Intermediate Accounting 2 Chapter 11 Part 2

True or false: Loss on impairment of goodwill is typically reported with amortization expense.

False

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

False

True or false: Assets held for sale are not depreciated or amortized while classified as held for sale.

True

Which accounting standard measures goodwill impairment as the difference between the book value of goodwill and the fair value of goodwill?

U.S. GAAP only

Loss on impairment of goodwill is typically reported as

a separate component of operating expense

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.

The key factor in classifying items as repairs and maintenance is that

future benefits are not provided beyond those originally anticipated from the asset.

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

impairment

Expenditures classified as ______ involve the replacement of a major component of an asset.

improvements

Which assets are required to be tested for impairment annually?

intangible assets with indefinite lives

Under U.S. GAAP, if a company recognizes an impairment loss,

later recovery of the impairment loss is prohibited.

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.

The measurement of an impairment loss for intangible assets with indefinite useful lives is a(n) ____ process.

one-step

Under IFRS reporting, an impairment loss is measured as the difference between the book value and the

recoverable amount

Under IFRS reporting, an impairment loss is measured as the difference between the book value and the:

recoverable amount

The types of expenditures that can occur subsequent to an asset's acquisition are

repairs and maintenance. rearrangements. additions. improvements.

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

Raphael Corp. incorrectly expensed a major addition to equipment when the company should have capitalized the expenditure. What are the financial statement effects in the year the error was made?

Net income is understated. Assets are understated.

Which of the following approaches cannot be used to determine the fair value of an impaired asset?

The sum of the undiscounted expected cash flows.

Woodruff Corp. incorrectly capitalized an expenditure instead of treating it as an expense. What is the financial statement effect of this error in the year the error was made?

Net income is overstated.

Which of the following are expenditures on assets subsequent to acquisition?

improvements repairs and maintenance additions

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

recognized as an impairment loss.

In January of 20X1, the Phillips Company purchased a patent at a cost of $100,000. In addition, $10,000 in legal fees were paid to acquire the patent. The company estimated a 10-year useful life for the patent and uses the straight-line amortization method for intangible assets. In 20X3, Phillips spent $25,000 in legal fees for an unsuccessful defense of the patent. The amount charged to income (expense and loss) in 20X3 related to the patent should be:

$113,000 Unamortized balance at 1/1/20X3: $88,000 [8/10 × ($100,000 + 10,000)]. This amount would be written off in 20X3, along with the $25,000 in legal fees.

A delivery van that cost $40,000 has an expected service life of 180,000 miles and a residual value of $4,000. The van was driven 24,000 miles in the first year and 36,000 miles in the second year. Accumulated depreciation by the end of the second year of the asset's life using the units-of-production method is:

$12,000 Depreciation per mile = ($40,000 − $4,000) / 180,000 miles = $0.20/mile. Accumulated depreciation = (24,000 + 36,000) × $0.20 = $12,000.

Which of the following events would require the investigation of a possible impairment?

-A significant decrease in market price. -A significant adverse change in how the asset is being used.

The Cromwell Company sold equipment for $35,000. The equipment, which originally cost $120,000 and had an estimated useful life of 10 years and $20,000 residual value, was depreciated for four years using the straight-line method. Cromwell should report the following on its income statement in the year of sale:

A $45,000 loss. Book value at disposal date: $80,000 [$120,000 − (4 × ($120,000 − $20,000) /10)].Asset sold for $35,000. $35,000 − 80,000 = $45,000 loss.

The journal entry to record an impairment loss on goodwill includes which of the following entries?

A credit to goodwill A debit to loss on impairment of goodwill

Which item qualifies as an addition and should be capitalized?

Adding a new computer-aided cutting device to an existing machine.

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

Changes in depreciation methods

True or false: Expenditures that qualify as an addition should be expensed in the period incurred.

False Reason: Additions that involve adding a new major component to an existing asset should be capitalized because future benefits are increased.

True or false: Although US GAAP does not allow reversals of goodwill impairment losses, IFRS allows the recovery of such losses.

False Reason: Neither IFRS nor US GAAP allows the recovery of goodwill impairment losses.

True or false: Repairs and maintenance expenditures should be capitalized in the period incurred.

False Reason: Repairs and maintenance expenditures should be expensed in the period incurred.

Which of the following assets cannot be directly associated with any specific identifiable right and is not separable from the company as a whole?

Goodwill

Which accounting standard measures goodwill impairment as the difference between the book value of the cash-generating unit and the recoverable amount?

IFRS only

In calculating present value, a traditional approach incorporates what items into the discount rate?

Risk and uncertainty

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 journal entry to recognize a loss on impairment of goodwill would include a

debit to loss on impairment of goodwill.

Under US GAAP, litigation costs to successfully defend an intangible right are ____________ and under IFRS, these costs generally are _______________.

capitalized; expensed

When an intangible right is successfully defended, the legal costs should be _____; when an intangible right is NOT successfully defended, the legal costs should be _____.

capitalized; expensed

Under IFRS reporting, the level of testing of goodwill is at the

cash-generating unit.

In June of 20X2, Scarlett Company discovered that it incorrectly expensed $12,000 of legal fees to successfully defend a patent infringement suit in January 20X1. At the time it paid the legal fees, the patent had a six-year remaining life of the patent. The entry to correct this error will include a

credit to retained earnings for $10,000

Evans Corp. incorrectly expensed $10,000 in the previous year when it purchased equipment. The entry to correct this error will include a

credit to retained earnings.

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. credit to assets of $52,000. debit to accumulated depreciation of $40,000.

Which of the following expenditures are classified as repairs and maintenance for a vehicle?

engine tune-up routine oil change

Expenditures for repairs and maintenance should be

expensed in the period incurred.

Under IFRS reporting, an impairment loss for intangible assets with indefinite lives is the difference between the book value and the recoverable amount. The recoverable amount is the higher of the asset's value-in-use and its

fair value less costs to sell.

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

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.

True or false: A write-down of an asset held and used can provide important information about the future cash flows a company expects to generate from using the asset.

true

An impairment occurs when the

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

Assets held for use that have a significant impairment of value should be

written down

At the beginning of Year 1, Western Inc. acquired a building for $10.6 million. Depreciation for Year 1 and Year 2 was calculated using the straight-line method, a 25-year useful life, and a $2.6 million residual value. In Year 3, the estimates of useful life and residual value were changed to 20 years (total) and $660,000, respectively. What is depreciation on the building for Year 3?

$516,667 Reason: (10.6 million - 2.6 million)/25 = $320,000 initial depreciation per year x 2 years = $640,000. ($10.6 - 640,000 - 660,000)/18 remaining years

Chen Corporation purchased equipment on January 1, year 1, for $100,000. The equipment was depreciated using the units-of-output method. During years 1 and 2, respectively, Chen recorded depreciation expense of $10,000 and $30,000. During year 3, Chen changed to the straight-line depreciation method and estimated that the equipment had a remaining useful life of 10 years and no residual value. What is the depreciation expense Chen should report during year 3?

$6,000 Reason: The book value at the beginning of year 3 is $100,000 less $40,000 accumulated depreciation = $60,000. Depreciation expense is $60,000 / 10 years = $6,000 per year.

A delivery van that cost $40,000 has an expected service life of eight years and a residual value of $4,000. Depreciation expense for the second year of the asset's life using the double-declining-balance method is:

$7,500 $7,500 = [$40,000 − (2/8 × $40,000)] × 2/8

At the beginning of Year 1, Western Inc. acquired a building for $10.7 million. Depreciation for Year 1 and Year 2 was calculated using the straight-line method, a 20-year useful life, and a $2.7 million residual value. In Year 3, the estimates of useful life and residual value were changed to 15 years (total) and $670,000, respectively. What is depreciation on the building for Year 3?

$710,000 Reason: (10.7 million - 2.7 million)/20 = $400,000 initial depreciation per year x 2 years = $800,000. ($10.7 - 800,000 - 670,000)/13 remaining years

Crane Corp. purchased equipment on January 1, year 1, for $100,000. The equipment had a 10-year life and was depreciated using the double-declining-balance method. In year 3, Crane changed its depreciation method to the straight-line method. The depreciation expense recognized in year 3 is

$8,000. Reason: The depreciation rate is 1/10 x 2 = 20%. Year 1 depreciation is $100,000 x 20% = $20,000. Year 2 depreciation is book value of $80,000 x 20% = $16,000. The book value at the beginning of year 3 is $100,000 - $36,000 = $64,000. Depreciation expense using the straight-line method in year 3 is $64,000/8 years remaining = $8,000.

Which of the following events would require testing for possible impairment?

-An adverse change in the business climate -A decline in the asset's physical condition -A significant decrease in market price

Which methods are acceptable for recording the cost of improvements to an asset?

-Capitalize the cost of the new component. -Record a disposition of the old component and an acquisition of the new component. -Reduce the accumulated depreciation account.

Which of the following would be considered "expenditures subsequent to acquisition" for a building?

-Cost of installing solar panels after three months of use of the building -Repairing a major roof leak three years after use

What are the issues when accounting for impairments?

-How to measure the impairment loss. -When to recognize the impairment.

Which of the following are true regarding costs to defend intangible rights?

-If the defense is unsuccessful, the legal costs should be expensed immediately. -If a defense is unsuccessful, the company should reduce the book value of the intangible to net realizable value.

Which of the following characteristics are unique to goodwill?

-Its cost cannot be directly associated with a specific identifiable right. -Its cost is not separable from the company as a whole.

Which of the following are required when a material error is discovered in a subsequent accounting period that impacts 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. -A prior period adjustment is made to the beginning balance of retained earnings.

If an impairment loss is recognized for an intangible asset with a finite life, which of the following occurs?

-The written-down book value is the new cost basis for future amortization. -Later recovery of the impairment is prohibited.

Under U.S. GAAP an impairment loss is required when the undiscounted sum of estimated future cash flows from an asset is less than the asset's book value. Which of the following statements are true regarding recoverability under IFRS reporting?

-There is no equivalent recoverability test -An impairment loss is required when the recoverable amount is less than the asset's book value.

The costs of restructuring an asset so that it has new capabilities and will prolong the use of the asset are classified as rearrangements and are

-depreciated over future periods benefited. -capitalized.

An expenditure that qualifies as an addition should be

-depreciated over the remaining useful life of original asset or its own useful life, whichever is shorter. -capitalized.

A company can manipulate income by overstating an impairment loss. The financial statement effects of this are

-future income is unrealistically high. -future depreciation, depletion, or amortization is unrealistically low. -current-year income is low.

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

-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.

Which of the following are required disclosures for an impairment loss?

-method used to determine fair value -description of the impaired asset

Which of the following are required disclosures for an impairment loss assuming the loss is not disclosed separately on the face of the income statement?

-the method used to determine fair value -the facts and circumstances leading to the impairment -the description of the impaired asset -the amount of the loss

Which of the following statements correctly describes the treatment of the recovery of previously recognized goodwill impairment losses under IFRS and U.S. GAAP?

Impairment losses cannot be reversed

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

Previous years' financial statements are restated.

What item(s) are used to determine the present value of cash flows when the expected cash flow approach is used?

Probability weighted cash flow and the risk-free interest rate

Identify the correct treatment of recovered impairment losses relating to indefinite-life intangible assets under IFRS.

They must be reversed

A new major component that is added to an existing asset is called

an addition.

If a company replaces a major component of an asset with a new component with the same characteristics of an old component, it is classified as

an improvement

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.

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.

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 objective of a(n) _____ is to create a new capability for the asset, but not necessarily extend its useful life.

rearrangement

Impairment losses can be used to manipulate earnings by

taking impairment losses in the current year to decrease future depreciation and increase future earnings.