Chapter 11 Accounting Smartbook

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 $5,000 $20,000 $10,000 $40,000

$10,000 Notes: 1/5 x 2 = 40% (depreciation rate). $100,000 x 40% x 1/4 = $10,000 depreciation expense in year 1.

Depreciation

Allocation of the cost of a tangible fixed asset

Amortization

Allocation of the cost of an intangible asset

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

When an asset has a significant decline in value and is written down, this is called _______ a) depreciation b) impairment c) amortization d) depletion

b) impairment

Which of the following accounting changes must be justified in the notes to the financial statements? a) changes in the remaining service life b) changes in the estimated residual value c) changes in depreciation methods

c) changes in depreciation methods

For natural resources the depletion base is... a) the cost less the restoration value b) the value of the resources to be extracted c) cost plus the value of resources extracted d) cost less any anticipated residual value

d) cost less any anticipated residual value

No amortization is recorded for a) intangible assets valued at fair value b) intangible assets with finite lives c) intangible assets used in production d) intangible assets with indefinite lives

d) intangible assets with indefinite lives

The cost of a natural resource less its anticipated residual value is called the ____ ____

depletion base

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 disclosure note describing the nature of the error and the impact of the correction on net income and earnings per share The error is accounted for on a prospective basis in the current year and future years A prior period adjustment is made to the beginning balance of retained earnings Previous financial statements are retrospectively restated The cumulative effect of the error is corrected in retained earnings and other account balances are unchanged.

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

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... a) book value b) net realizable value c) net present value d) discounted future cash flows

A) book value

Depletion

Allocation of the cost of natural resources

The acronym MACRS stands for a) management accounting cost recovery system b) modified accelerated cost recovery system c) management accrual cost recognition system d) modified accepted cost replacement system

B) modified accelerated cost recovery system

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 Net present Net realizable Fair Book

Book

The acryonym "MACRS" refers to a(n) _____ method that may be used for ____ purposes. a) amortization; financial reporting b) depreciation; financial reporting c) depreciation; tax d) amortization; tax

C) depreciation; tax

The retirement method for recording depreciation expense records depreciation... a) over the useful life of the asset b) when the assets are impaired c) when the assets are disposed of

C) when the assets are disposed of

The retirement depreciation method assumes a _____ cost approach in determining depreciation expense at the time the assets are disposed

FIFO

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 repairs and maintains the asset in working order 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, extends the asset's useful life, increases the quality of the goods or services produced by the asset

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) incorrectly capitalizing an item when it should be expensed increasing the residual value of an asset change in useful life of an asset forgetting to record depreciation expense in the previous period

Increasing the residual value of an asset, change in useful life of an asset

Which statement is true about the straight-line method of depreciation? It is an accelerated method of depreciation It is the preferred method for companies expecting to use the asset more in its early years of life It allocates an equal amount of depreciation to each year of the asset's service life It recognizes expense proportionately with the amount of use of the asset

It allocates an equal amount of depreciation to each year of the asset's service life

Which of the following is an activity-based depreciation method? Sum-of-the-years'-digits method Units-of-production method Double-declining-balance method Straight-line method

Units-of-production method

The allocation of the cost of an intangible asset over its useful life is called a) amortization b) accretion c) depletion d) depreciation

a) amortization

In accounting, the term impairment refers to.. a) an asset's significant decline in value b) allocation of an asset over its useful life c) offsetting liabilities against the related assets d) cost recovery of an asset for investment purposes

a) an assets significant decline in value

If obsolescence were expected to limit the longevity of a protected product, the useful life of a patent might be _____ its legal life a) less than b) more than c) the same as

a) less than

Which of the following intangible assets are usually considered to have indefinite lives? a) trademarks b) copyrights c) patents d) franchises

a) trademarks

An impairment occurs when the... a) undiscounted sum of estimated future cash flows is less than the asset's book value b) fair value of the asset is less than the book value of the asset c) discounted sum of past cash flows is more than the asset's book value d) book value of the asset is less than the fair value of the asset

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

If there is a change in an intangible asset's estimated useful life, the change is treated a) as a prior period adjustment b) as a change in accounting principle c) on a prospective basis d) as an extraordinary item

c) on a prospective basis

The gain or loss on disposal of an asset is calculated as... the cost of the asset less the accumulated depreciation consideration received less the book value of asset sold the fair value of the asset less the accumulated depreciation consideration received less the fair value of the asset sold

consideration received less the book value of an asset sold

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 a) objectivity b) relevance c) neutrality d) materiality

d) materiality

The two categories for intangible assets are intangibles with indefinite lives intangibles with finite lives intangibles with infinite lives intangibles with undefined lives

intangibles with indefinite lives, intangibles with finite lives

The measurement of an impairment loss in step 2 is the difference between a) the asset's book value and its fair value b) the asset's book value and its net present value c) the asset's estimated future cash flows and its fair value d) the asset's fair value and its lower-of-cost-or-market value

A) the asset's book value and its fair value

What is the purpose of group or composite depreciation? a) to eliminated the accounting entries when disposing of assets b) to eliminate the need for impairment testing c) to classify assets by type as required by GAAP d) to reduce the record-keeping costs of determining depreciation

D) to reduce the record-keeping costs of determining depreciation

Which of the following terms is equivalent to an asset's useful life to a particular company? Base life Life expectancy Physical life Service life

Service life

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, useful or depreciable

The depreciation method that allocates an equal amount of the depreciable base to each year of the asset's service life is the double-declining-balance method MACRS units-of-output method straight-line method

Straight-line method

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 sum-of-the-years'-digits straight-line double-declining-balance units-of-production

Units-of-production

A change in accounting estimate requires a company to account for the change... a) as a prior period adjustment b) as an error in the previous periods c) by retroactively restating the financial statements d) on a prospective basis in the current year and future years

d) on a prospective basis in the current year and future years

What is the accounting treatment for the discovery of a material error in a previous year? a) the error is accounted for on a prospective basis in the current year and future years b) a gain or loss is recognized in the year the error is discovered c) account balances are corrected in the current year with an adjustment made to net income of the period d) previous years' financial statements are restated

d) previous years' financial statements are restated

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 $2,500 $5,000 $10,000 $20,000

$5,000 Notes: $100,000/5 years = $20,000 per year x 1/4 year = $5,000 depreciation expense

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.... a) by restating the previous year's financial statements b) by making an error correction adjustment in the current year c) by making a prior period adjustment d) prospectively in the current and future periods

d) prospectively in the current and future periods

In measuring an impairment loss, the difference between the asset's book value and its fair value is a) recorded in a revaluation account in OCI b) recognized as a gain c) recognized as an extraordinary loss d) recognized as an impairment loss

d) recognized as an impairment loss

In determining whether an impairment loss should be recognized for goodwill, a company compares the book value of the reporting unit with a). the undiscounted sum of estimated cash flows from goodwill b) the total amount of fixed assets c) the discounted sum of estimated cash flows from goodwill d) the fair value of the reporting unit

d) the fair value of the reporting unit

Group and composite depreciation commonly is used to..... reduce costs of record-keeping mislead financial statement users increase reported assets decrease total depreciation expense

reduce costs of record-keeping

The useful life of an intangible asset may be limited by what type of provisions? (Select all that apply) regulatory contractual U.S. GAAP legal

regulatory, contractual, and legal

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