Ch 11 smartbook

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

Which of the following characteristics are unique to goodwill?

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

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

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.

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

consideration received less the book value of asset sold.

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

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

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

cost less accumulated depreciation

Group and composite depreciation commonly is used to

reduce costs of record-keeping.

The retirement method for recording depreciation expense records depreciation

when the assets are disposed of.

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

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

recognized as an impairment loss.

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

recoverable amount

IFRS

recoverable amount Impairment losses must be reversed cash-generating unit

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

goodwill.

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

improvements

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.

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

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.

When group depreciation is used, and an asset is sold, which of the following occurs?

The asset's cost is removed from the books. No gain or loss is recorded.

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

an addition.

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

written down

Which of the following are characteristics of goodwill?

Subject to impairment testing Indefinite life

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

depletion 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 _____.

depreciation; amortization

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

depreciation; tax

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.

Under the replacement depreciation method, the amount paid for new or replacement assets is recorded as _____ _____

depreciation expense

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?

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

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.

Which of the following is true when an asset is disposed and group depreciation is used?

It is assumed that the book value of the asset is equal to the proceeds received.

The acronym MACRS stands for

Modified Accelerated Cost Recovery System

Loss on impairment of goodwill is typically reported as

a separate component of operating expense

Depreciation

allocation of the cost of a tangible fixed asset

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

Changes in depreciation methods

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?

Credit the natural resource. Debit depletion expense.

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

FIFO

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

impairment

The two categories for intangible assets are

intangibles with indefinite lives. intangibles with finite lives.

Companies use accelerated depreciation for tax purposes because

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

allocation base

the cost of the asset that is expected to be consumed

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.

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.

In Year 1, Orange Company determines that it will depreciate its equipment using the group method. The cost of equipment purchased, along with its residual values and estimated lives by type of equipment are as follows: Mowers: Cost- $55,000 Residual value- $5,000 Depreciable base- $50,000 estimated life- 5 Planters: Cost- $190,000 Residual value- $10,000 Depreciable base- $180,000 estimated life- 6 Loaders: Cost- $75,000 Residual value- $15,000 Depreciable base- $60,000 estimated life- 4 Total: Cost- $320,000 Residual value- $30,000 Depreciable base- $290,000 Over what term will the group be depreciated?

5.27 years Reason: = ($290,000) / [(50,000/5) + (180,000/6) + (60,000/4)]

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.

Which item qualifies as an addition and should be capitalized?

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

depletion

Allocation of the cost of a natural resources

Amortization

Allocation of the cost of an intangible asset

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 events would require testing for possible impairment?

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

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

What are the issues when accounting for impairments?

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

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

IFRS only

The revaluation method is allowed for property, plant, and equipment under

IFRS only.

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

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

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.

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

Risk and uncertainty

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

They must be reversed

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

True or false: The sum-of-the-years'-digits (SYD) method of depreciation is an accelerated method in which depreciation expense decreases each year.

True Reason: The SYD method has no logical foundation other than it is an accelerated method.

Theoretically, which depreciation method provides the best estimate of expense to correspond with the usage of the asset?

Units-of-production depreciation

Which of the following items should be considered when choosing an allocation method for a long-term asset?

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

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.

When accounted for using IFRS, the revaluation option can be applied to

all intangible assets other than goodwill

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

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 costs of restructuring an asset so that it has new capabilities, but where it is uncertain if the restructuring will provide future benefits, should be

expensed.

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

fair value

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

rearrangement

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

the asset's book value and its fair value.

The formula for the sum-of-the-years'-digits method is the depreciable base times the depreciation rate, which is calculated as

the numbers of years remaining in the asset's life divided by the sum-of-the-years'-digits.

Allocation Method

the pattern in which the usefulness is expected to be consumed

If a company has a commitment from another company to purchase its indefinite life intangible asset at the end of its useful life at a specific price, the company should utilize a residual value equal to

the pre-specified sales price

The formula for straight-line depreciation is

(cost-residual value)/useful life

The residual value of an intangible asset is usually

zero

The three factors that should be established to measure cost allocation are

allocation base. service life. allocation method.

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.

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

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

service life

the estimated use that the company expects to receive from the asset

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 Reason: A write-down can provide important information about the future cash flows that a company can generate from using the asset.

An impairment occurs when the

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

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.

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

depreciation expense.

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.

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.

On January 1, year 1, Green Tractor Corp. purchased equipment for $100,000. The equipment has a useful life of 4 years, and a residual value of $20,000. Using the sum-of-the-years'-digits method, what is the depreciation expense for year 1?

$32,000 Reason: ($100,000 - $20,000) x (4/10) = $32,000. The denominator in SYD is 1 + 2 + 3 + 4 = 10.

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 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.

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.

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.

On January 1, year 1, Glasser Corp. purchased equipment for $120,000. The equipment has a useful life of 3 years, and a residual value of $20,000. Using the sum-of-the-years'-digits method, what is the book value at the end of year 1?

$70,000 Reason: ($120,000 - 20,000) x (3/6) = $50,000. The denominator in SYD is 1 + 2 + 3 = 6. Book value is cost - accumulated depreciation so $120,000 - $50,000

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

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

At the beginning of Year 1, Mitchell Company purchased office equipment for $15,000. The equipment 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

Which of the following statements are true regarding depletion?

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

False Reason: Goodwill impairment losses are normally reported as a separate component of operating expenses.

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.

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

Which of the following occurs under the replacement method for recording depreciation expense?

Proceeds from dispositions reduce depreciation expense. Depreciation expense is the amount paid for new or replacement assets.

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

Service life

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

Units-of-production method

In accounting, the term impairment refers to

an asset's significant decline in value.

The group and composite methods of depreciation are similar because they both

apply straight-line depreciation to the assets based on average service lives of the assets.

When using group depreciation, the total cost of the group is depreciated over the ______ of the assets in the group.

average service life

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

Under U.S. GAAP, property, plant, and equipment is reported at ______ value; under IFRS, property, plant, and equipment is reported at ______ value.

book; book or fair

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

cash-generating unit.

For natural resources the depletion base is

cost less any anticipated residual value.

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.)

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

On December 30, 20X1, Rocket Corp. disposed of equipment with a historical cost of $100,000 and accumulated depreciation of $70,000. The equipment was sold for $80,000 cash. The journal entry to record the sale will include which of the following entries?

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

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

credit to the natural resource.

Western Company purchased a franchise on January 1, 20X1 for $100,000 cash. The franchise agreement is for a period of 10 years. Western uses the straight-line method for intangible assets. The journal entry at the end of 20X1 includes

debit amortization expense $10,000 credit franchise $10,000 Reason: depreciation is used for tangible assets and a franchise is an intangible 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

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

The journal entry to record the amortization of an intangible asset would include a

debit to amortization expense.

The journal entry to record depreciation expense includes

debit to depreciation expense credit to accumulated depreciation

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

debit to loss on impairment of goodwill.

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

depreciable base

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.

Violet Company prepares its financial statements consistent with IFRS. At the beginning of the year, the company purchased land for $1 million. At the end of the year, the fair value of the land is 1.2 million. On its current year balance sheet, Violet Company should report land at:

either $1 million or $1.2 million

U.S. GAAP

fair value Impairment losses must be reversed Under IFRS reporting, the level of testing of goodwill is at the Reporting unit

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 Multiple choice question.

fair value less costs to sell.

Subsequent to acquisition, an IFRS-reporting company may value its property, plant, and equipment at

fair value or cost less accumulated depreciation

For IFRS reporting, intangible assets may be valued at

fair value. cost less accumulated amortization.

Amortization is appropriate for intangible assets with

finite useful lives

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

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

No amortization is recorded for

intangible assets with indefinite lives

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.

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

method used to determine fair value description of the impaired asset

Group depreciation is calculated by

multiplying the group depreciation rate by the total cost of assets in the group for that period.

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

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.

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 useful life of an intangible asset may be limited by what type of provisions?

regulatory legal contractual

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

routine oil change engine tune-up

The amount of use that the company expects to obtain from an asset before disposing of it is referred to as the _____ life of the asset.

service, useful, or depreciable

The group depreciation method defines the collection of depreciable assets as those that

share similar service lives and attributes.

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?

sum-of-the-years digits declining balance

Which of the following are accelerated methods of depreciation?

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

Impairment losses can be used to manipulate earnings by

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

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

For assets using the group or composite method of depreciation, the assets will be depreciated over

the average service life of assets in the group.

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

the book value at the beginning of the year.

Although activity-based depreciation methods are theoretically superior to time-based methods, activity-based methods are

too costly to use. difficult to apply in practice.

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

true Reason: Assets held for sale are not depreciated or amortized while classified as held for sale

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