Chapter 11- Intermediate Accounting

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 (LO 3) (a)$0. (b)$15,000. (c)$25,000. (d)$35,000

(a)$0. No impairment loss is recognized because the asset does not fail the recoverability test: expected future cash flows of $165,000 exceed the $140,000 book value of the asset.

Which of the following is not true of depreciation accounting? (LO 1) (a)Depreciation lowers the book value of the asset as it ages and its fair value declines. (b)Depreciation matches expenses against revenues over the periods which benefit from the asset's use. (c)Depreciation is a process of cost allocation (d)Tangible assets with limited lives are depreciated.

(a)Depreciation lowers the book value of the asset as it ages and its fair value declines. Depreciation is not a matter of valuation.

The major difference between the service life of an asset and its physical life is that (LO 1) (a)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. (b)physical life is the life of an asset without consideration of salvage value and service life requires the use of salvage value. (c)physical life is always longer than service life. (d)service life refers to the length of time an asset is of use to its original owner, while physical life refers to how long the asset will be used by all owners.

(a)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. 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.

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 (LO 3) (a)record a discontinued operations loss of $80,000. (b)increase the asset's Accumulated Depreciation account by $285,000. (c)reduce income from continuing operations by $205,000. (d)include a $285,000 credit to the asset account.

(b) increase the asset's Accumulated Depreciation account by $285,000. The impairment loss of $285,000 (book value of $2,200,000 less the fair value of $1,915,000) is recorded with a debit to an ordinary loss account and a credit to Accumulated Depreciation.

An impairment of property, plant, or equipment has occurred if (LO 3) (a)the estimated salvage value is less than the actual proceeds received on disposal. (b)the expected future net cash flows is less than the asset's carrying value. (c)the revised estimated useful life is less than the original estimated useful life. (d)the expected future cash outflows exceeds the asset's carrying value.

(b) the expected future net cash flows is less than the asset's carrying value. An asset impairment occurs when the expected future net cash flows are less than the asset's carrying value.

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? (LO 2) (a)$66,000 (b)$70,000 (c)$72,000 (d)$186,667

(b)$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.

Which of the following principles best describes the conceptual rationale for the methods of matching depreciation expense with revenues? (LO 1) (a)Associating cause and effect (b)Systematic and rational allocation (c)Immediate recognition (d)Partial recognition

(b)Systematic and rational allocation

A principal objection to the straight-line method of depreciation is that it (LO 1) (a)provides for the declining productivity of an aging asset. (b)ignores variations in the rate of asset use. (c)tends to result in a constant rate of return on a diminishing investment base. (d)gives smaller periodic write-offs than decreasing charge methods.

(b)ignores variations in the rate of asset use.

Ignoring income tax effects, accelerated depreciation methods can (LO 1) (a)generate funds for the earlier replacement of fixed assets. (b)decrease funds provided by operations. (c)offset the effect of increasing repair and maintenance costs as the asset ages. (d)decrease the fixed asset turnover ratio.

(c) offset the effect of increasing repair and maintenance costs as the asset ages. Over the life of the asset, depreciation expense decreases each period while repairs and maintenance expense increases.

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. (LO 1) (a)$11,000 (b)$13,900 (c)$16,988 (d)$17,820

(c)$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.

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? (LO 2) (a)$12,000 (b)$14,400 (c)$24,000 (d)$25,333

(c)$24,000 ($80,000 − $20,000) /5 years equals depreciation expense of $12,000/ year for 2012 and 2013. To compute the revised depreciation, calculate the new book value: $80,000 − $24,000 + 16,000 = $72,000 and divide by the remaining useful life of 3 years to get depreciation expense of $24,000.

For the composite method, the composite (LO 2) (a)rate is the total cost divided by the total annual depreciation. (b)rate is the total annual depreciation divided by the total depreciable cost. (c)life is the total cost divided by the total annual depreciation. (d)life is the total depreciable cost divided by the total annual depreciation.

(d) life is the total depreciable cost divided by the total annual depreciation. The composite life is the total depreciable cost divided by the total annual depreciation.

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 (LO 3) (a)$0. (b)$50,000. (c)$55,000. (d)$105,000.

(d)$105,000. The future cash flows are less than book value, thus the book value is not recoverable. Book value, $520,000, less fair value, $415,000, results in a loss of $105,000 to be recognized.

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? (LO 2) (a)$10,500 (b)$15,750 (c)$25,500 (d)$34,500

(d)$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.

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 (LO 7) (a)$0. (b)$25,000. (c)$35,000. (d)$45,000.

(d)$45,000. The impairment loss would be the $45,000 difference between the asset's book value of $200,000 and its fair value of $155,000.

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 (LO 5) (a)0.23 times. (b)0.25 times. (c)1.14 times. (d)1.25 times.

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

16. The total cost of natural resources includes all of the following except: (LO 4) (a)exploration costs. (b)intangible development costs. (c)restoration costs. (d)All of the options are included in the total cost.

(d)All of the options are included in the total cost. The total cost of natural resources includes all of the options.

IFRS accounting for impairments differs from GAAP in which of the following ways? (LO 7) (a)IFRS uses only a recoverability test in testing for impairment. (b)IFRS prohibits write-ups for recoveries of impairments for assets held for sale. (c)The IFRS impairment test is less strict than that required by GAAP. (d)IFRS permits recoveries of impairment to be recorded for all tangible assets.

(d)IFRS permits recoveries of impairment to be recorded for all tangible assets. While GAAP only permits write-ups for recoveries of impairment for assets held for sale, IFRS permits recovery write-ups for all tangible assets.

Under MACRS, which one of the following is not considered in determining depreciation? (LO 6) (a)Cost of asset (b)Property recovery class (c)Half-year convention (d)Salvage value

(d)Salvage value MACRS assumes a salvage value of zero.

What is the Return on assets ratio?

1. Asset turnover * Profit margin of sales 2.Net Income/Average of total assets

Western Resort Company purchased a hot tub for $10,000 on January 1, 2016. Straight-line depreciation is used, based on a 6-year life and a $1,600 salvage value. In 2018, the estimates are revised. Western Resort now feels the hot tub will be used until December 31, 2020, when it can be sold for $750. Compute the 2018 depreciation.

Annual depreciation expense: ($10,000 − $1,600)/6 = $1,400 Book value, 1/1/18: $10,000 − (2 × $1,400) = $7,200 Depreciation expense, 2018: ($7,200 − $750)/3 = $2,150

Southwest Mining Corporation acquires a coal mine at a cost of $950,000. Intangible development costs total $230,000. After extraction has occurred, Southwest Mining must restore the property (estimated fair value of the obligation is $97,000), after which it can be sold for $125,000. Southwest Mining estimates that 9,000 tons of coal can be extracted. If 600 tons are extracted the first year, prepare the journal entry to record depletion.

Inventory 76,800 Coal Mine 76,800 $950,000+$230,000+$97,000−$125,0009,000=$128per ton 600×$128=$76,800

Techcore Inc. owns equipment that cost $560,000 and has accumulated depreciation of $145,000. The expected future net cash flows from the use of the asset are expected to be $370,000. The fair value of the equipment is $320,000. Prepare the journal entry, if any, to record the impairment loss.

Recoverability test: Future net cash flows ($370,000) < Carrying amount ($415,000); therefore, the asset has been impaired. Journal entry: Loss on Impairment 95,000 Accumulated Depreciation— Equipment ($415,000 − $320,000) 95,000

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? (LO 1) (a)$6,400 (b)$7,000 (c)$8,000 (d)$16,000

c)$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.

What is Profit margin on sales ratio?

net income/total sales

What is asset turnover ratio?

net sales/average of total assets