Accounting Chapter 11

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

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

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.

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. Previous financial statements are retrospectively restated. A disclosure note describing the nature of the error and the impact of the correction on net income and earnings per share.

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

Blank 1: depletion Blank 2: 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 _________.

Blank 1: depreciation Blank 2: amortization

he 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 ____________.

Blank 1: depreciation Blank 2: amortization

Which of the following accounting changes must be justified in the notes to the financial statements?

Changes in depreciation methods

True or false: When accounting for impairments, the two categories for recognizing and measuring the loss are tangible and intangible assets.

False

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

Previous years' financial statements are restated.

Which of the following terms is equivalent to an asset's useful life to a particular company?

Service life

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

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.

The allocation of the cost of an intangible asset over its useful life is called

amortization.

In accounting, the term impairment refers to

an asset's significant decline in value.

Intangible assets with indefinite useful lives should be tested for impairment

annually or more frequently if events or changes in circumstances indicate possible impairment.

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 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.

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.

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 regulatory legal

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 a

debit to loss on impairment of $12,000.

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

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

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

differs

The two categories for intangible assets are

intangibles with indefinite lives. intangibles with finite lives.

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.

In measuring an impairment loss, the difference between the asset's book value and its fair value is

recognized as an impairment loss.

Group and composite depreciation commonly is used to

reduce costs of record-keeping.

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 service life or useful life of an asset is

the amount of use that the company expects to obtain from the asset before disposing of it

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

the asset's book value and its fair value.

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.

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.

What is the purpose of group or composite depreciation?

To reduce the record-keeping costs of determining depreciation.

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

fair value.

Amortization is appropriate for intangible assets with

finite useful lives

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

impairment

A subsequent expenditure for an asset increases the future benefits of the asset if it

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?

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.

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

A change in accounting estimate requires a company to account for the change

on a prospective basis in the current year and future years.

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

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.