chapter 11 test
An asset group is being evaluated for an impairment loss. The following financial information is available for the asset group: Carrying value $100,000,000 Sum of the undiscounted cash flows $95,000,000 Fair value $80,000,000 What amount of impairment loss, if any, should be recognized? $20,000,000 $0 $5,000,000 $15,000,000
$20,000,000 Determination of impairment for an asset held in use is a two-step process. First the carrying value (CV) is compared to the recoverable cost (undiscounted cash flows). Since the CV is more than the recoverable cost, the second step must measure the impairment loss. The impairment loss is measured as the difference between CV and fair value (FV). The CV is $100 million and the FV is $80 million so the impairment loss is $20 million.
During the year, Lake Co. issued 3,000 of its 9%, $1,000 face value bonds at 101½. In connection with the sale of these bonds, Lake paid the following expenses: Promotion costs $ 20,000 Engraving and printing 25,000 Underwriters' commissions 200,000 What amount should Lake record as bond issue costs? - $0 - $220,000 - $225,000 - $245,000
$245,000 Debt issuance costs must be presented in the balance sheet as a direct deduction from the carrying amount of the related debt liability, consistent with debt discounts.The items listed (promotion costs, engraving and printing, and underwriters' commissions) would all qualify as bond issuance costs:$20,000 + $25,000 + $200,000 = $245,000
Spiro Corp. uses the sum-of-the-years' digits method to depreciate equipment purchased in January year 1 for $20,000. The estimated salvage value of the equipment is $2,000 and the estimated useful life is four years. What should Spiro report as the asset's carrying amount as of December 31, year 3? $2,800 $1,800 $3,800 $4,500
$3,800 Sum-of-the-years' digits (SYD) depreciation = (Cost less Salvage value) × Applicable fraction. Where applicable fraction = Number of years of estimated life remaining as of the beginning of the year and SYD = N (n + 1)Where n = estimated useful life2 Calculated as Year 1=$18,000*×4/10=$7,200Year 2=$18,000*×3/10=$5,400Year 3=$18,000*×2/10=$3,600 *($20,000 − $2,000)On December 31, year 3, the carrying amount of Spiro's asset equals $3,800 (the asset's cost of $20,000 minus accumulated depreciation of $16,200**).**($7,200 + $5,400 + $3,600)
A company reported the following information for Year 1: Net income $34,000 Owner contribution 9,000 Deferred gain on an effective cash-flow hedge 8,000 Foreign currency translation gain 2,000 Prior service cost not recognized in net periodic pension cost 5,000 What is the amount of other comprehensive income for Year 1? - $5,000 - $14,000 - $15,000 - $43,000
$5,000 Other comprehensive income includes items such as gains and losses on foreign currency transactions designated as hedges, gains and losses on derivative instruments, and gains or losses associated with pension or other postretirement benefits. Therefore, for this question the correct answer is $5,000:Deferred gain on an effective cash-flow hedge ($8,000) + Foreign currency translation gain ($2,000) − Prior service cost not recognized in net periodic pension cost ($5,000) = $5,000
On January 16, Tree Co. paid $60,000 in property taxes on its factory for the current calendar year. On April 2, Tree paid $240,000 for unanticipated major repairs to its factory equipment. The repairs will benefit operations for the remainder of the calendar year. What amount of these expenses should Tree include in its third-quarter interim financial statements for the three months ended September 30? - $0 - $15,000 - $75,000 - $95,000
$95,000 Property taxes ($60,000 x 3/12) $15,000Major repairs ($240,000 x 3/9) 80,000-------Total $95,000
Four years ago on January 2, Randall Co. purchased a long-lived asset. The purchase price of the asset was $250,000, with no salvage value. The estimated useful life of the asset was 10 years. Randall used the straight-line method to calculate depreciation expense. An impairment loss on the asset of $30,000 was recognized on December 31 of the current year. The estimated useful life of the asset at December 31 of the current year did not change. What amount should Randall report as depreciation expense in its income statement for the next year? $25,000. $20,000. $22,000. $30,000.
ANSWER: $20,000 The net book value of the asset at the time of impairment was $150,000: $250,000 cost less $100,000 accumulated depreciation (4 years of depreciation at $25,000 a year). After the impairment of $30,000, the net book value is $120,000 ($150,000 − 30,000). The remaining life is 6 years and annual depreciation is $20,000.
In which of the following situations is the units-of-production method of depreciation most appropriate? An asset incurs increasing repairs and maintenance with use. An asset is subject to rapid obsolescence. An asset's service potential declines with the passage of time. An asset's service potential declines with use.
An asset's service potential declines with use.
In January 2012, Winn Corp. purchased equipment at a cost of $500,000.The equipment had an estimated salvage value of $100,000, an estimated 8-year useful life, and was being depreciated by the straight-line method. Two years later, it became apparent to Winn that this equipment suffered a permanent impairment of value.In January 2014, management of Winn Corp. determines the expected future net cash flows (undiscounted) from the use of the equipment and its eventual disposal to be $250,000 and a fair value of $225,000. Amount of an impairment loss for the equipment: $350,000 $100,000 $150,000 $175,000
Answer $175,000
Crowder Company acquired a tract of land containing an extractable natural resource. Crowder is required by the purchase contract to restore the land to a condition suitable for recreational use after it has extracted the natural resource. Geological surveys estimate that the recoverable reserves will be 5,000,000 tons, and that the land will have a value of $1,000,000 after restoration. Relevant cost information follows: Land $9,000,000 Estimated restoration costs $1,500,000 If Crowder maintains no inventories of extracted material, what should be the charge to depletion expense per ton of extracted material? 2.10 $1.80 $1.60 $1.90
Answer: $1.90 The depletion computation is Net cost of resource=Depletion charge per unitUnits of resource The estimated net cost is the cost of the land ($9,000,000) and the related restoration costs ($1,500,000), less the salvage value of the land ($1,000,000). This results in a net cost of $9,500,000. The estimated recoverable reserves total 5,000,000 tons. Therefore, the depletion charge is $1.90 per ton ($9,500,000/5,000,000). $9,500,000=$1.90$5,000,000 Note that depletion cost on extractable natural resources does not become an expense until the mined resource is sold. If some of the extracted material remained in inventory that portion would be an asset, not an expense.
Vore Corp. bought equipment on January 2, 20X4 for $200,000. This equipment had an estimated useful life of five years and a salvage value of $20,000. Depreciation was computed by the 150% declining balance method.The accumulated depreciation balance at December 31, 20X5 should be: $98,000 $72,000 $91,800 $102,000
Answer: $102,000 Depreciation in 20X4 = $200,000(1.50/5)=$60,000Depreciation in 20X5 = ($200,000-$60,000)(1.50/5)=$42,000Accumulated depreciation balance at the end of 20X5=$102,000 The declining balance class of depreciation method does not deduct salvage value when computing depreciation although care must be taken not to depreciate the asset below salvage value. Also, the rate of depreciation applied to book value is the percentage of the method (150% in this case) divided by the useful life of the asset. Double declining balance, for example, is 200%/n or 2/n where n = useful life.
On April 1, 2014, Kew Co. purchased new machinery for $300,000. The machinery has an estimated useful life of five years, and depreciation is computed by the sum-of-the-years'-digits method.The accumulated depreciation on this machinery at March 31, 2016 should be: $192,000 $120,000 $100,000 $180,000
Answer: $180,000 $180,000, the correct answer, equals $300,000[(5 + 4)/(5 + 4 + 3 + 2 + 1)].Two full years of depreciation have been recorded, and the SYD method uses the number of years left at the beginning of each year as the numerator of the fraction used in depreciation. At the beginning of the first and second years, five and four years of the asset's life remained, respectively. The denominator is the sum of the digits up to the asset's useful life (5).
Zahn Corp.'s comprehensive Balance Sheet at December 31, 2005 and 2004 reported accumulated depreciation balances of $800,000 and $600,000, respectively. Property with a cost of $50,000 and a carrying amount of $40,000 was the only property sold in 2005.Depreciation charged to operations in 2005 was: $210,000 $200,000 $190,000 $220,000
Answer: $210,000 The accumulated depreciation on the property sold was $10,000 ($50,000 cost less $40,000 carrying value). The sale of property requires that the accumulated depreciation on the property be removed from the accounts. Thus, the $10,000 amount is a decrease in accumulated depreciation. With an overall increase of $200,000 in accumulated depreciation during the period ($800,000-$600,000), depreciation must have been $210,000 ($200,000 + $10,000).
A firm began a mineral exploitation venture during the current year by spending (1) $40 million for the mineral rights; (2) $100 million exploring for the minerals, one-fourth of which were successful; and (3) $60 million to develop the site. Management estimated that 20 million tons of ore would ultimately be removed from the property. Wages and other extraction costs for the current year amounted to $10 million. In total, 2 million tons of ore were removed from the deposit in the current year. The entire production for the period was sold. Compute cost of goods sold under the successful efforts method. $30 million $10 million $22.5 million $12.5 million
Answer: $22.5 million The depletion rate = [$40 + (.25)($100) + $60]/20 = $6.25/ton. Depletion = 2,000,000($6.25/ton) = $12,500,000. Because all the ore removed was sold, cost of goods sold includes the entire amount of depletion and the extraction costs. Cost of goods sold = $12,500,000 + $10,000,000 = $22,500,000. Note, that extraction costs is included in inventory (and therefore, cost of goods sold), but not in the deposit (and therefore, not in depletion).
Cantor Co. purchased a coal mine for $2,000,000. It cost $500,000 to prepare the coal mine for extraction of the coal. It was estimated that 750,000 tons of coal would be extracted from the mine during its useful life. Cantor planned to sell the property for $100,000 at the end of its useful life. During the current year, 15,000 tons of coal were extracted and sold. What would be Cantor's depletion amount per ton for the current year? $2.60 $3.30 $3.20 $2.50
Answer: $3.20 Cantor should capitalize all costs to prepare the mine for extraction. Cantor would then calculate the depletion rate as the cost minus residual value divided by the estimated units of output. Therefore, the depletion amount per ton would be ($2,000,000 + $500,000 - $100,000)/$750,000 tons = $3.20 per ton.
Wilson Corp. experienced a $50,000 decline in the market value of its inventory in the first quarter of its fiscal year. Wilson had expected this decline to reverse in the third quarter, and in fact, the third quarter recovery exceeded the previous decline by $10,000. Wilson's inventory did not experience any other declines in market value during the fiscal year. What amounts of loss and/or gain should Wilson report in its interim financial statements for the first and third quarters?
First quarter: $0; Third quarter: $0
Which of the following is a component of other comprehensive income? - Minimum accrual of vacation pay - Foreign currency-translation adjustments - Changes in market value of inventory - Unrealized gain or loss on investment in equity securities
Foreign currency-translation adjustments
Which of the following conditions must exist in order for an impairment loss to be recognized?I. The carrying amount of the long-lived asset is less than its fair value.II. The carrying amount of the long-lived asset is not recoverable. Both I and II. II only. I only. Neither I nor II.
II only.
How are discontinued operations that occur at midyear initially reported? - Disclosed only in the notes to the year-end financial statements - Included in net income and disclosed in the notes to the year-end financial statements - Included in net income and disclosed in the notes to interim financial statements - Disclosed only in the notes to interim financial statements
Included in net income and disclosed in the notes to interim financial statements Discontinued operations should be reported separately, net-of-tax, on the income statement for the interim period. Disclosure in the notes to the interim statements is required.
According to the FASB conceptual framework, comprehensive income includes which of the following? - Loss on discontinued operations - Investment by owners - Both loss on discontinued operations and investment by owners - Neither loss on discontinued operations nor investment by owners
Loss on discontinued operations
A machine with a 4-year estimated useful life and an estimated 15% salvage value was acquired on January 1, year 1. The increase in accumulated depreciation for year 2 using the double-declining balance method would be Original cost × 50% × 50%. Original cost × 85% × 50%. Original cost × 50%. Original cost × 85% × 50% × 50%
Original cost × 50% × 50%. The increase in accumulated depreciation for year 2 is the depreciation expense recorded in year 2. The equation for calculating DDB depreciation is Book value×200% Useful life The percentage used for DDB is always twice the straight-line rate. Note that salvage value is not used in determining depreciation expense under this method. In year 1:Original cost × 50%(200%/4 = 50%) In year 2:(Original cost × 50%) × 50%
The Securities and Exchange Commission was created under which of the following acts? - The 1933 Securities Act - The 1934 Securities Exchange Act - The Tax Equity and Fiscal Responsibility Act - Both the 1933 Securities Act and 1934 Securities Exchange Act
The 1934 Securities Exchange Act
Which of the following uses the straight-line depreciation method? Group depreciation Composite depreciation No No YesNo YesYes NoYes
Yes Yes Composite (group) depreciation averages the service life of a number of property units and depreciates the group as if it were a single unit. The term "group" is used when the assets are similar; the term "composite" is used when they are dissimilar. The mechanical application of both of these methods is identical. The depreciation rate is the following ratio: Sum of annual SL depreciation of individual assets Total asset cost Thus, both group and composite depreciation utilize the straight-line depreciation method.
A schedule of machinery owned by Lester Manufacturing Company is presented below. Total cost Estimated salvage value Estimated life in years Machine A$550,000$50,00020 Machine B$200,000$20,00015 Machine C$40,000—5 Lester computes depreciation on the straight-line method. Based upon the information presented, the composite life of these assets (in years) should be 18 13.3 19.8 16
answer: 16 The solutions approach is to determine the annual SL depreciation and divide the annual depreciation into the total amount to be depreciated. The annual depreciation is $45,000, which when divided into the total depreciation base of $720,000, indicates a composite life of 16 years. Machine A$500,000 depr. base/20 yrs=$25,000 depr.Machine B$180,000 depr. base/15 yrs=$12,000 depr.Machine C$40,000 depr. base/ 5 yrs.=$8,000 depr.$720,000 total depr. Base=$45,000 total depr.$720,000/$45,000=16 years Assets can be grouped for composite depreciation purposes. Under this method, major repair/replacement expenditures are charged to an accumulated depreciation account. Related gains (losses) on disposal of individual assets are usually not recognized. The difference between the proceeds received and the asset's cost is debited to accumulated depreciation.
