Smartbook Ch 11
Assets to be sold
When classified as held for sale
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
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
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
The measurement of an impairment loss in step 2 is the difference between
the asset's book value and its fair value.
At the beginning of year 1, Valerie Corp. purchases equipment for $10,000. The equipment has a residual value of $4,000 and an expected useful life of 4 years. What is straight-line depreciation expense for year 1?
$1,500
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
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. What is accumulated depreciation at the end of year 2 using straight-line depreciation?
$16,000 Reason: ($100,000 - 20,000)/10 years = $8,000 per year x 2 years
Which of the following are required when a material error is discovered in a subsequent accounting period that impacts retained earnings?
A prior period adjustment is made to the beginning balance of retained earnings. A disclosure note describing the nature of the error and the impact of the correction on net income and earnings per share. Previous financial statements are retrospectively restated.
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: Year 1 - Depreciation is only for 3months (Oct to Dec) $100,000/5 years = $20,000 per year x 1/4 year = $5,000 depreciation expense in year 1.
A retirement or abandonment of an asset is different from a sale of an asset because
(1) no consideration is received (2) a loss must be recognized for the remaining book value
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: Over what term will the group be depreciated?
5.27 years
Indefinite life intangible assets other than goodwill
At least annually, or more frequently if indicated
An asset retirement is treated similarly to selling an asset; however, a loss equal to the remaining ________ ________ is recorded because there will be no monetary consideration received.
Book value
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 considered "expenditures subsequent to acquisition" for a building?
Cost of installing solar panels after three months of use of the building Repairing a major roof leak three years after use
Which of the following is true regarding property, plant, and equipment or intangibles held for sale?
If the fair value less costs to sell is below book value, an impairment loss is recognized. The assets held for sale are not depreciated or amortized.
A subsequent expenditure for an asset increases the future benefits of the asset if it
Increases the operating efficiency of the asset increases the quality of the goods or services produced by the asset extends the asset's service life
Which statement is true about the straight-line method of depreciation?
It allocates an equal amount of depreciation to each year the asset is used.
The acronym MACRS stands for
Modified Accelerated Cost Recovery System
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
Allocation of the cost of an intangible asset
amortization
Allocation of the cost of an intangible asset is called
amortization
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 accounting for impairments, the two categories for recognizing and measuring the loss are
assets to be held and used and assets held for sale.
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.
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.
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?
debit loss on sale of equipment $20,000 debit accumulated depreciation $60,000 debit cash $70,000 credit equipment $150,000
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 loss on impairment of $12,000. debit to accumulated depreciation of $40,000. credit to assets of $52,000.
Allocation of the cost of natural resources
depletion
The cost of a natural resource less its anticipated residual value is called the
depletion base
Which of the following expenditures are classified as repairs and maintenance for a vehicle?
engine tune-up routine oil change
Expenditures for repairs and maintenance should be
expensed in the period incurred
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
Which of the following is an activity-based depreciation method?
units of production method
Which of the following are not accelerated methods of depreciation?
units-of-output depreciation straight-line depreciation
Assets to be held and used
Excess of book value over fair value
What is the purpose of group or composite depreciation?
To reduce the record-keeping costs of determining depreciation.
Which of the following terms is equivalent to an asset's useful life to a particular company?
service life
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
The allocation of the cost of a tangible fixed asset over a period of time is referred to as __________, whereas the allocation of the cost of an intangible asset is referred to as __________.
Depreciation, amortization
The retirement depreciation method assumes a ________ cost approach in determining depreciation expense at the time the assets are disposed.
FIFO
True or false: When accounting for impairments, the two categories for recognizing and measuring the loss are tangible and intangible assets.
False
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
What is the accounting treatment for the discovery of a material error in a previous year?
Previous years' financial statements are restated.
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 is true regarding property, plant, and equipment or intangibles held for sale?
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.
Assets to be sold
The excess of book value over fair value less costs to sell
Goodwill
The excess of book value over implied fair value
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
True or false: Assets held for sale are not depreciated or amortized while classified as held for sale.
True
Property to be held and used
When events or circumstances indicate book value may not be recoverable
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.
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 credit to equipment $100,000 debit accumulated depreciation $70,000
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?
credit to equipment $50,000 debit to accumulated depreciation $30,000 credit to gain on sale of asset $25,000 debit to cash $45,000
An expenditure that qualifies as an addition should be
depreciated over the remaining useful life of original asset or its own useful life, whichever is shorter. capitalized.
Allocation of the cost of a tangible fixed asset
depreciation
The portion of a tangible asset's cost that is recognized as an expense in the current year is called
depreciation expense
The acronym "MACRS" refers to a(n) _____ method that may be used for ______ purposes.
depreciation; tax
An impairment loss for intangible assets with indefinite lives is calculated as the book value less the
fair value
True or false: Expenditures that qualify as an addition should be expensed in the period incurred.
false, additions that involve adding a new major component to an existing asset should be capitalized because future benefits are increased
True or false: Repairs and maintenance expenditures should be capitalized in the period incurred.
false, repairs and maintenance expenditures should be expensed in the period incurred
Amortization is appropriate for intangible assets with
finite useful lives
The key factor in classifying items as repairs and maintenance is that
future benefits are not provided beyond those originally anticipated from the asset.
When an asset has a significant decline in value and is written down, this is called ______.
impairment
Which of the following are expenditures on assets subsequent to acquisition?
improvements additions repairs and maintenance
The types of expenditures that can occur subsequent to an asset's acquisition are
improvements, repairs and maintenance, additions, rearrangements
Which items are considered changes in estimates that would be treated on a prospective basis in the current period and future periods?
increasing the residual value of an asset change in useful life of an asset
No amortization is recorded for
intangible assets with indefinite lives
The useful life of an intangible asset may be limited by what type of provisions?
legal regulatory contractual
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
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.
In measuring an impairment loss, the difference between the asset's book value and its fair value is
recognized as an impairment loss.
Group and composite depreciation commonly is used to
reduce costs of record-keeping.
Which of the following are expenditures on assets subsequent to acquisition?
repairs and maintenance additions improvements
In calculating present value, a traditional approach incorporates what items into the discount rate?
risk and uncertainty
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
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.
Straight-line depreciation is calculated as the depreciable base divided by
the estimated useful life of the asset.
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.
Which of the following intangible assets are usually considered to have indefinite lives?
trademarks
The retirement method for recording depreciation expense records depreciation
when the assets are disposed of.
Assets held for use that have a significant impairment of value should be
written down