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