Intermediate Accounting 2 Chapter 11 Part 1

For IFRS reporting, the revaluation method is possible only if

fair value can be determined by reference to an active market.

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.

For a manufacturing company, what type of cost is factory depreciation expense?

Product cost

When a company uses accelerated depreciation, it is common practice to change to which depreciation method approximately halfway through the asset's life?

Straight-line

Which of the following are characteristics of goodwill?

Subject to impairment testing Indefinite life

When group depreciation is used, and an asset is sold, which of the following occurs?

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

Allocation base

The cost of the asset that is expected to be consumed

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

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

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

average service life

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; amoritization

Subsequent to initial valuation, IFRS allows a company to value an intangible asset at:

fair value cost less accumulated amortization

Consistent with IFRS, biological assets are valued at

fair value less estimated costs to sell

Although activity-based depreciation methods are theoretically superior to time-based methods, activity-based methods are

too costly to use. difficult to apply in practice.

Under U.S. GAAP, when property, plant, and equipment are held for sale, the assets are reported at

the lower of its book value or fair value less costs to sell.

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 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 Reason: 2 x 1/5 x $400,000 = $160,000 depreciation expense in year 1. Book value is calculated as cost less accumulated depreciation ($400,000 - $160,000 = $240,000) book value at end of year 1.

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 Reason: The depreciation rate is 2 x 1/5 = 40%. $100,000 x 40% = $40,000 depreciation expense in year 1.

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 Reason: The units-of-production rate per unit is ($120,000 - $20,000)/1,000,000 hours = $0.10 per machine hour. Year 2 depreciation is 50,000 hours x $0.10 = $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 Reason: ($120,000 - 20,000) x (3/6) = $50,000. The denominator in SYD is 1 + 2 + 3 = 6.

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

Which of the following occur when the revaluation option is used for IFRS reporting?

-A revaluation resulting in a write-down is included as expense on the income statement. -A revaluation surplus is included in other comprehensive income.

A retirement or abandonment of an asset is different from a sale of an asset because

-a loss must be recognized for the remaining book value. -no consideration is received.

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?

Debit depletion expense. Credit the natural resource.

Which of the following describes IFRS rules regarding depreciation?

Each component of an item of property, plant, and equipment must be depreciated separately if its cost is significant.

Which of the following are examples of biological assets?

Fruit trees Timberlands Farm animals

True or false: An accelerated method of depreciation might be appropriate if benefits are derived equally over the life of the asset, but repair and maintenance expenses are expected to be higher in later years.

True

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

Kensington Corp. prepares its financial statements in accordance with IFRS and elects the revaluation option for equipment. The equipment cost $100,000 and has accumulated depreciation of $20,000 at the end of its first year in business. The fair value of the equipment is $90,000 at the end of year 1. The journal entry to record the revaluation of equipment will include a

credit to revaluation surplus in OCI of $10,000.

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?

legal regulatory contractual

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

Which of the following items should be considered when choosing an allocation method for a long-term asset?

-a systematic and rational allocation method -a pattern in which the services are obtained from its use

The journal entry to record depreciation expense includes

-credit to accumulated depreciation -debit to depreciation expense

The total amount of cost to be allocated over an asset's service life is called its allocation

base

For IFRS reporting, living animals and plants, including trees in a timber tract or in a fruit orchard, are referred to as ___________ assets.

biological

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

goodwill.

For intangible assets used in the manufacturing of a product, amortization expense for the period is

included in the cost of inventory.

Most companies use the __________-_________ method to calculate amortization expense.

straight-line

Which of the following are not accelerated methods of depreciation?

units-of-output depreciation straight-line depreciation

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.

On January 1, year 1, Laramy Corp. purchased equipment for $100,000. Laramy uses the double-declining-balance method of depreciation. The equipment has a useful life of 10 years with no residual value. In year 3, Laramy changes to the straight-line method of depreciation. What is the accumulated depreciation at the end of year 3?

$44,000 Reason: The DDB rate is 2 x 1/10 = 20%. Depreciation for year 1 is 20% x $100,000 = $20,000. The book value at the end of year 1 is $80,000. Therefore, depreciation expense in year 2 is $16,000. Straight-line depreciation in year 3 is ($100,000 - 36,000)/8 years = $8,000. Accumulated depreciation at the end of year 3 is $20,000 + $16,000 + $8,000 = $44,000.

True or false: Component depreciation is required under both IFRS and US GAAP.

False Reason: IFRS requires component depreciation for each component if its cost is significant relative to the total cost of the item; however, in the US, component depreciation is allowed but rarely used.

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

IFRS only.

The journal entry to record the amortization of an intangible asset would include a

debit to amortization expense.

The journal entry to record the amortization of an intangible asset would include

debit to amortization expense. credit to the intangible asset.

Corr reports its financial statements in accordance with IFRS and uses the revaluation option for its equipment. At the end of year 3, the revaluation surplus has a credit balance of $10,000. At the end of the year 3, Corr has equipment with a carrying value of $200,000, which is revalued at $175,000. The entry to record the adjustment to fair value would include which of the following?

debit to revaluation expense $15,000 debit to revaluation surplus—OCI $10,000

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.

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. Reason: $5,000,000/20,000,000 tons = $0.25 per ton. 400,000 tons extracted x $0.25 = $100,000 depletion expense.

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, 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 Reason: The units-of-production rate per unit is ($160,000 - $10,000)/100,000 hours = $1.50 per machine hour. Year 2 depreciation is 3,000 hours x $1.50 = $4,500.

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.

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 Reason: ($120,000 - 20,000) x (3/6) = $50,000. The denominator in SYD is 1 + 2 + 3 = 6. Book value is cost - accumulated depreciation so $120,000 - $50,000

On January 1, of 20X1, Oriole Corp. purchased equipment for $160,000. The equipment has a useful life of 8 years with no residual value. In Years X1 through X2, Oriole used the double-declining-balance method of depreciation. At the start of 20X3, Oriole changes to the straight-line method of depreciation. What is the book value of the equipment at the end of year 3?

$75,000 Reason: The DDB rate is 1/8 X 2 = 25%. In X1, depreciation is $40,000, and the book value at the end of X1 is 120,000. Therefore, depreciation in X2 is $30,000 (120,000*25%), and the book value at the end of X2 is 90,000. Straight-line depreciation in X3 is $90,000/6 years = $15,000. Therefore, the book value is $75,000 (160,000 - 40,000 - 30,000 - 15,000).

Under what circumstances are accelerated depreciation methods most appropriate?

-For an asset that will be used extensively in earlier years of its life. -For an asset that has high repair and maintenance costs later in life.

Which of the following is true regarding property, plant, and equipment or intangibles held for sale?

-The assets held for sale are not depreciated or amortized. -If the fair value less costs to sell is below book value, an impairment loss is recognized.

Which of the following statements are true regarding depletion?

-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.

For oil, gas, and most mineral natural resources,

-companies are allowed to use percentage depletion for income tax purposes. -depletion could exceed the asset's cost for income tax purposes.

The method of amortization used for intangible assets

-is most commonly straight-line. -should reflect the pattern of use of the asset.

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 Reason: = ($290,000) / [(50,000/5) + (180,000/6) + (60,000/4)]

Ivy Inc. prepares its financial statements in accordance with IFRS. Ivy elects the revaluation method for its intangible assets. In fiscal year 20X1, Ivy purchased a patent for $25,000. At the end of the year, its value determined by reference to an active market is $27,500. The journal entry to record the revaluation will include:

A credit to revaluation surplus - OCI for $2,500

Depreciation

Allocation of the cost of a tangible fixed asset

depletion

Allocation of the cost of natural resources

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.

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 credit to accumulated depreciation for $2,800

True or false: Depletion for tax purposes must always equal cost depletion used for GAAP purposes.

False Reason: For tax purposes, companies are allowed to deduct the greater of cost-based depletion or a fixed percentage of gross income.

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.

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 is an activity-based depreciation method?

Units-of-production method

For assets used in the manufacturing of a product, depreciation expense should be recorded as

a part of the cost of inventory.

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.

A depreciation approach that allocates an asset's cost base using a measure of input or output is referred to as a(n) ____________ method.

activity-based

The two approaches for a systematic and rational allocation of the cost of an asset over its useful life are

activity-based methods. time-based methods.

When accounted for using IFRS, the revaluation option can be applied to

all intangible assets other than goodwill

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

allocation method. service life. allocation base.

Allocation of the cost of an intangible asset is called

amortization.

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 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

An asset retirement is treated similarly to selling an asset; however, a loss equal to the remaining _____________ ___________ is recorded because there will be no monetary consideration received.

book value

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 gain or loss on disposal of an asset is calculated as

consideration received less the book value of asset sold.

When determining how to allocate depreciation, a method should be selected that

corresponds to the pattern of benefits received from the asset's use.

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

cost less accumulated depreciation

Consistent with U.S. GAAP, biological assets are valued at

cost less accumulated depreciation or depletion

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?

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

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

credit to the natural resource.

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?

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

The accounting treatment for a planned switch to straight-line depreciation from an accelerated method is the same as a change in _______________ method.

depreciation

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

depreciation expense.

Violet Company prepares its financial statements consistent with IFRS. At the beginning of the year, the company purchased land for $1 million. At the end of the year, the fair value of the land is 1.2 million. On its current year balance sheet, Violet Company should report land at:

either $1 million or $1.2 million

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

estimated extractable amount of natural resource.

For intangible assets used in the manufacturing of a product, amortization is

expensed when the inventory is sold included in the cost of inventory

Subsequent to acquisition, an IFRS-reporting company may value its property, plant, and equipment at

fair value or cost less accumulated depreciation

For IFRS reporting, intangible assets may be valued at

fair value. cost less accumulated amortization.

True or false: The total amount of cost to be allocated over an asset's service life is called its residual value.

false allocation base

Group depreciation is calculated by

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

If an IFRS-reporting company chooses to report its intangible assets at fair value, the revaluation option

must be applied to all assets within that class of intangible assets

It is ___________ for a company to use different depreciation methods for different classes of assets.

not unusual

Under the revaluation option in IFRS, if an asset's fair value is higher than its book value, the difference is reported as a surplus in ___________; and, if its book value is higher than fair value, the difference is reported as an expense in _____________.

other comprehensive income; net income

Group and composite depreciation commonly is used to

reduce costs of record-keeping.

Cordier Company prepares its financial statements in accordance with IFRS. Cordier elects the revaluation method for its intangible assets. The cost of the intangible asset during the year was $10,000, and its value in an active market is determined to be $12,000 at the end of the year. The journal entry to record the revaluation will include a credit to

revaluation surplus—OCI for $2,000.

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

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.

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?

sum-of-the-years digits declining balance

The service life or useful life of an asset is

the amount of use the company expects to obtain before disposing of the asset.

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.

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

Which of the following methods are specifically mentioned in IFRS?

units-of-production straight-line diminishing balance

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.

useful