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Terms in this set (104)
Which statement is true about the straight-line method of depreciation?
It is the preferred method for companies expecting to use the asset more in its early years of life.
It allocates an equal amount of depreciation to each year of the asset's service life.
It is an accelerated method of depreciation.
It recognizes expense proportionately with the amount of use of the asset.
It is the preferred method for companies expecting to use the asset more in its early years of life.
It allocates an equal amount of depreciation to each year of the asset's service life.
It is an accelerated method of depreciation.
It recognizes expense proportionately with the amount of use of the asset.
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? (Select all that apply.)
declining balance
sum-of-the-years digits
straight-line
retirementdeclining balance
sum-of-the-years digitsStraight-line depreciation is calculated as the depreciable base divided by
the estimated useful life of the asset.
the residual value of the asset.
the cost of the asset.the estimated useful life of the asset.Declining balance depreciation methods multiply _____ by an annual rate that is a multiple of the straight-line rate.
cost less accumulated depreciation
depreciable base
cost less residual value
market valuecost less accumulated depreciationThe cumulative amount of a tangible asset's cost that has been depreciated in all prior years plus the current year is called
depreciation expense.
accumulated depreciation.
amortization expense.
accumulated amortization.accumulated depreciation.Which of the following is an activity-based depreciation method?
Double-declining-balance method
Sum-of-the-years'-digits method
Units-of-production method
Straight-line methodUnits-of-production methodAt 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?
$64,000
$92,000
$80,000
$16,000
$84,000$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 depreciationOn 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?
$6,000
$5,000
$8,000
$3,000$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.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 of $3,000
Debit to depreciation expense for $2,800
Credit to accumulated depreciation for $12,200
Credit to depreciation expense for $3,000Debit to depreciation expense for $2,800On 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
$20,000
$2,500
$10,000$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.Which of the following are accelerated methods of depreciation? (Select all that apply.)
declining balance method
straight-line depreciation
double-declining-balance method
sum-of-the-years'-digits methoddeclining balance method
double-declining-balance method
sum-of-the-years'-digits methodWhen 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.
net realizable
net present
book
fairbookThe formula for calculating declining balance depreciation is the depreciation rate per year times
the cost less the residual value.
the book value at the beginning of the year.
the cost less the residual value less the accumulated depreciation.the book value at the beginning of the year.The composite depreciation method is used when assets
are similar in attributes and service lives.
are purchased individually at different times of the year.
have similar values.
are dissimilar and have different services lives.are dissimilar and have different services lives.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.
straight-line
double-declining-balance
units-of-production
sum-of-the-years'-digitsunits-of-productionWhat is the purpose of group or composite depreciation?
To classify assets by type as required by GAAP.
To eliminate the accounting entries when disposing of assets.
To reduce the record-keeping costs of determining depreciation.
To eliminate the need for impairment testing.To reduce the record-keeping costs of determining depreciation.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?
$4,800
$4,500
$3,000
$7,500$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.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:
Asset Cost RV DB EL
Mowers 55,000 5,000 50,000 5 yrs
Planters 190,000 10,000 180,000 6 yrs
Loaders 75,000 15,000 60,000 4 yrs
Total 320,000 30,00 290,000
5.27 years
5 years
4 years
5.52 years5.27 years
Reason:
= ($290,000) / [(50,000/5) + (180,000/6) + (60,000/4)]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
$40,000
$10,000
$5,000
$20,000$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.For natural resources the depletion base is
the value of the resources to be extracted.
the cost less the restoration value.
cost less any anticipated residual value.
cost plus the value of resources extracted.cost less any anticipated residual value.The gain or loss on disposal of an asset is calculated as
the fair value of the asset less the accumulated depreciation.
consideration received less the fair value of the asset sold.
consideration received less the book value of asset sold.
the cost of the asset less the accumulated depreciation.consideration received less the book value of asset sold.Allocation of the cost of an intangible asset is called
amortization.
accretion.
depreciation.
depletion.amortization.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.
require that assets are purchased at the same time.
require that the assets are located in the same geographic location.
require that all assets are retired at the same time.apply straight-line depreciation to the assets based on average service lives of the assets.Group and composite depreciation commonly is used to
increase reported assets.
decrease total depreciation expense.
reduce costs of record-keeping.
mislead financial statement users.reduce costs of record-keeping.The useful life of an intangible asset may be limited by what type of provisions? (Select all that apply.)
Multiple select question.
regulatory
financial
contractual
legalregulatory
contractual
legalFor assets using the group or composite method of depreciation, the assets will be depreciated over
the economic life of the entity.
the shorter of the economic life or useful life of the asset.
the economic life of the longest-lived asset in the group.
the average service life of assets in the group.the average service life of assets in the group.Which of the following intangible assets are usually considered to have indefinite lives?
Franchises
Trademarks
Copyrights
PatentsTrademarksThe cost of a natural resource less its anticipated residual value is called the ___________ ____________depletion baseWhich items are considered changes in estimates that would be treated on a prospective basis in the current period and future periods? (Select all that apply.)
forgetting to record depreciation expense in the previous period
increasing the residual value of an asset
incorrectly capitalizing an item when it should be expensed
change in useful life of an assetincreasing the residual value of an asset
change in useful life of an assetThe two categories for intangible assets are
intangibles with undefined lives.
intangibles with indefinite lives.
intangibles with finite lives.
intangibles with infinite lives.intangibles with indefinite lives.
intangibles with finite lives.Which of the following accounting changes must be justified in the notes to the financial statements?
Changes in the remaining service life
Changes in depreciation methods
Changes in the estimated residual valueChanges in depreciation methodsThe composite depreciation method is used when assets
are similar in attributes and service lives.
have similar values.
are purchased individually at different times of the year.
are dissimilar and have different services lives.are dissimilar and have different services lives.Which of the following are required when a material error is discovered in a subsequent accounting period that impacts retained earnings? (Select all that apply.)
The cumulative effect of the error is corrected in retained earnings and other account balances are unchanged.
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.
A prior period adjustment is made to the beginning balance of retained earnings.
The error is accounted for on a prospective basis in the current year and future years.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.
A prior period adjustment is made to the beginning balance of retained earnings.If obsolescence were expected to limit the longevity of a protected product, the useful life of a patent might be _________ its legal life.
the same as
more than
less thanless thanWhen an asset has a significant decline in value and is written down, this is called ______.
depletion
amortization
impairment
depreciationimpairmentNo amortization is recorded for
intangible assets with indefinite lives.
intangible assets with finite lives.
intangible assets valued at fair value.
intangible assets used in production.intangible assets with indefinite lives.True or false: When accounting for impairments, the two categories for recognizing and measuring the loss are tangible and intangible assets.
True
FalseFalse
The categories for accounting for impairments are assets to be held and used and assets held for sale.A change in accounting estimate requires a company to account for the change
on a prospective basis in the current year and future years.
as a prior period adjustment.
as an error in the previous periods.
by retroactively restating the financial statements.on a prospective basis in the current year and future years.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
FalseTrueA change in depreciation method is treated as a change in estimate that is achieved by a change in accounting principle, and is accounted for
by restating the previous year's financial statements.
by making a prior period adjustment.
prospectively in the current and future periods.
by making an error correction adjustment in the current year.prospectively in the current and future periods.What are the issues when accounting for impairments? (Select all that apply.)
Whether to recognize the impairment as an extraordinary loss.
How to measure the impairment loss.
When to recognize the impairment.
What duration of time to allocate the impairment to the income statement.How to measure the impairment loss.
When to recognize the impairment.What is the accounting treatment for the discovery of a material error in a previous year?
The error is accounted for on a prospective basis in the current year and future years.
A gain or loss is recognized in the year the error is discovered.
Previous years' financial statements are restated.
Account balances are corrected in the current year with an adjustment made to net income of the period.Previous years' financial statements are restated.Which of the following events would require the investigation of a possible impairment? (Select all that apply.)
An offer to purchase the asset for an amount above the asset's book value.
A significant decrease in market price.
A significant adverse change in how the asset is being used.
An increase in the market demand for the asset.A significant decrease in market price.
A significant adverse change in how the asset is being used.In accounting, the term impairment refers to
an asset's significant decline in value.
cost recovery of an asset for investment purposes.
allocation of an asset over its useful life.
offsetting liabilities against the related assets.an asset's significant decline in value.An impairment occurs when the
book value of the asset is less than the fair value of the asset.
discounted sum of past cash flows is more than the asset's book value.
fair value of the asset is less than the book value of the asset.
undiscounted sum of estimated future cash flows is less than the asset's book value.undiscounted sum of estimated future cash flows is less than the asset's book value.Accounting for impairment of value of assets with finite lives and those with indefinite lives
depends on the remaining life
is the same
differsdiffersAssets held for use that have a significant impairment of value should be
depreciated over one year
reclassified as investments
written down
unaffectedwritten downUnder U.S. GAAP, if a company recognizes an impairment loss,
recovery of the loss is limited to the actual amount of the loss.
later recovery of the impairment loss is prohibited.
recovery of the loss can be made within the next accounting period.
the asset is revalued at fair value at the end of each period.later recovery of the impairment loss is prohibited.For plant, property, and equipment, U.S. GAAP requires the investigation of possible impairment
every 3 years from the date of acquisition of the asset.
annually if the group or composite depreciation method is used.
only if events or changes in circumstances indicate that the asset may not be recoverable.
at the end of each reporting period.only if events or changes in circumstances indicate that the asset may not be recoverable.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 (Select all that apply.)
debit to loss on impairment of $12,000.
debit to accumulated depreciation of $40,000.
credit to assets of $52,000.
debit to assets of $48,000.
credit to assets of $100,000.
credit to accumulated depreciation of $40,000.debit to loss on impairment of $12,000.
debit to accumulated depreciation of $40,000.
credit to assets of $52,000.Which of the following events would require testing for possible impairment? (Select all that apply.)
A significant decrease in market price
An adverse change in the business climate
Higher than expected maintenance costs on the asset
A decline in the asset's physical condition
An offer to purchase the asset above the asset's book valueA significant decrease in market price
An adverse change in the business climate
A decline in the asset's physical conditionIn calculating present value, a traditional approach incorporates what items into the discount rate?
Probabilities and the risk-free interest rate
Expected cash flows
Risk and uncertainty
Risk and rewardRisk and uncertaintyThe measurement of an impairment loss in step 2 is the difference between
the asset's book value and its net present value.
the asset's book value and its fair value.
the asset's fair value and its lower-of-cost-or-market value.
the asset's estimated future cash flows and its fair value.the asset's book value and its fair value.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? (Select all that apply.)
the method used to determine fair value
the facts and circumstances leading to the impairment
the date acquired and the date of the expected disposal
the amount of the loss
the description of the impaired assetthe method used to determine fair value
the facts and circumstances leading to the impairment
the amount of the loss
the description of the impaired assetUnder IFRS reporting, an impairment loss is measured as the difference between the book value and the:
recoverable amount
fair value
net present value
undepreciated valuerecoverable amountIf an impairment loss is recognized for an intangible asset with a finite life, which of the following occurs? (Select all that apply.)
Future impairment losses are prohibited.
A recovery can be recognized up to the initial amount of the impairment
The written-down book value is the new cost basis for future amortization.
Later recovery of the impairment is prohibited.The written-down book value is the new cost basis for future amortization.
Later recovery of the impairment is prohibited.Which assets are required to be tested for impairment annually?
intangible assets with finite lives
intangible assets with indefinite lives
property, plant, and equipmentintangible assets with indefinite livesMarston 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
credit to impairment expense of $12,000.
debit to loss on impairment of $12,000.
debit impairment loss of $40,000.
debit to assets of $48,000.debit to loss on impairment of $12,000.The measurement of an impairment loss for intangible assets with indefinite useful lives is a(n) ____ process.
one-step
three-step
two-stepone-stepWhat item(s) are used to determine the present value of cash flows when the expected cash flow approach is used?
Incremental borrowing rate
Probability weighted cash flow and the risk-free interest rate
Risk and reward
Undiscounted estimates of future cash flowsProbability weighted cash flow and the risk-free interest rateUnder 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
fair value less costs to sell.
fair value.
depreciation expense for the period.
undiscounted expected cash flows.fair value less costs to sell.Which of the following are required disclosures for an impairment loss? (Select all that apply.)
amount of expected amortization in future periods
description of the impaired asset
method used to determine fair value
original cost of the impaired assetdescription of the impaired asset
method used to determine fair valueAssume that the value of indefinite-life intangible assets for which an impairment loss was recognized during the prior year has been recovered. Match the appropriate accounting treatment with the correct accounting standard.
IFRS
U.S. GAAPimpairment losses must be reversed
impairment losses cannot be reversedUnder 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? (Select all that apply.)
An impairment loss is required when the recoverable amount is less than the asset's book value.
The impairment loss is the amount by which fair value is less than book value.
Testing recoverability under IFRS is the same as U.S. GAPP
There is no equivalent recoverability testAn impairment loss is required when the recoverable amount is less than the asset's book value.
There is no equivalent recoverability testWhich of the following assets cannot be directly associated with any specific identifiable right and is not separable from the company as a whole?
Patents
Goodwill
Trademarks
LandGoodwillIntangible assets with indefinite useful lives should be tested for impairment
only if events or changes in circumstances indicate possible impairment.
on the last day of the fiscal year-end.
annually or more frequently if events or changes in circumstances indicate possible impairment.annually or more frequently if events or changes in circumstances indicate possible impairment.An impairment loss for intangible assets with indefinite lives is calculated as the book value less the
net realizable value.
fair value.
net present value.
replacement cost.fair value.An impairment loss related to indefinite-life intangible assets is measured as the difference between book value and another measure. Match the correct measure with the appropriate accounting standard.
U.S. GAAP
IFRSfair value
recoverable amountA(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 unitIdentify the correct treatment of recovered impairment losses relating to indefinite-life intangible assets under IFRS.
They may be reversed
They must be reversed
They cannot be reversedThey must be reversedTrue or false: Assets held for sale are not depreciated or amortized while classified as held for sale.
True
FalseTrue
Reason:
Assets held for sale are not depreciated or amortized while classified as held for saleWhich of the following characteristics are unique to goodwill? (Select all that apply.)
Its cost is not separable from the company as a whole.
Its cost cannot be directly associated with a specific identifiable right.
Impairment of goodwill is determined by comparing book value to the sum of undiscounted cash flows expected from goodwill.Its cost is not separable from the company as a whole.
Its cost cannot be directly associated with a specific identifiable right.Property to be held and used
Indefinite life intangible assets other than goodwill
Assets to be soldWhen events or circumstances indicate book value may not be recoverable
At least annually, or more frequently if indicated
Assets to be sold Drop zone When classified as held for sale correct Toggle Button Unavailable.
When classified as held for saleWhich assets are required to be tested for impairment annually?
intangible assets with indefinite lives
intangible assets with finite lives
property, plant, and equipmentintangible assets with indefinite livesA subsequent expenditure for an asset increases the future benefits of the asset if it (Select all that apply.)
repairs and maintains the asset in working order.
extends the asset's useful life.
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.
increases the quality of the goods or services produced by the asset.
increases the operating efficiency of the asset.The measurement of an impairment loss for intangible assets with indefinite useful lives is a(n) ____ process.
two-step
three-step
one-stepone-stepThe types of expenditures that can occur subsequent to an asset's acquisition are (Select all that apply.)
repairs and maintenance.
intangibles.
improvements.
rearrangements.
goodwill.
additions.repairs and maintenance.
improvements.
rearrangements.
additions.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
net realizable value.
discounted future cash flows.
book value.
net present value.book value.The key factor in classifying items as repairs and maintenance is that
the asset must be a current asset used in the normal course of business.
the invoice must be less than $1,000 for productive assets.
future benefits are not provided beyond those originally anticipated from the asset.future benefits are not provided beyond those originally anticipated from the asset.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.
accumulated depreciation less fair value.
historical cost less fair value.book value over the fair value less costs to sell.Match the measurement to each type of impairment.
Assets to be held and used
Goodwill
Assets to be soldThe excess of book value over the fair value
The excess of book value over implied fair value
The excess of book value over fair value less costs to sellExpenditures for repairs and maintenance should be
capitalized
expensed in the period incurred.
expensed over the useful life of the asset.expensed in the period incurred.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
neutrality.
materiality.
relevance.
objectivity.materiality.Which item qualifies as an addition and should be capitalized?
Performing tasks such as oiling and calibrating to an existing machine.
Replacing the cutting blades on a machine.
Adding a new computer-aided cutting device to an existing machine.Adding a new computer-aided cutting device to an existing machine.Which of the following would be considered "expenditures subsequent to acquisition" for a building? (Select all that apply.)
Real estate fees paid six months after acquisition
Payment of appraisals fees related to purchase of building
Repairing a major roof leak three years after use
Cost of installing solar panels after three months of use of the buildingRepairing a major roof leak three years after use
Cost of installing solar panels after three months of use of the buildingTrue or false: Expenditures that qualify as an addition should be expensed in the period incurred.
True
FalseFalse
Reason:
Additions that involve adding a new major component to an existing asset should be capitalized because future benefits are increased.Which of the following expenditures are classified as repairs and maintenance for a vehicle? (Select all that apply.)
routine oil change
new engine installation
engine tune-uproutine oil change
engine tune-upThe acronym "MACRS" refers to a(n) _____ method that may be used for ______ purposes.
depreciation; financial reporting
amortization; tax
amortization; financial reporting
depreciation; taxdepreciation; taxThe retirement method for recording depreciation expense records depreciation
over the useful life of the asset.
when the assets are disposed of.
when the assets are impaired.when the assets are disposed of.True or false: Repairs and maintenance expenditures should be capitalized in the period incurred.
True
FalseFalse
Reason:
Repairs and maintenance expenditures should be expensed in the period incurred.A new major component that is added to an existing asset is called
maintenance.
an improvement.
a rearrangement.
an addition.an addition.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 longer.
capitalized.
expensed.
depreciated over the remaining useful life of original asset or its own useful life, whichever is shorter.capitalized.
depreciated over the remaining useful life of original asset or its own useful life, whichever is shorter.The acronym MACRS stands for
management accrual cost recognition system.
modified accepted cost replacement system.
modified accelerated cost recovery system.
management accounting cost recovery system.modified accelerated cost recovery system.The retirement depreciation method assumes a __________cost approach in determining depreciation expense at the time the assets are disposed.FIFOWhich item qualifies as an addition and should be capitalized?
Replacing the cutting blades on a machine.
Adding a new computer-aided cutting device to an existing machine.
Performing tasks such as oiling and calibrating to an existing machine.Adding a new computer-aided cutting device to an existing machine.
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