ACCT 3001 Ch.11

the sum of the expected future net cash flows is less than the asset's carrying value.

An impairment of property, plant, or equipment has occurred if

Establishing a depletion base

1) Acquisition cost 2) Exploration costs 3) Development costs 4) Restoration costs

Because of the significant impact on the financial statements of the depreciation method(s) used, companies should disclose the following

1) Deprecation expense for the period 2) Balances of major classes of depreciable assets, by nature and function 3) Accumulated depreciation 4) A general description of the method or method used in computing depreciation with respect to major classes of depreciable assets.

Calculation of depreciation for partial period

1) determine the depreciation expense for the full year 2) Pro-rate the depreciation for the time the asset is owned.

should be included in corporate financial statements or notes thereto.

A general description of the depreciation methods applicable to major classes of depreciable assets - should be included in corporate financial statements or notes thereto. - is needed in financial reporting when company policy differs from income tax policy. - is not a current practice in financial reporting. - is not essential to a fair presentation of financial position.

assumes that the asset's economic usefulness is the same each year.

A principal objection to the straight-line method of depreciation is that it -gives smaller periodic write-offs than decreasing charge methods. -assumes that the asset's economic usefulness is the same each year. -provides for the declining productivity of an aging asset. -tends to result in a constant rate of return on a diminishing investment base

wear and tear

All of the following are economic factors related to depreciation except: - inadequacy. - supersession. - obsolescence. - wear and tear.

under IFRS, units-of-production depreciation is not permitted.

All of the following statements are true regarding IFRS accounting for property, plant, and equipment except: - under IFRS, a fair value test is used to measure impairment loss. - under IFRS, interest costs incurred during construction must be capitalized. - under IFRS, units-of-production depreciation is not permitted. - under IFRS, depreciation is viewed as an allocation of cost over an asset's life.

expected future net cash flows.

An asset impairment occurs when the asset's carrying amount exceeds the:

Hybrid or Combination Methods

Companies are also free to develop tailor-made depreciation methods, provided the method results in the allocation of an asset's cost over the asset's life in a systematic and rational manner

the basis of the nearest full month

Companies normally compute depreciation on

is usually part of cost of goods sold.

Depletion expense - includes tangible equipment costs in the depletion base. - is usually part of cost of goods sold. - excludes intangible development costs from the depletion base. - excludes restoration costs from the depletion base.

Fixed assets

Depreciation expense

Decreasing charge methods

Depreciation methods that allow for higher depreciation charges in the early years and lower charges in later periods. Also called accelerated depreciation methods. Generally, companies use one of two decreasing-charge methods: sum-of-the-years'-digits or declining-balance.

all of these answer choices are correct.

Economic factors that shorten the service life of an asset include - obsolescence. - supersession. - inadequacy. - all of these answer choices are correct.

life is the total depreciable cost divided by the total annual depreciation.

For the composite method, the composite

offset the effect of increasing repair and maintenance costs as the asset ages.

Ignoring income tax effects, accelerated depreciation methods can - decrease the fixed asset turnover ratio. - offset the effect of increasing repair and maintenance costs as the asset ages. - decrease funds provided by operations. - generate funds for the earlier replacement of fixed assets.

the nearest full month.

In computing partial-year depreciation, depreciation is normally computed on the basis of: - a half year's depreciation in the period of acquisition and disposal. -the nearest full month. -a full year's depreciation in the period of acquisition and none in the year of disposal. -the nearest fraction of a year.

Write-off of Resource Cost

Normally, companies compute depletion (cost depletion) on a unit of production (activity approach). Depletion is a function of the number of units extracted during the period

requires estimates of future production costs, the appropriate discount rate, and the expected selling price of oil and gas reserves.

Reserve recognition accounting - requires estimates of future production costs, the appropriate discount rate, and the expected selling price of oil and gas reserves. - is a historical cost method similar to the full cost approach and the successful efforts approach. - is used for reporting of oil and gas reserves for federal income tax purposes. - is presently the generally accepted accounting method for financial reporting of oil and gas reserves.

Special Depreciation Methods

Sometimes companies adopt special depreciation methods. Reasons for doing so might be that a company's assets have unique characteristics, or the nature of the industry. Two of these special methods are: 1. Group and composite methods. 2. Hybrid or combination methods.

False

T/F: Depletion is normally calculated using the straight-line method.

False

T/F: The major limitation of the straight-line method is that it is inappropriate in situations in which depreciation is a function of time instead of activity.

False

T/F: The sum-of-the-years digits method does not deduct the salvage value in computing the depreciation base

True

T/F: Total depreciation over an asset's life cannot exceed an amount equal to cost minus estimated salvage value.

False

T/F:Obsolescence is the replacement of one asset with another more efficient and economical asset.

service life refers to the time an asset will be used by a company and physical life refers to how long the asset will last.

The major difference between the service life of an asset and its physical life is that - service life refers to the time an asset will be used by a company and physical life refers to how long the asset will last. - service life refers to the length of time an asset is of use to its original owner, while physical life refers to how long the asset will be used by all owners. - physical life is the life of an asset without consideration of salvage value and service life requires the use of salvage value. - physical life is always longer than service life.

all of the options are included in the total cost.

The total cost of natural resources includes all of the following except: - exploration costs. - intangible development costs. - restoration costs. - all of the options are included in the total cost.

On all tangible assets whether held for use or disposal.

Under IFRS, when is the recovery of an impairment loss on a tangible asset permitted? - On assets held for use. - On all tangible assets whether held for use or disposal. - On assets being held for disposal. - On assets that have been that have already been disposed.

Salvage value

Under MACRS, which one of the following is not considered in determining depreciation? - Cost of asset - Half-year convention - Salvage value - Property recovery class

the nearest full month.

Unless otherwise stipulated, depreciation is normally computed on the basis of: - a full year's depreciation in the period of acquisition, none in the period of disposal. - a half-year's depreciation in the period of acquisition and in the period of disposal. - the nearest full month. - the nearest fraction of a year.

recorded in the Accumulated Depreciation account.

When an asset being depreciated under the group method is disposed of, any resulting gain or loss is:

On assets being held for disposal.

When is the restoration of an impairment loss permitted? - None of the answers are correct. - On assets held for use. - On assets being held for disposal. - On all tangible assets whether held for use or disposal.

Revision of Depreciation Rates

When purchasing a plant asset, companies carefully determine depreciation rates based on past experience with similar assets and other pertinent information. The provisions for depreciation are only estimates, however. They may need to revise them during the life of the asset. Unexpected physical deterioration or unforeseen obsolescence may decrease the estimated useful life of the asset. Improved maintenance procedures, revision of operating procedures, or similar developments may prolong the life of the asset beyond the expected period.

Useful life must be shorter than legal life.

Which of the following is not a way in which MACRS differs from GAAP depreciation? - Estimated life is mandated by tax law. - Cost recovery is accelerated. - Assigned salvage value of zero. - Useful life must be shorter than legal life.

Depreciation lowers the book value of the asset as it ages and its fair value declines.

Which of the following is not true of depreciation accounting? - Depreciation lowers the book value of the asset as it ages and its fair value declines. - Tangible assets with limited lives are depreciated. - Depreciation matches expenses against revenues over the periods which benefit from the asset's use. - Depreciation is a process of cost allocation.

Systematic and rational allocation

Which of the following principles best describes the conceptual rationale for the methods of matching depreciation expense with revenues? - Immediate recognition - Partial recognition - Systematic and rational allocation - Associating cause and effect

Straight-line method

Which one of the following is not an accelerated depreciation method? - Straight-line method. - Double-declining-balance method. - Declining balance method. - Sum-of-the years' digits method

Changes in estimate should be handled in the current period only.

Which one of the following statements regarding revision of depreciation rates is incorrect? - Opening balances are not adjusted when a change in estimate occurs. - Changes in estimate should be handled in the current period only. - No entry is made at the time a revision of depreciation rates occurs. - Depreciation is computing by dividing the remaining book value less any salvage value by the remaining estimated life.

Intangibles

amortization expense

Natural resources

depletion expense

Replacement of Assets

depreciation is not a fund for the replacement of assets. Funds for the replacement of the assets come from the revenues

Companies retire assets for two reasons:

physical factors and economic factors

Depletion

the process of allocating the cost of natural resources

composite method

used when the assets are dissimilar and have different lives

Group method

used when the assets are similar in nature and have approximately the same useful lives