ACCT 3313 Chapter 11 - PPE and Intangible Assets (Utilization and Disposition)
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
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
When an asset has a significant decline in value and is written down, this is called ______.
impairment
The measurement of an impairment loss for intangible assets with indefinite useful lives is a(n) ____ process.
one-step
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.
The measurement of an impairment loss in step 2 is the difference between
the asset's book value and its fair value.
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
Allocation of the cost of an intangible asset is called
amortization.
In accounting, the term impairment refers to
an asset's significant decline in value.
The gain or loss on disposal of an asset is calculated as
consideration received less the book value of asset sold.
The useful life of an intangible asset may be limited by what type of provisions?
contractual legal regulatory
For natural resources the depletion base is
cost less any anticipated residual value.
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
credit to assets of $52,000. debit to loss on impairment of $12,000. debit to accumulated depreciation of $40,000.
Which items are considered changes in estimates that would be treated on a prospective basis in the current period and future periods?
increasing the residual value of an asset change in useful life of an asset
Which assets are required to be tested for impairment annually?
intangible assets with indefinite lives
No amortization is recorded for
intangible assets with indefinite lives.
The two categories for intangible assets are
intangibles with finite lives. intangibles with indefinite lives.
Under U.S. GAAP, if a company recognizes an impairment loss,
later recovery of the impairment loss is prohibited.
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
An impairment occurs when the
undiscounted sum of estimated future cash flows is less than the asset's book value.
Which of the following accounting changes must be justified in the notes to the financial statements?
Changes in depreciation methods
What is the accounting treatment for the discovery of a material error in a previous year?
Previous years' financial statements are restated.
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
Which of the following terms is equivalent to an asset's useful life to a particular company?
Service life
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.
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
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 Reason: The depreciation rate is 1/5 x 2 = 40%. $100,000 x 40% x 1/4 = $10,000 depreciation expense in year 1.
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 Reason: $100,000/5 years = $20,000 per year x 1/4 year = $5,000 depreciation expense in year 1.
Which of the following are required when a material error is discovered in a subsequent accounting period that impacts retained earnings?
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.
True or false: When accounting for impairments, the two categories for recognizing and measuring the loss are tangible and intangible assets.
False Reason: The categories for accounting for impairments are assets to be held and used and assets held for sale.
Which statement is true about the straight-line method of depreciation?
It allocates an equal amount of depreciation to each year of the asset's service life.
If an impairment loss is recognized for an intangible asset with a finite life, which of the following occurs?
Later recovery of the impairment is prohibited. The written-down book value is the new cost basis for future amortization.
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: Assets held for sale are not depreciated or amortized while classified as held for sale.
True
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.
The cost of a natural resource less its anticipated residual value is called the _____ _____.
depletion 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 ________.
depreciation; amortization
A subsequent expenditure for an asset increases the future benefits of the asset if it
extends the asset's useful life. increases the quality of the goods or services produced by the asset. increases the operating efficiency of the asset.
An impairment loss for intangible assets with indefinite lives is calculated as the book value less the
fair value.
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.
If there is a change in an intangible asset's estimated useful life, the change is treated
on a prospective basis.
For plant, property, and equipment, U.S. GAAP requires the investigation of possible impairment
only if events or changes in circumstances indicate that the asset may not be recoverable.
Group and composite depreciation commonly is used to
reduce costs of record-keeping.
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.
reporting unit
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.
service
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 is an activity-based depreciation method?
Units-of-production method
What are the issues when accounting for impairments?
When to recognize the impairment. How to measure the impairment loss.
Intangible assets with indefinite useful lives should be tested for impairment
annually or more frequently if events or changes in circumstances indicate possible impairment.
An asset impairment for assets to be held for sale is measured as the excess of the
book value over the fair value less costs to sell.
