Chapter 11

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

differs

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.

Group and composite depreciation commonly is used to

reduce costs of record-keeping.

An impairment occurs when the

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

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

The retirement depreciation method assumes a (1) cost approach in determining depreciation expense at the time the assets are disposed.

1. FIFO

Match each term with its definition.

Depreciation: Allocation of the cost of a tangible fixed asset Depletion: Allocation of the cost of natural resources Amortization: Allocation of the cost of an intangible asset

Select all that apply If an impairment loss is recognized for an intangible asset with a finite life, which of the following occurs? (Select all that apply.)

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

Allocation of the cost of an intangible asset is called

amortization.

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

The allocation of the cost of a tangible fixed asset is referred to as (1), whereas the allocation of the cost of an intangible asset is referred to as (2). (Enter one word per blank.)

1. depreciation 2. amortization

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.

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

Previous years' financial statements are restated.

Select all that apply The useful life of an intangible asset may be limited by what type of provisions? (Select all that apply.)

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

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

impairment

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

Changes in depreciation methods

Select all that apply What are the issues when accounting for impairments? (Select all that apply.)

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

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 accounting for impairments, the two categories for recognizing and measuring the loss are

assets to be held and used and assets held for sale.

Amortization is appropriate for intangible assets with

finite useful lives

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

later recovery of the impairment loss is prohibited.

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

recognized as an impairment loss.

The acronym "MACRS" refers to a(n) _____ method that may be used for ______ purposes.

depreciation; tax

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

The cost of a natural resource less its anticipated residual value is called the (1) (2). (Enter one word per blank.)

1. depletion 2. base

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

Service life

In accounting, the term impairment refers to

an asset's significant decline in value.

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.

For natural resources the depletion base is

cost less any anticipated residual value.

No amortization is recorded for

intangible assets with indefinite lives.

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.

Select all that apply 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. A prior period adjustment is made to the beginning balance of retained earnings. Previous financial statements are retrospectively restated.

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

False

Which of the following is an activity-based depreciation method?

Units-of-production method

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

Select all that apply 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.)

change in useful life of an asset increasing the residual value of an asset

The gain or loss on disposal of an asset is calculated as

consideration received less the book value of asset sold.

Select all that apply 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 (Select all that apply.)

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

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

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

The service life or useful life of an asset is

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

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.

Select all that apply 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. increases the quality of the goods or services produced by the asset. extends the asset's useful life.

Select all that apply The two categories for intangible assets are

intangibles with finite lives. intangibles with indefinite lives.

If there is a change in an intangible asset's estimated useful life, the change is treated

on a prospective basis.

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

the asset's book value and its fair value.

The retirement method for recording depreciation expense records depreciation

when the assets are disposed of.