ACTY 3100 Ch. 11 SB

Expenditures for repairs and maintenance should be

expensed in the period incurred.

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

impairment

To determine whether an impairment loss should be recorded for goodwill, a company should determine if the fair value of the reporting unit is less than its

book value.

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

Trademarks

True or false: A write-down of an asset held and used can provide important information about the future cash flows a company expects to generate from using the asset.

True

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

differs

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

estimated extractable amount of natural resource.

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

on a prospective basis.

The measurement of an impairment loss for intangible assets with indefinite useful lives is a(n) ____ process.

one-step

Loss on impairment of goodwill is typically reported as

a separate component of operating expense

The measurement of an impairment loss in step 2 is the difference between

the asset's book value and its fair value.

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

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

- debit to depreciation expense - credit to accumulated depreciation

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

Previous years' financial statements are restated.

An impairment occurs when the

undiscounted sum of estimated future cash flows is less than the asset's book value.

Assets held for use that have a significant impairment of value should be

written down

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

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.

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

- Indefinite life - Subject to impairment testing

At the beginning of Year 1, Western Inc. acquired a building for $10.6 million. Depreciation for Year 1 and Year 2 was calculated using the straight-line method, a 25-year useful life, and a $2.6 million residual value. In Year 3, the estimates of useful life and residual value were changed to 20 years (total) and $660,000, respectively. What is depreciation on the building for Year 3?

$516,667

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

On December 30, 20X1, Glaze Corp. disposed of equipment with a historical cost of $50,000 and accumulated depreciation of $30,000. The equipment was sold for $45,000 cash. The journal entry to record the sale will include which of the following entries? (Select all that apply.)

- credit to equipment $50,000 - credit to gain on sale of asset $25,000 - debit to accumulated depreciation $30,000 - debit to cash $45,000

The journal entry to record the amortization of an intangible asset would include (Select all that apply.)

- credit to the intangible asset. - debit to amortization expense.

Which of the following are expenditures on assets subsequent to acquisition? (Select all that apply.)

- repairs and maintenance - additions - improvements

Match each factor to its definition.

Service life = The estimated use that the company expects to receive from the asset Allocation method = The pattern in which the usefulness is expected to be consumed Allocation base = The cost of the asset that is expected to be consumed

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

Match the timing of when to test for impairment with the type of asset.

Property to be held and used = When events or circumstances indicate book value may not be recoverable Indefinite life intangible assets other than goodwill = At least annually, or more frequently if indicated Assets to be sold = When classified as held for sale

When accounting for impairments, the two categories for recognizing and measuring the loss are

assets to be held and used and assets held for sale.

In June of 20X2, Scarlett Company discovered that it incorrectly expensed $12,000 of legal fees to successfully defend a patent infringement suit in January 20X1. At the time it paid the legal fees, the patent had a six-year remaining life of the patent. The entry to correct this error will include a

credit to retained earnings for $10,000

Evans Corp. incorrectly expensed $10,000 in the previous year when it purchased equipment. The entry to correct this error will include a

credit to retained earnings.

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

goodwill.

A(n) ___ ___ is an operating segment of a company or a component of an operating segment for which discrete financial information is available and management regularly reviews the operating results of that component. (Enter one word per blank.)

reporting unit

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

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.

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

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

The three factors that should be established to measure cost allocation are

- allocation base. - allocation method. - service life.

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

- contractual - regulatory - legal

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 ___.

depreciation, amortization

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

At the beginning of year 1, Valerie Corp. purchases equipment for $10,000. The equipment has a residual value of $4,000 and an expected useful life of 4 years. What is straight-line depreciation expense for year 1?

$1,500

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.

On January 1, year 1, London Corp. purchases equipment for $400,000. The equipment has a 5-year life and a $50,000 residual value. London uses the double-declining-balance method of depreciation. What is the book value at the end of year 1?

$240,000

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

At the beginning of year 1, Kuhn Corp. purchases equipment for $22,000. The equipment has a residual value of $2,000 and an expected useful life of 5 years. What is straight-line depreciation expense for year 3?

$4,000

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

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 October 1, year 1, Kirby Corp. purchased equipment for $100,000. The equipment has a useful life of 5 years with no residual value. Kirby uses the straight-line method of depreciation. The partial year depreciation for year 1 is

$5,000

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. Assuming straight-line depreciation, what is book value at the end of year 2?

$84,000

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

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

Match the measurement to each type of impairment.

Assets to be held and used = The excess of book value over the fair value Goodwill = The excess of book value over implied fair value Assets to be sold = The excess of book value over fair value less costs to sell

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.

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: Loss on impairment of goodwill is typically reported with amortization expense.

False

In accounting, the term impairment refers to

an asset's significant decline in value.

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 record the amortization of an intangible asset would include a

debit to amortization expense.

Marston acquired assets for $100,000. At the end of year 3, the assets had accumulated depreciation of $40,000. An impairment loss was indicated, and the fair value of the assets was $48,000. The journal entry to record the impairment loss will include a

debit to loss on impairment of $12,000.

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

debit to loss on impairment of goodwill.

An impairment loss for intangible assets with indefinite lives is calculated as the book value less the

fair value.

No amortization is recorded for

intangible assets with indefinite lives.

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

Expenditures subsequent to acquisition may be properly capitalized when they increase the asset's useful life or increase its productive capacity. However, most companies set thresholds for capitalizing these expenditures based on

materiality.

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

the estimated useful life of the asset.

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

Which of the following are required when a material error is discovered in a subsequent accounting period that impacts retained earnings? (Select all that apply.)

- A prior period adjustment is made to the beginning balance of retained earnings. - A disclosure note describing the nature of the error and the impact of the correction on net income and earnings per share. - Previous financial statements are retrospectively restated.

An expenditure that qualifies as an addition should be

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

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

On December 30, 20X1, Brighton Corp. disposed of equipment with a historical cost of $150,000 and accumulated depreciation of $60,000. The equipment was sold for $70,000 cash. The journal entry to record the sale will include which of the following entries? (Select all that apply.)

- debit accumulated depreciation $60,000 - debit cash $70,000 - credit equipment $150,000 - debit loss on sale of equipment $20,000

On December 30, 20X1, Rocket Corp. disposed of equipment with a historical cost of $100,000 and accumulated depreciation of $70,000. The equipment was sold for $80,000 cash. The journal entry to record the sale will include which of the following entries? (Select all that apply.)

- debit cash $80,000 - credit gain on sale of equipment $50,000 - debit accumulated depreciation $70,000 - credit to equipment $100,000

Marston acquired assets for $100,000. At the end of year 3, the assets had accumulated depreciation of $40,000. An impairment loss was indicated, and the fair value of the assets was $48,000. The journal entry to record the impairment loss will include (Select all that apply.)

- debit to loss on impairment of $12,000. - debit to accumulated depreciation of $40,000. - credit to assets of $52,000.

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

- improvements. - repairs and maintenance. - rearrangements. - additions.

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.)

- sum-of-the-years digits - declining balance

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

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

Which of the following are not accelerated methods of depreciation? (Select all that apply.)

- units-of-output depreciation - straight-line depreciation

At the beginning of Year 1, Western Inc. acquired a building for $10.7 million. Depreciation for Year 1 and Year 2 was calculated using the straight-line method, a 20-year useful life, and a $2.7 million residual value. In Year 3, the estimates of useful life and residual value were changed to 15 years (total) and $670,000, respectively. What is depreciation on the building for Year 3?

$710,000

Western Company purchased a franchise on January 1, 20X1 for $100,000 cash. The franchise agreement is for a period of 10 years. Western uses the straight-line method for intangible assets. The journal entry at the end of 20X1 includes (Select all that apply.)

- debit amortization expense $10,000 - credit franchise $10,000