indefinite lives?

Trademarks

True or false: The sum-of-the-years'-digits (SYD) method of depreciation is an accelerated method in which depreciation expense decreases each year.

True

Theoretically, which depreciation method provides the best estimate of expense to correspond with the usage of the asset?

Units-of-production depreciation

Which of the following statements are true regarding depletion? (Select all that apply)

Units-of-production depreciation on assets used for natural resources often uses the same activity base that is used to calculate depletion. Depletion is a product cost and is included in the cost of inventory of the resource extracted.

Which of the following is an activity-based depreciation method?

Units-of-production method

The cumulative amount of a tangible asset's cost that has been depreciated in all prior years plus the current year is called

accumulated depreciation.

Allocation of the cost of an intangible asset is called

amortization.

A new major component that is added to an existing asset is called

an addition.

If a company replaces a major component of an asset with a new component with the same characteristics of an old component, it is classified as

an improvement

If a company replaces a major component of an asset with a new component with the same characteristics of an old component, it is classified as Instructions

an improvement

The group and composite methods of depreciation are similar because they both

apply straight-line depreciation to the assets based on average service lives of the assets.

The composite depreciation method is used when assets

are dissimilar and have different services lives.

When using group depreciation, the total cost of the group is depreciated over the ___________ of the assets in the group.

average service life

The portion of a tangible asset's cost that is When selling a fixed asset, the seller recognizes a gain or loss for the difference between the consideration received and the ______ value of the asset sold. as an expense in the current year is called

book

When selling a fixed asset, the seller recognizes a gain or loss for the difference between the consideration received and the ______ value of the asset sold.

book

Under U.S. GAAP, property, plant, and equipment is reported at ______ value; under IFRS, property, plant, and equipment is reported at _____ value.

book; book or fair

The journal entry to record depreciation expense includes (Select all that apply.)

credit to accumulated depreciation debit to depreciation expense

The journal entry to record the allocation of the cost of a natural resource will include a

credit to the natural resource.

The journal entry to recognize a loss on impairment of goodwill would include a

debit to loss on impairment of goodwill.

Emil Company expects that its asset will be more useful during early years of its life than during later years. In addition, the company estimates that repair costs will increase over time. Which method(s) may help equalize total expenses recognized over the service life of this asset? (Select all that apply.)

declining balance sum-of-the-years digits

Which of the following are accelerated methods of depreciation? (Select all that apply.)

declining balance method double-declining-balance method sum-of-the-years'-digits method

An expenditure that qualifies as an addition should be

depreciated over the remaining useful life of original asset or its own useful life, whichever is shorter. capitalized.

If equipment used in excavation of natural resources is not movable from site to site, it should be

depreciated over the shorter of its useful life or the life of the natural resource.

The formula to calculate the depletion rate of a natural resource is the depletion base divided by the

estimated extractable amount of natural resource.

Expenditures for repairs and maintenance should be

expensed in the period incurred.

For IFRS reporting, intangible assets may be valued at (Select all that apply.)

fair value. cost less accumulated amortization.

Amortization is appropriate for intangible assets with

finite useful lives

The key factor in classifying items as repairs and maintenance is that

future benefits are not provided beyond those originally anticipated from the asset.

Group depreciation is calculated by

multiplying the group depreciation rate by the total cost of assets in the group for that period.

A change in accounting estimate requires a company to account for the change

on a prospective basis in the current year and future years.

If there is a change in an intangible asset's estimated useful life, the change is treated

on a prospective basis.

A change in depreciation method is treated as a change in estimate that is achieved by a change in accounting principle, and is accounted for

prospectively in the current and future periods.

The depreciation method that allocates an equal amount of the depreciable base to each year of the asset's service life is the

straight-line method.

Match the description with the method for recording the costs of improvements. Instructions

substitution - Record a disposition of the old component and an acquisition of the new component. capitalization - Capitalize the cost of the improvements, without removing the original costs or related accumulated depreciation. Reduction of accumulated depreciation- Leave the asset account unchanged and reduce the accumulated depreciation account.

For assets using the group or composite method of depreciation, the assets will be depreciated over

the average service life of assets in the group.

The formula for calculating declining balance depreciation is the depreciation rate per year times

the book value at the beginning of the year.

Straight-line depreciation is calculated as the depreciable base divided by

the estimated useful life of the asset.

In determining whether an impairment loss should be recognized for goodwill, a company compares the book value of the reporting unit with

the fair value of the reporting unit.

The formula for the sum-of-the-years'-digits method is the depreciable base times the depreciation rate, which is calculated as

the numbers of years remaining in the asset's life divided by the sum-of-the-years'-digits.

If a company has a commitment from another company to purchase its indefinite life intangible asset at the end of its useful life at a specific price, the company should utilize a residual value equal to

the pre-specified sales price

If a company bases depreciation expense on the life of a machine in hours, and depreciates the machine for the number of hours used during the year, it is using the ______ method of depreciation.

units-of-production

The residual value of an intangible asset is usually

zero.

Which of the following characteristics are unique to goodwill? (Select all that apply.)

Its cost cannot be directly associated with a specific identifiable right. Its cost is not separable from the company as a whole.