ACC-358 Chap 11 SB

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

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? (Select all that apply.)

contractual legal regulatory

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

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

Subsequent to initial valuation, IFRS allows a company to value an intangible asset at: (select all that apply)

cost less accumulated amortization fair value

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? (Select all that apply.)

Subject to impairment testing Indefinite life

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; useful life

Allocation method

The pattern in which the usefulness is expected to be consumed

Which of the following intangible assets are usually considered to have indefinite lives?

Trademarks

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

Units-of-production method

Which of the following items should be considered when choosing an allocation method for a long-term asset? (Select all that apply.)

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

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, 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.

JM Mining has a coal mine with a depletion base of $1,000,000. It is estimated that 500,000 tons will be extracted over the mine's useful life. During year 1, JM extracted 20,000 tons of coal. The depletion expense for year 1 is

$40,000. Reason: $1,000,000/500,000 tons = $2.00 per ton. 20,000 tons extracted x $2.00 = $40,000 depletion expense.

Under what circumstances are accelerated depreciation methods most appropriate? (Select all that apply.)

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.

Identify accounting standards that permit intangible assets to be reported at fair value subsequent to acquisition.

IFRS only

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.

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.

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

depletion base

For oil, gas, and most mineral natural resources, (Select all that apply.)

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

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.

No amortization is recorded for

intangible assets with indefinite lives.

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

On January 1, year 1, Mark Corp. purchases equipment for $300,000. The equipment has a 10-year life and a $50,000 residual value. Mark uses the double-declining-balance method of depreciation. What is depreciation expense for year 1?

$60,000 Reason: 2 x 1/10 x $300,000 = $60,000 depreciation expense in year 1. Under the double declining balance method, residual value is not included in computing the annual depreciation. However, the asset's book value cannot be depreciated below residual value.

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

Amortization

Allocation of the cost of an intangible asset

Depletion

Allocation of the cost of natural resources

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

Biological assets

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? (Select all that apply.)

Debit depletion expense. Credit the natural resource.

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

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.

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? (Select all that apply.)

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

On December 30, 20X1, Brighton Corp. disposed of equipment with a historical cost of $150,000 and accumulated depreciation of $60,000. The equipment was sold for $70,000 cash. The journal entry to record the sale will include which of the following entries? (Select all that apply.)

debit accumulated depreciation $60,000 credit equipment $150,000 debit loss on sale of equipment $20,000 debit cash $70,000

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

goodwill

Companies use accelerated depreciation for tax purposes because

it reduces taxable income in the early years of the asset's life.

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

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

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.

The method of amortization used for intangible assets (Select all that apply.)

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

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? (Select all that apply.)

sum-of-the-years digits declining balance

Which of the following are not accelerated methods of depreciation? (Select all that apply.)

units-of-output depreciation straight-line depreciation

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 residual value of an intangible asset is usually

zero.

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.

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

depreciation expense.

For IFRS reporting, the revaluation method is possible only if

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

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.

At the beginning of year 1, Kuhn Corp. purchases equipment for $22,000. The equipment has a residual value of $2,000 and an expected useful life of 5 years. What is straight-line depreciation expense for year 3?

$4,000 Reason: ($22,000 - 2,000)/5 years = $4,000 per year

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.

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 Reason: ($100,000 - 20,000)/10 years = $8,000 per year x 2 years = 16,000 accumulated depreciation. Book value is cost - accumulated depreciation

The formula for straight-line depreciation is

(cost - residual value)/useful life.

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.

Which of the following statements are true regarding depletion? (Select all that apply)

Depletion is a product cost and is included in the cost of inventory of the resource extracted. Units-of-production depreciation on assets used for natural resources often uses the same activity base that is used to calculate depletion.

True or false: Companies must use the same depreciation method for all assets.

False Reason: Companies may use different depreciation methods for different classes of assets.

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.

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

False Reason: It is called its allocation base.

Which of the following are examples of biological assets? (Select all that apply.)

Farm animals Fruit trees Timberlands

Which of the following is true regarding property, plant, and equipment or intangibles held for sale? (Select all that apply.)

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.

depreciable base

The total cost of plant and equipment to be expensed over its service life is referred to as its

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 Reason: If repair and maintenance are expected to increase significantly over the life of the asset, an accelerated method might be appropriate.

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

cost less accumulated depreciation

For natural resources the depletion base is

cost less any anticipated residual value.

The journal entry to record depreciation expense includes (Select all that apply.)

credit to accumulated depreciation debit to depreciation expense

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

credit to the natural resource.

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 (Select all that apply.)

debit to amortization expense. credit to the intangible asset.

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

depreciation

Which of the following are accelerated methods of depreciation? (Select all that apply.)

sum-of-the-years'-digits method declining balance method double-declining-balance method

The formula for calculating declining balance depreciation is the depreciation rate per year times

the book value at the beginning of the year.

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.