chapter 11 intermediate
3
Under IFRS, value-in-use is defined as: Entry field with correct answer total future undiscounted cash flows. fair value. future cash flows discounted to present value. net realizable value.
successful efforts concept
companies should capitalize only the costs of succesful projects believe the only relevant measure for a project is the costs directly related to that project and that companies hould report any remaining costs as preiod changes
why use decreasing charge methods
companies should charge more depreciation in earlier years because the asset is most productive in the earlier years it provides a constant cost because the depreciation charge is lower in the later periods at the time when the repair and maintenance costs are often higher
revision of depreciation rates
company should report changes in the estimate in the current and prospective periods (prospectively) no entry at the time of the change occurs charges for depreciation in subsequent peirods are determinded by dividing the remaining book value less any salvage value by the remaining estimated life
cost depletion
computed on a units of production method(activity approach) function of the number of units extracted during the peiod
straight line method
considers depreciation as a function of time rather than a function of usage SIMPLE most conceptually appropriate
restoration costs
costs incurred to restore property to its natural state after extraction has occured considered part of the depletion base
declining balance method
does not deduct the salvage value in computing the depreciation base
ifrs
does not use the first stage recoverability test impairment loss is difference between assets book value and its fair value
intangible development costs
drilling costs, tunnels, shafts, and wells no tangible characteristics but are needed for production of the natural resource considered part of the depletion base
tax lives
each item of depreciable property belongs to a property class the recovery period (depreciable tax life) of an asset on its property calss
Modified Accelerated Cost Recovery System (MACRS)
enacted in the tax reform act of 1986 applies to depreciable assets placed in service in 1987 and later
journal to record impairment
loss on impairment - accumulated depreciation
depreciation
means of cost allocation accounting process of allocating the cost of tangible assets to expense in a systematic and rational manner to those periods expected to benefit from te use of the asset
if impairment is recognized
must disclose the assets impaired, the events leading to the impairment the amount of the loss and how it determined fair value (disclosing the interest rate if appropriate)
special disclosure requirements related to oil and gas industry
must disclose the basis method of accounting for those costs incurred in oil and gas producing activities how the company disposes of costs related to extractive activities
profit margin on sales
net income/net sales
39 year property
nonresidential real property
assets held for disposal
not depreciated or amortized during the period they are held bc depreciation is inconsistent with the notion of these assets and with the use of lcnrv they are like inventory, and companies should report them at the lower of cost or net realizable value
7 year property
office furniture and fixtures agricultural equipment oil exploration and development equipment railroad truck manufacturing equipment any property not designated by law as being any other classes
depreciation base
original cost - salvage value
reasons for retiring assets
physical factors (casualty, or expiration of physical life) economic factors(obsolescence)
historical costs
ppe is disclosed on this basis of evaluation along with pledges, liens, and other commitements related to these assets
not in accordiance with gaap
the adoption of one mehtod for both tax and book purposes in all cases is
development costs
divide into two parts 1. tangible equipment costs 2. intangible equipment costs
depreciation charge (activity method)
(cost - salvage) * hours this year ------------------------------------ total estimated hours
depreciation charge (straight line)
(cost - salvage) / estimated service life
depletion cost per unit
(total cost - salvage value) / total estimated units available
true
A company can write up or write down an asset held for disposal in future periods as long as the carrying value after the write-up does not exceed the carrying amount before the impairment. Entry field with correct answer True False
1
A depreciation method that is used when a collection of assets is heterogeneous and the assets have different useful lives is the: Entry field with correct answer composite method. group method. hybrid method. combination method.
1
A general description of the depreciation methods applicable to major classes of depreciable assets Entry field with correct answer should be included in corporate financial statements or notes thereto. is not a current practice in financial reporting. is not essential to a fair presentation of financial position. is needed in financial reporting when company policy differs from income tax policy.
1
A principal objection to the straight-line method of depreciation is that it Entry field with correct answer assumes that the asset's economic usefulness is the same each year. tends to result in a constant rate of return on a diminishing investment base. gives smaller periodic write-offs than decreasing charge methods. provides for the declining productivity of an aging asset.
2
All of the following are economic factors related to depreciation except: Entry field with correct answer supersession. wear and tear. inadequacy. obsolescence.
false
Both U.S. GAAP and IFRS use the first-stage recoverability test to measure impairment loss. Entry field with correct answer True False
false
Changes in the estimates used to calculate depreciation should be handled as a correction of an error and require an adjustment to the beginning balance of Retained Earnings. Entry field with correct answer True False
4
Correct answer. Correct! The total cost of natural resources includes exploration costs, intangible development costs, and restoration costs which is all of the options. The total cost of natural resources includes all of the following except: Entry field with correct answer exploration costs. intangible development costs. restoration costs. all of the options are included in the total cost.
false
Depreciation is a means of adjusting an asset's cost to its fair value. Entry field with correct answer True False
2
For the composite method, the composite Entry field with correct answer rate is the total annual depreciation divided by the total depreciable cost. life is the total depreciable cost divided by the total annual depreciation. life is the total cost divided by the total annual depreciation. rate is the total cost divided by the total annual depreciation.
systematic and rational manner
GAAP requires that the method result in the allocation of an asset's cost over the asset's lfie in a __________________-
special depreciation methods
Group and composite methods and hybrid or combination methods.
3
IFRS accounting for impairments differs from GAAP in which of the following ways? Entry field with correct answer IFRS prohibits write-ups for recoveries of impairments for assets held for sale. The IFRS impairment test is less strict than that required by GAAP. IFRS permits recoveries of impairment to be recorded for all tangible assets. IFRS uses a recoverability test in addition to the fair value test used by GAAP in testing for impairment.
2
Impairment has occurred when the undiscounted expected future net cash flows are less than the carrying amount of an asset. Entry field with correct answer True False
true
Impairment has occurred when the undiscounted expected future net cash flows are less than the carrying amount of an asset. Entry field with correct answer True False
1
In computing partial-year depreciation, depreciation is normally computed on the basis of: Entry field with correct answer the nearest full month. a half year's depreciation in the period of acquisition and disposal. the nearest fraction of a year. a full year's depreciation in the period of acquisition and none in the year of disposal.
2
Lebanon Corporation owns equipment with a cost of $320,000 and accumulated depreciation at December 31, 2017 of $120,000. It is estimated that the machinery will generate future cash flows of $175,000. The machinery has a fair value of $155,000. If Lebanon uses IFRS, the company should recognize a loss on impairment of Entry field with correct answer $0. $45,000. $35,000. $25,000.
half-year convention
MACRS depreciation computations for income perposes are based on this
2
Mains Corporation owns equipment with a cost of $290,000 and accumulated depreciation at December 31, 2017 of $150,000. It is estimated that he machinery will generate future cash flows of $165,000. The machinery has a fair value of $115,000. Mains should recognize a loss on impairment of Entry field with correct answer $25,000. $0. $35,000. $15,000.
2
Mandall Company constructed a warehouse for $280,000 on January 2, 2017. Mandall estimates that the warehouse has a useful life of 20 years and no residual value. Construction records indicate that $40,000 of the cost of the warehouse relates to its heating, ventilation, and air conditioning (HVAC) system, which has an estimated useful life of only 10 years. What is the first year of depreciation expense using straightline component depreciation under IFRS? Entry field with correct answer $14,000. $16,000. $28,000. $4,000.
1
Miller Company follows IFRS and applies revaluation accounting to plant assets with a carrying value of $900,000, a useful life of 3 years, and no salvage value. Depreciation is calculated on the straight-line basis. At the end of year 1, independent appraisers determine that the asset has a fair value of $990,000. Miller's journal entry to record depreciation for year one will include: Entry field with correct answer debit to Depreciation Expense for $300,000. debit to Accumulated Depreciation for $300,000. debit to Depreciation Expense for $330,000. credit to Accumulated Depreciation for $30,000.
3
Morrow Company purchased a depreciable asset for $38,000 on January 1, 2015. The estimated salvage value is $6,000, and the estimated useful life is 4 years. The sum-of-the-years' digits method is used for depreciation. What is depreciation expense for the year 2017? Entry field with correct answer $8,000. $12,800. $6,400. $11,400.
decreasing charge methods
Sum-of-the-year's-digits and declining-balance method.
2
The depreciable base (cost) of an asset is its original cost: Entry field with correct answer less accumulated depreciation. less salvage value. plus accumulated depreciation. plus salvage value.
exploration costs
The expenditures required to find natural resources; when substantial, companies may capitalize them into the depletion base. Other companies, based on their industry, either capitalize or expense the costs.
composite life
The length of time it takes a company to depreciate its assets on a composite basis total depreciation base / total depreciation per year
3
The return on assets is computed by dividing: Entry field with correct answer net income by ending total assets. net sales by ending total assets. net income by average total assets. net sales by average total assets.
false
The sum-of-the-years digits method does not deduct the salvage value in computing the depreciation base. Entry field with correct answer True False
1
When is the restoration of an impairment loss permitted? Entry field with correct answer On assets being held for disposal. On all tangible assets whether held for use of disposal. On assets held for use. On assets that have been that have already been disposed.
4
Which of the following is not a way in which MACRS differs from GAAP depreciation? Entry field with correct answer Assigned salvage value of zero. Estimated life is mandated by tax law. Cost recovery is accelerated. Useful life must be shorter than legal life.
2
Which of the following is not true of depreciation accounting? Entry field with correct answer Depreciation matches expenses against revenues over the periods which benefit from the asset's use. Depreciation lowers the book value of the asset as it ages and its fair value declines. Depreciation is a process of cost allocation. Tangible assets with limited lives are depreciated.
4
Which of the following statements is correct? Entry field with correct answer GAAP permits revaluation of property, plant, and equipment but not IFRS. Both IFRS and GAAP do not permit revaluation of property, plant, and equipment. Both IFRS and GAAP permit revaluation of property, plant, and equipment. IFRS permits revaluation of property, plant, and equipment but not GAAP.
1
Which one of the following statements regarding revision of depreciation rates is incorrect? Entry field with correct answer Changes in estimate should be handled in the current period only. Depreciation is computing by dividing the remaining book value less any salvage value by the remaining estimated life. No entry is made at the time a revision of depreciation rates occurs. Opening balances are not adjusted when a change in estimate occurs.
Accelerated Cost Recovery System (ACRS)
a depreciation method under U.S. tax law allowing for the accelerated write-off of property under various classifications
how does depreciation computation under MACRS differ from GAAP
a mandated tax life which is generally shorter than the economic life cost recovery on accelerated basis an assigned salvage value of zero
computation of depletion base
acquaisition cost of the deposit exploration costs development costs restoration costs
methods of depreciation
activity(units of use or production) straight line method decreasing charge methods (accelerated) - sum of the years' digits - declining balance method special depreciation methods - group and composite methods - hybrid or combination methods
impairment loss
amount by which the carrying value of the asset exceeds its fair value
optional straight line method
applies to the six classes of property alternative macrs applies this method to the macrs recovery periods ignores salvage value in teh first year in which th eproptery is put in service the company deducts half of the amount of depreciation that would be permitted for a full year
where to report impairment loss
as part of income from continuing operations in the other expenses and losses section
reserve recognition accounting
as soon as a company discovers oil, it reprots the value of the oil on the balance sheet and in the income statement this is a fair value approach in response criticisms of FASB 1977 actions the SEC came up with this
activity method
assumes that depreciation is a function of the use or productivity, instead of the passage of time considers the useful life of the asset in terms of either the output it provides or an input measure such as the number of hours it works aka variable charge or units of production approach
5 year property
automobiles trucks computers and peripheral eqipment office machines
fair value of an asset
based on the market price if an active market for the asset exists if no active market exists, use the present value of expected future cash flows to determine the fair value
asset held for use
can not restore an impairment loss for bc the new cost basis puts the impaired asset on an equal basis with other assets that are unimpaired
both
currently companies can use which mehtod(full costing or succesfful efforts)
accelerated depreciation methods
decreasing charge methods
group and composite methods
depreciate multiple asset accounts using one rate
double declining balance method
depreciates assets at twice the straight line rate
companies should disclose
depreciation expense for the period balances of major classes of depreciable assets by nature and function accumulated deprecitation either by major classes of depreciable assets or in total a general description of the method or methods used in computing depreciation with respect to major classes of depreciable assets
computing group or composite methods
find an average and depreciate on that basis
composite depreciation rate
found by dividing the depreciation per year by the total cost of the assets
Under IFRS, value-in-use is defined as
future cash flows discounted to present value
asset turnover
how efficiently a company uses its assets to generate sales net sales / average total assets
production variable method
hybrid depreciation method used in the steal industry
liquidating dividends
if the company does not expect to purchase additional properties it may gradually distribute to stockholders their capital investments by paying __________________________ these are dividends greater than the amount of accumulated net income
past experience
in most cases, companies estimate the useful life on an asset based on its __________________________ with the same or similar asset
economical factors
inadequacy supersession obsolescence
tangible equipment costs
include all of the transportation and other heavy equipment needed to extract the resourece and get it ready for market not normally included in the depletion base
3 year property
includes small tool horeses and assets used in R & D activities
record depletion
inventory -silver mine
limitation of activity mehtod
it is inappropriate in situation in which depreciation is a function of time instead of activity
major objection to straight line mehtod
it rests on two tenuous assumptions 1. the assets economic usefulness is the same each year 2. the maintenance and repai expense is essentially the same each period distortions in the rate of return analysis (income/assets) develop
acquisition costs
price paid to obtain property right to search and find an undiscoverable natural resource price paid for an already discovered resource lease payments for property containing a productive natural resource includes royalty payments to the owner of the property recorded in an account titled "undeveloped property"
return on assets
profit margin on sales * asset turnover or net income / average total assets measures profitablility well bc it combines the effects of profit margin and asset turnover
decreasing charge methods
provide for a higher depreciation cost in the earlier years and lower charges in later periods
10 year property
railroad tank cars mobile homes boilers certain public utility property
purpose of taxation
raise revenue from constituents in an equitable manner
marcs depreciation
recovers total cost of the asset on an accelerated basis
depletion
reduction in the cost of natural resources over a period of time timber, gravel, oil, and coal
GAAP
requires that companies allocate the cost of depreciable assets to expense over the useful life in a systamativ and rational manne
27.5 year property
residential rental proptery
sum of the years digits
results in a decresing depreciaiton charge based on a decreasing fraction of depreciable costs(oc - sal) each fraction uses the sum of the years as the denominator the numerator is the number of years of estimated life remaining as the beginning of that year
inadequacy
results when an asset ceases to be useful to a company because the demands of the firm have change ex. no longer needing a building to handle increased production
15 year property
roads shrubbery certain low income housing
events leading to impairment
significant decrease in fair value of the asset change in the extent or manner in which the asset is used significant adverse change in legal factors or in the business climate that affects the value of an asset an accumulation of costs significantly in excess of the amount originally expected to acquire or construct an asset a projection or forecast that demonstrates continuing losses associated with an asseet
advantages of group or composite method
simplifies bookkeeping processes and tends to average out errors caused by over or under production gains and losses on disposals of assets do not distort periodic income
advantages of unit method
simplifies the computation identifies gains and losses on disposal isolates depreciation on idle equipment represents the best estimate of the depreciation of each asset not the result of averaging the cost over a longer peirod of time
recording liquidated dividends
since the dividend is a return of the invesotrs original contribution company should debit paid in capital in excess of par for the portion related to the original investment instead of debiting retained earnings
when depleting natural resources
some companies use an accumualted depletion account however, most simply credit the natural resource account directly since natural resources are consumer, making direct reduction of the cost of the natural resources appropriate
obsolescence
the catchall for situations not involving inadequacy and supersession
segregate
the compnay should ____________ ppe not currently employe as producting assets in the business from assets used in operations
salvage value
the estimated amount that a company will receive when it sells the asset or removes it from service amount by which the company writes down or depreciates the asset during its useful life
amortization
the expiration of intangible assets, such as patents or copyrights
new cost basis
the reduced carrying amount of an asset held for use after recording an impairment loss
supersession
the replacement of one asset with another more efficient and economical asset
assets held for disposal in future periods
these assets can be written up or down as long as the carrying value after the write up never exceeds the carrying amount of the asset before the impairment companies report gains or losses related to these impaired assets as part of income from continuing operations
lcnrv
this general accounting standard does not apply to ppe
major accounting problem with liquidating dividends
to distinguish between dividends that are a return of capital and those that are not
purpose of financial reporting
to reflect the economic substance of a transaction as closely as possible and to help predict the amounts timing and uncertaintiy of future cash flows
150% declining balance
used for property classes 15 and 20
straight line
used for property classes 27.5 and 39
double declingin balance
used for property classes 3, 5, 7, and 10
recoverability test
used to determine whether an impairment has occurred 1. a compnay estimates the future net cash flows expected from the use of that asset and its eventual disposition if the sum of est future net cash flows (undiscounted) is < the carrying amount of the asset, it is impaired if the future net cash flows (undiscounted) >= the carrying amount of the asset, no impairment has occured
composite approach
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 more closely approximates a single unit cost procedure becasue the dispersion from the average is not as great
declinging-balance method
utilizes a depreciation rate that is some multiple of the straight line method apply the constant rate to the decreasing book value each year does not deduct the salvage value in computing depreciation base
20 year property
waste water treatment plants and sewer systems
natural resources
wasting assets petroleum, minerals, timber two main features: 1. the complete removal(consumption) of the asset 2. replacement of the asset by an act of nature
physical factors
wear and tear decay casualties that make it difficult for the asset to perform indefinitely set the outside limit for the service life of an asset
questions to ask before establishing a pattern of charges to revenue
what depreciable base is to be used for the asset what is the assets useful life what method of cost apportionment is best for this asset
maintenance
whenever the physical nature of the asset primarily determines useful life, ______________ plays and extremely vital role, the better the _______________ the longer the life of the asset
impairments
write-offs of long-lived assets
