Ch.11 – Test Bank + Answers – Depreciation, Impairment, and - Intermediate Accounting v1 13e | Canada | Test Bank by Donald E. Kieso. DOCX document preview.
CHAPTER 11
DEPRECIATION, IMPAIRMENT, AND DISPOSITION
CHAPTER STUDY OBJECTIVES
1. Understand the importance of depreciation, impairment, and disposition from a business perspective. The economic benefits of property, plant, and equipment are typically consumed as the items are used by the organization. Because the benefits are consumed over multiple periods, companies use depreciation to allocate the benefits of the PP&E to each period as the assets’ capacity is used up. By allocating the cost of property, plant, and equipment over their useful lives, businesses are better able to match the assets’ costs and benefits of the assets to the revenues that they help generate. Companies also need to assess their PP&E each year under IFRS for indications of impairment, and if these indications are present, they should re-estimate how much will be recoverable. Following GAAP should also help companies better understand their businesses.
2. Explain the concept of depreciation and identify the factors to consider when determining depreciation charges. Depreciation is the process of allocating the cost of property, plant, and equipment assets in a systematic and rational manner to the periods that are expected to benefit from their use. The allocation of the cost of intangible capital assets is termed “amortization” and the allocation of the costs of mineral resource assets is termed “depletion.” Four factors involved in determining depreciation expense are (1) recognition of the appropriate asset components, (2) the amount to be depreciated (depreciable amount), (3) estimated useful life, and (4) the pattern and method of depreciation.
3. Identify how depreciation methods are selected; calculate and recognize depreciation using straight-line, diminishing balance, activity, and other methods. The depreciation method chosen should amortize an asset in a pattern and at a rate that corresponds to the benefits received from that asset. The choice often involves the use of professional judgement. Tax reporting, simplicity, perceived economic consequences, and impact on ratios are examples of factors that influence such judgements in practice.
The straight-line method assumes that an asset provides its benefits as a function of time. As such, cost less residual value is divided by the useful life to determine the depreciation expense per period. The decreasing charge method provides for a higher depreciation charge in the early years and lower charges in later periods. For this method, a constant rate (such as double the straight-line rate) is multiplied by the carrying value (cost less accumulated depreciation and accumulated impairment losses) at the start of the period to determine each period’s expense. The main justification for this approach is that the asset provides more benefits in the earlier periods. The activity method assumes that the benefits provided by the asset are a function of use instead of the passage of time. The asset’s life is considered in terms of either the output that it provides or an input measure, such as the number of hours it is used. The depreciation charge per unit of activity (depreciable amount divided by estimated total units of output or input) is calculated and multiplied by the units of activity produced or consumed in a period to determine the depreciation.
4. Explain the accounting issues for depletion of mineral resources. After the depletion base has been established through accounting decisions related to the acquisition, exploration and evaluation, development, and restoration obligations associated with mineral resources, these costs are allocated to the natural resources that are removed from the ground. Depletion is normally calculated using the unit of production method. In this approach, the resource’s cost less residual value, if any, is divided by the number of units that are estimated to be in the resource deposit, to obtain a cost per unit of product. The cost per unit is then multiplied by the number of units withdrawn in the period to calculate the depletion.
5. Explain and apply the accounting procedures for partial periods and a change in depreciation rate. Because all the variables in determining depreciation are estimates—with the exception, perhaps, of an asset’s original cost—it is common for a change in those estimates to result in a change in the depreciation amount. When this occurs, there is no retroactive change and no catch-up adjustment. The change is accounted for in the current in the current and future periods.
6. Explain the issues and apply the accounting standards for capital asset impairment under both IFRS and ASPE. A capital asset is impaired when its carrying amount is not fully recoverable. The cost recovery method (ASPE) defines recoverable as the undiscounted cash flows from the asset’s use and later disposal. If impaired, the asset is written down to its fair value, and this loss cannot be reversed later if the asset’s value recovers. The rational entity model (IFRS) defines recoverable amount as the higher of the asset’s value in use and fair value less costs of disposal. Both these values reflect discounted cash flow amounts. If the recoverable amount subsequently improves, the impairment losses recognized are reversed.
7. Account for derecognition of property, plant, and equipment, and explain and apply the accounting standards for long-lived assets that are held for sale. Assets held for sale are no longer depreciated. They are remeasured to their fair value less costs of disposal at each statement of financial position date. Recoveries in value may be recognized to the extent of previous losses. Under ASPE held-for-sale items of PP&E are separately reported as non-current assets unless they are sold before the financial statements are completed and the proceeds on sale are expected within 12 months from the date of the statement of financial position (or operating cycle, if longer). Under IFRS, most non-current assets that are held for sale meet the criteria for recognition as current assets.
Depreciation continues for PP&E assets until they are classified as held for sale or derecognized. At the date of disposal, all accounts related to the retired asset are removed from the books. Gains and losses from the disposal of PP&E assets are shown on the income statement in income before discontinued operations, unless the conditions for reporting as a discontinued operation are met. For property, plant, and equipment donated to an organization outside the reporting entity, the donation is reported at its fair value with a gain or loss on disposal recognized.
8. Describe the types of disclosures required for property, plant, and equipment, and provide an analysis of investment in capital assets. The type of information required to be disclosed for PP&E is governed by the information needs of users. Because users of private entities’ financial information are often able to seek further specific information from a company, there are fewer required disclosures than for public companies reporting under IFRS. The required disclosures under IFRS include those relating to measurement, changes in account balances and the reasons for the changes, information about how fair values are determined, and many others. The efficiency of use of a company’s investment in assets may be evaluated by calculating and interpreting the asset turnover rate, the profit margin, and the rate of return on assets.
9. Identify differences in accounting between IFRS and ASPE, and what changes are expected in the near future. In most major ways, international and Canadian accounting standards for the depreciation of property, plant, and equipment are similar. Some differences do exist, however, in the extent of componentization for depreciation, the impairment models applied, and the extent of disclosure. The impairment differences relate to how it is determined whether an asset is impaired, how the impairment is measured, and the ability to recognize recoveries in value. No significant changes are expected to these standards in the near future.
10. Calculate capital cost allowance in routine and non-routine situations. “Capital cost allowance” (CCA) is the term used for depreciation when calculating taxable income in income tax returns. The CCA method is similar to the declining-balance method except that rates are specified for asset classes and the amount claimed is based on year-end balances. The Accelerated Investment Incentive (AII) is applied to net additions in the first year until the end of 2023, which means that 150% of the normal rate is permitted. After that, the AII will be phased out during 2024–2027. For an asset class, retirements are accounted for under specific rules that govern the calculation of taxable income. Capital gains occur if the proceeds on disposal are more than the asset’s original cost. When an asset class is eliminated, a terminal loss or recapture of CCA can occur.
Multiple Choice QUESTIONS
d 1. Knowledge of depreciation accounting
c 2. Factors in depreciation accounting
b 3. Definition of componentization
c 4. Asset’s useful life
b 5. Depreciation commencement or continuation
a 6. Residual vs. salvage value
a 7. Residual value
c 8. Graphic depiction of straight-line and declining-balance methods
b 9. Disadvantage of using straight-line method
d 10. Depreciation as decreasing expense
d 11. Units of production depreciation
a 12. Units of production depreciation
b 13. Time-based depreciation
d 14. Knowledge of declining-balance method
c 15. Effect of accelerated depreciation on the income statement
c 16. Componentization of assets
c 17. Calculate depreciation using double-declining-balance
b 18. Calculate depreciation using double-declining-balance
b 19. Double-declining-balance method
d 20. Calculate book value of asset
c 21. Calculate depreciation using straight-line
a 22. Calculate acquisition cost from straight-line depreciation
d 23. Calculate acquisition cost from units of production
d 24. Calculate depreciation expense
d 25. Calculate depreciation expense using double-declining-balance
c 26. Calculate accumulated depreciation using units of production
b 27. Calculate depreciation using double-declining-balance
b 28. Calculate accumulated depreciation using straight-line
a 29. Calculate depreciation using double-declining-balance
b 30 Calculate depreciation using double-declining-balance
c 31. Calculate accumulated depreciation using double-declining-balance
d 32. Calculate depreciation using double-declining-balance
b 33. Calculate depreciation using units of production
a 34. Classification of depletion expense
d 35. Depletion expense method
b 36. Definition of liquidating dividend
c 37. Calculate units of production depletion expense
c 38. Calculate depletion expense
c 39. Units of production depletion expense
b 40. Definition of depletion
b 41. Calculating a liquidating dividend
c 42. Revision of depreciation
a 43. Disclosure of changes in depreciation
Answer No. Description
d 44. Calculate revised depreciation expense
a 45. Calculate revised depreciation expense after major overhaul
a 46. Calculate revised depreciation
b 47. Calculate loss on disposal
a 48. Calculate loss on disposal
c 49. Revision of estimates
c 50. ASPE requirements for impairment
b 51. IFRS requirements for impairment
d 52. Indicators of asset impairment
a 53. Cost recovery impairment model
d 54. Rational entity impairment model
b 55. Definition of cash-generating unit (CGU)
a 56. Journal entry for impairment loss under ASPE
b 57. Calculate recoverable amount
d 58. Proper accounting treatment for impairment loss
b 59. Rationale entity model – impairment loss
a 60. Recovery impairment model – impairment loss
d 61. Assets held for sale
b 62. Discontinuation of depreciation
a 63. Loss on disposal of asset
b 64. Accounting treatment for gain under involuntary conversion
a 65. Depreciation on asset held for sale
b 66. Fair value adjustment on equipment held for sale
d 67. Calculate depreciation expense from change in contra asset account
b 68. Calculate depreciation expense from change in contra asset account
c 69. Calculate gain for held for sale assets
c 70. Calculate gain on disposal
c 71. Gain on disposal
d 72. Derecognizing held for sale assets
d 73. Depreciation methods
b 74. Asset turnover ratio
c 75. Rate of return on assets
c 76. Calculate asset turnover ratio
b 77. Calculate rate of return on assets
b 78. Calculate asset turnover ratio
b 79. Calculate profit margin.
c 80. Calculate return on assets
d 81. Effect of depreciation on the financial statements
c 82. Disclosures related to PP&E
c *83. Objectives of CCA method
d *84. Factors to consider for CCA
a *85. Calculate CCA for the year
b *86. Calculate CCA for the year
d *87. Calculate recapture or terminal loss on disposal
b *88. Calculate the difference between CCA and depreciation
*This topic is dealt with in an Appendix to the chapter.
Item Description
E11-89 Depreciation as a cost allocation
E11-90 Componentization and depreciation of PP&E assets
E11-91 Accounting for depreciation ASPE vs. IFRSE
E11-92 True or false?
*E11-93 Calculate depreciation and CCA
*E11-94 Calculate depreciation and CCA
E11-95 Asset depreciation and disposition
E11-96 Calculate depletion expense
E11-97 Liquidating dividends
E11-98 Revising depreciation
E11-99 Rational entity impairment model
E11-100 Impairment
E11-101 Held for sale assets and depreciation
PROBLEMS
Item Description
*P11-102 Calculate depreciation and CCA
P11-103 Calculating and recording depletion
P11-104 Cost recovery impairment model, revision of depreciation
P11-105 Differences between the rational entity versus cost recovery methods
P11-106 Loss on impairment
P11-107 Impairment losses – cash-generating units rational entity model
P11-108 Impairment losses – cash-generating units cost recovery model
P11-109 Calculation of ratios
*This topic is dealt with in an Appendix to the chapter
MULTIPLE CHOICE QUESTIONS
1. Which of the following is INCORRECT regarding depreciation?
a) It is not a matter of valuation.
b) It is part of the matching of revenues and expenses.
c) It is a means of cost allocation.
d) It is an attempt to reflect the fair market values of the related assets.
Difficulty: Easy
Learning Objective: Understand the importance of depreciation, impairment, and disposition from a business perspective.
Section Reference: The Importance of Depreciation, Impairment, and Disposition from a Business Perspective
CPA: Financial Reporting
Bloomcode: Knowledge
AACSB: Analytic
2. Factors to consider in the depreciation process do NOT include
a) the asset’s depreciable amount.
b) the period over which to depreciate the asset.
c) the asset’s fair market value.
d) which asset components should be depreciated separately.
Learning Objective: Explain the concept of depreciation and identify the factors to consider when determining depreciation charges.
Section Reference: Factors Considered in the Depreciation Process
CPA: Financial Reporting
Bloomcode: Knowledge
AACSB: Analytic
3. Deciding which PP&E components to depreciate separately is called
a) separate depreciation.
b) componentization.
c) group depreciation.
d) individual asset depreciation.
Difficulty: Easy
Learning Objective: Explain the concept of depreciation and identify the factors to consider when determining depreciation charges.
Section Reference: Factors Considered in the Depreciation Process
CPA: Financial Reporting
Bloomcode: Knowledge
AACSB: Analytic
4. An asset’s useful life
a) remains unchanged once it has been determined.
b) is the same as its physical life.
c) is affected by physical and economic factors.
d) is not affected by physical and economic factors.
Difficulty: Easy
Learning Objective: Explain the concept of depreciation and identify the factors to consider when determining depreciation charges.
Section Reference: Factors Considered in the Depreciation Process
CPA: Financial Reporting
Bloomcode: Comprehension
AACSB: Analytic
5. Depreciation commences or continues when
a) the asset has been paid for.
b) the asset is available for use.
c) the asset’s fair value can be recovered.
d) the asset is taken out of service.
Difficulty: Easy
Learning Objective: Explain the concept of depreciation and identify the factors to consider when determining depreciation charges.
Section Reference: Factors Considered in the Depreciation Process
CPA: Financial Reporting
Bloomcode: Knowledge
AACSB: Analytic
6. Sage Corp is a publicly traded company that has just purchased a new piece of equipment for its production process. The equipment costs $50,000 with an $8,000 residual value, an estimated useful life of 7 years and an expected life of 10 years with a $2,000 salvage value. Assuming that Sage has a December 31 year end and the equipment was purchased on January 1, how much depreciation expense should the company record at the end of year one? The company uses the straight-line method.
a) $6,000
b) $4,800
c) $5,000
d) $4,200
Difficulty: Medium
Learning Objective: Explain the concept of depreciation and identify the factors to consider when determining depreciation charges.
Section Reference: Factors Considered in the Depreciation Process
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic
Feedback: ($50,000 – $8,000)/7 years =$6,000
7. Residual value is
a) the estimate of an asset’s net realizable value at the end of its useful life.
b) the estimate of an asset’s net realizable value at the end of its legal life.
c) the estimate of an asset’s net realizable value at the end of its physical life.
d) equal to salvage value.
Difficulty: Easy
Learning Objective: Explain the concept of depreciation and identify the factors to consider when determining depreciation charges.
Section Reference: Factors Considered in the Depreciation Process
CPA: Financial Reporting
Bloomcode: Knowledge
AACSB: Analytic
8. A graph is set up with "yearly depreciation expense" on the vertical axis and "time" on the horizontal axis. Assuming linear relationships, how would the graphs for straight-line and declining-balance depreciation, respectively, be drawn?
a) vertically and sloping down to the right
b) vertically and sloping up to the right
c) horizontally and sloping down to the right
d) horizontally and sloping up to the right
Difficulty: Easy
Learning Objective: Identify how depreciation methods are selected; calculate and recognize depreciation using straight-line, diminishing balance, activity, and other methods.
Section Reference: Depreciation—Methods of Allocation and Calculation
CPA: Financial Reporting
Bloomcode: Comprehension
AACSB: Analytic
9. A principal objection to the straight-line method of depreciation is that it
a) provides for the declining productivity of an aging asset.
b) ignores variations in the rate of asset use.
c) tends to result in a constant rate of return on a diminishing investment base.
d) gives smaller periodic write-offs than decreasing charge methods.
Difficulty: Easy
Learning Objective: Identify how depreciation methods are selected; calculate and recognize depreciation using straight-line, diminishing balance, activity, and other methods.
Section Reference: Depreciation—Methods of Allocation and Calculation
CPA: Financial Reporting
Bloomcode: Comprehension
AACSB: Analytic
10. For income statement purposes, depreciation is a decreasing expense if the depreciation method used is
a) units of production.
b) straight-line.
c) increasing charge.
d) declining-balance.
Difficulty: Easy
Learning Objective: Identify how depreciation methods are selected; calculate and recognize depreciation using straight-line, diminishing balance, activity, and other methods.
Section Reference: Depreciation—Methods of Allocation and Calculation
CPA: Financial Reporting
Bloomcode: Comprehension
AACSB: Analytic
11. If a company uses the units of production method for calculating depreciation on its factory machinery, the credit to accumulated depreciation from period to period during the life of the firm will
a) be constant.
b) vary with unit sales.
c) vary with sales revenue.
d) vary with production.
Difficulty: Easy
Learning Objective: Identify how depreciation methods are selected; calculate and recognize depreciation using straight-line, diminishing balance, activity, and other methods.
Section Reference: Depreciation—Methods of Allocation and Calculation
CPA: Financial Reporting
Bloomcode: Comprehension
AACSB: Analytic
12. When the unit of production method of depreciation is used, which of the following best describes depreciation expense?
a) Depreciation expense will vary directly with output.
b) Depreciation expense will vary directly with sales.
c) Depreciation rate per unit will vary directly with output.
d) Depreciation rate per unit will vary directly with sales.
Difficulty: Easy
Learning Objective: Identify how depreciation methods are selected; calculate and recognize depreciation using straight-line, diminishing balance, activity, and other methods.
Section Reference: Depreciation—Methods of Allocation and Calculation
CPA: Financial Reporting
Bloomcode: Comprehension
AACSB: Analytic
13. Which of the following is NOT a time-based depreciation method?
a) straight-line
b) units of production
c) double-declining balance
d) any diminishing balance method
Difficulty: Easy
Learning Objective: Identify how depreciation methods are selected; calculate and recognize depreciation using straight-line, diminishing balance, activity, and other methods.
Section Reference: Depreciation—Methods of Allocation and Calculation
CPA: Financial Reporting
Bloomcode: Knowledge
AACSB: Analytic
14. Which of the following does NOT apply to the declining-balance method?
a) It results in a decreasing charge to depreciation expense.
b) Residual value is not deducted in calculating the depreciation base.
c) The book value should not be reduced below residual value.
d) In certain circumstances, the book value may be reduced below residual value.
Difficulty: Easy
Learning Objective: Identify how depreciation methods are selected; calculate and recognize depreciation using straight-line, diminishing balance, activity, and other methods.
Section Reference: Depreciation—Methods of Allocation and Calculation
CPA: Financial Reporting
Bloomcode: Knowledge
AACSB: Analytic
15. If income tax effects are ignored, accelerated depreciation methods
a) provide funds for the earlier replacement of assets.
b) increase funds provided by operations.
c) tend to offset the effect of steadily increasing repair and maintenance costs on the income statement.
d) tend to decrease the current ratio.
Difficulty: Easy
Learning Objective: Identify how depreciation methods are selected; calculate and recognize depreciation using straight-line, diminishing balance, activity, and other methods.
Section Reference: Depreciation—Methods of Allocation and Calculation
CPA: Financial Reporting
Bloomcode: Comprehension
AACSB: Analytic
16. Consider an asset that was separated into its main components (A, B, and C). The $1,200,000 purchase price was allocated to these components in equal proportions. The useful lives are 12, 4, and 7 years for components A, B, and C respectively. Components A and B are not expected to have any residual value, but Component C is expected to have a residual value of $18,000. Assuming straight-line depreciation, total annual depreciation expense, to the nearest dollar, relating to these assets is
a) $100,100.
b) $125,120.
c) $187,905.
d) $190,476.
Difficulty: Medium
Learning Objective: Identify how depreciation methods are selected; calculate and recognize depreciation using straight-line, diminishing balance, activity, and other methods.
Section Reference: Depreciation—Methods of Allocation and Calculation
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic
Feedback: $1,200,000 ÷ 3 = $400,000
($400,000 ÷ 12) + ($400,000 ÷ 4) + ($400,000–$18,000) ÷ 7 = $187,905
17. Cassidy Corporation purchased factory equipment that was installed and put into service on January 2, 2022, at a total cost of $55,000. Residual value was estimated at $3,000. The equipment is being depreciated over four years using the double-declining-balance method. For the calendar year 2023, Cassidy should record depreciation expense on this equipment of
a) $27,500.
b) $52,000.
c) $13,750.
d) $13,000.
Difficulty: Medium
Learning Objective: Identify how depreciation methods are selected; calculate and recognize depreciation using straight-line, diminishing balance, activity, and other methods.
Section Reference: Depreciation—Methods of Allocation and Calculation
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic
Feedback: [$55,000 – ($55,000 x 2 ÷ 4)] × 2 ÷ 4 = $13,750
18. Ella Inc. purchased machinery that was installed and ready for use on January 3, 2022, at a total cost of $460,000. Residual value was estimated at $60,000. The machinery will be depreciated over five years using the double-declining-balance method. For the calendar year 2023, Ella should record depreciation expense on this machinery of
a) $96,000.
b) $110,400.
c) $120,000.
d) $184,000.
Difficulty: Medium
Learning Objective: Identify how depreciation methods are selected; calculate and recognize depreciation using straight-line, diminishing balance, activity, and other methods.
Section Reference: Depreciation—Methods of Allocation and Calculation
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic
Feedback: [$460,000 – ($460,000 × 2 ÷ 5)] × 2 ÷ 5 = $110,400
19. A machine has a cost of $24,000, a residual value of $6,000, and an estimated three-year life. If depreciation in the second year was $2,000, which depreciation method was used?
a) straight-line
b) double-declining-balance
c) units of production
d) cannot tell from information given
Difficulty: Medium
Learning Objective: Identify how depreciation methods are selected; calculate and recognize depreciation using straight-line, diminishing balance, activity, and other methods.
Section Reference: Depreciation—Methods of Allocation and Calculation
CPA: Financial Reporting
Bloomcode: Analysis
AACSB: Analytic
Feedback: $24,000 × 2 ÷ 3 = $16,000; $24,000 – $16,000 = Carrying value of $8,000;
$8,000 × 2 ÷ 3 = $5,333, but only need $2,000 to arrive at residual value of $6,000
20. On January 1, 2022, Incredible Corp. purchased a new machine for $350,000. The new machine has an estimated useful life of eight years and the residual value was estimated to be $25,000. Depreciation was calculated using the double-declining-balance method. To the nearest dollar, what amount should be shown in Incredible’s balance sheet at December 31, 2023, net of accumulated depreciation, for this machine?
a) $153,125
b) $175,000
c) $201,563
d) $196,875
Difficulty: Medium
Learning Objective: Identify how depreciation methods are selected; calculate and recognize depreciation using the straight-line, diminishing balance, activity and other methods.
Section Reference: Depreciation—Methods of Allocation and Calculation
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic
Feedback: $350,000 × 2 ÷ 8 = $87,500; ($350,000 – $87,500) × 2 ÷ 8 = $65,625
$350,000 – ($87,500 + $65,625) = $196,875
21. On April 1, 2018, Ninja Ltd. purchased equipment for $120,000. The equipment was estimated to have a residual value of $15,000 and is being depreciated over ten years using the straight-line method. What should be the depreciation expense for this equipment for the year ended December 31, 2023?
a) $7,875
b) $8,000
c) $10,500
d) $12,000
Difficulty: Medium
Learning Objective: Identify how depreciation methods are selected; calculate and recognize depreciation using straight-line, diminishing balance, activity, and other methods.
Section Reference: Depreciation—Methods of Allocation and Calculation
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic
Feedback: ($120,000 – $15,000) ÷ 10 = $10,500
22. On January 3, 2021, City Corp. purchased machinery. The machinery has an estimated useful life of eight years and an estimated residual value of $67,500. City uses straight-line depreciation for all its machinery, and recorded $115,500 depreciation expense for 2023. The acquisition cost of the machinery was
a) $991,500.
b) $924,000.
c) $856,500.
d) $655,500.
Difficulty: Medium
Learning Objective: Identify how depreciation methods are selected; calculate and recognize depreciation using straight-line, diminishing balance, activity, and other methods.
Section Reference: Depreciation—Methods of Allocation and Calculation
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic
Feedback: Original cost: ($115,500 × 8) + $67,500 residual value = $991,500
23. On January 2, 2022, Urban Ltd. purchased equipment to be used in its manufacturing operations. The equipment has an estimated useful life of ten years, and an estimated residual value of $33,000. It was also estimated that the equipment would be used a total of 63,000 hours over its useful life. The depreciation expense for this equipment was $156,000 for calendar 2023, using the units of production method. The machine was used for 7,500 hours in 2023. The acquisition cost of the equipment was
a) $1,587,600.
b) $1,527,000.
c) $1,066,200.
d) $1,343,400.
Difficulty: Medium
Learning Objective Identify how depreciation methods are selected; calculate and recognize depreciation using straight-line, diminishing balance, activity, and other methods.
Section Reference: Depreciation—Methods of Allocation and Calculation
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic
Feedback: UOP rate: $156,000 ÷ 7,500 hours = $20.80; ($20.80 x 63,000 hours = $1,310,400 (depreciable amount)) + $33,000 residual = $1,343,400 original cost
24. Consider an asset for which the following information is available:
Carrying value at Dec 31, 2023 before depreciation $9,000
Calculated depreciation for 2023 $2,400
Original cost $24,000
Residual value $8,500
Remaining useful life 3 years
The depreciation expense for 2023 is
a) $3,100.
b) $3,000.
c) $2,400.
d) $500.
Difficulty: Medium
Learning Objective: Identify how depreciation methods are selected; calculate and recognize depreciation using straight-line, diminishing balance, activity, and other methods.
Section Reference: Depreciation—Methods of Allocation and Calculation
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic
Feedback: $9,000 – $8,500 = $500 (maximum)
25. Swallow Ltd. takes a full year's depreciation expense in the year of an asset's acquisition and no depreciation expense in the year of disposition. Data relating to one of Swallow’s pieces of equipment at December 31, 2022, are as follows:
Acquisition year 2020
Cost $280,000
Residual value $40,000
Accumulated depreciation $219,520
Estimated useful life 5 years
Using the same depreciation method that was used in 2020, 2021, and 2022, how much depreciation expense should be recorded in 2023 for this asset?
a) $60,480
b) $48,000
c) $32,000
d) $20,480
Difficulty: Medium
Learning Objective: Identify how depreciation methods are selected; calculate and recognize depreciation using straight-line, diminishing balance, activity, and other methods.
Section Reference: Depreciation—Methods of Allocation and Calculation
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic
Feedback: $280,000 × .6 × .6 × .6 = $60,480
$60,480 – $40,000 = $20,480 maximum
26. On March 24, 2022, Dagger Ltd. purchased a new machine for $50,000. This machine has an eight-year estimated useful life, an estimated residual value of $2,500, and is expected to produce 95,000 units over its useful life. The machine produced 5,500 units in 2022 and 6,500 units in 2023. Using the unit of production method, to the nearest dollar, the related Accumulated Depreciation account on the adjusted trial balance at December 31, 2023 would be
a) $6,500.
b) $6,316.
c) $6,000.
d) $3,250.
Difficulty: Medium
Learning Objective: Identify how depreciation methods are selected; calculate and recognize depreciation using straight-line, diminishing balance, activity, and other methods.
Section Reference: Depreciation—Methods of Allocation and Calculation
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic
Feedback: UOP rate: ($50,000 – $2,500) ÷ 95,000 = $0.50 per unit;
Accumulated depreciation to end 2023 = $0.50 x ((5,500 + 6,500) = $6,000
27. On July 1, 2022, Boots Corporation purchased factory equipment for $200,000. Residual value was estimated to be $5,000. The equipment will be depreciated over ten years using the double-declining-balance method. Counting the year of acquisition as one-half year, Boots should record depreciation expense on this equipment for the calendar year 2023 of
a) $36,100.
b) $36,000.
c) $180,000.
d) $16,000.
Difficulty: Medium
Learning Objective: Identify how depreciation methods are selected; calculate and recognize depreciation using straight-line, diminishing balance, activity, and other methods.
Section Reference: Depreciation—Methods of Allocation and Calculation
Learning Objective: Explain and apply the accounting procedures for partial periods and a change in depreciation rate.
Section Reference: Other Depreciation Issues
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic
Feedback: [$200,000 – ($200,000 × 2 ÷ 10 x 50%)] × 2 ÷ 10 = $36,000
28. On April 10, 2022, Rio Corp. purchased machinery for $180,000. Residual value was estimated at $4,000. The machinery will be depreciated over ten years using the straight-line method. If depreciation is calculated on the basis of the nearest full month, the related Accumulated Depreciation account at December 31, 2023 will be
a) $31,500.
b) $30,800.
c) $30,000.
d) $29,333.
Difficulty: Medium
Learning Objective: Identify how depreciation methods are selected; calculate and recognize depreciation using straight-line, diminishing balance, activity, and other methods.
Section Reference: Depreciation—Methods of Allocation and Calculation
Learning Objective: Explain and apply the accounting procedures for partial periods and a change in depreciation rate.
Section Reference: Other Depreciation Issues
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic
Feedback: ($180,000 – $4,000) ÷ 10 x 1.75 years = $30,800
29. On September 25, 2022, Panther Corp. purchased machinery for $336,000. Residual value was estimated to be $15,000. The machinery will be depreciated over eight years using the double-declining-balance method. If depreciation is calculated on the basis of the nearest full month, Panther should record depreciation expense for calendar 2023 on this machinery of
a) $78,750.
b) $63,000.
c) $60,000.
d) $42,000.
Difficulty: Medium
Learning Objective: Identify how depreciation methods are selected; calculate and recognize depreciation using straight-line, diminishing balance, activity, and other methods.
Section Reference: Depreciation—Methods of Allocation and Calculation
Learning Objective: Explain and apply the accounting procedures for partial periods and a change in depreciation rate.
Section Reference: Other Depreciation Issues
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic
Feedback: $336,000 × 2 ÷ 8 × 3 ÷ 12 = $21,000; ($336,000 – $21,000) × 2 ÷ 8 = $78,750
30. On July 1, 2023, Eland Corp. purchased a machine for $375,000. The machine has an estimated useful life of five years and a residual value of $50,000. The machine is being depreciated using the double-declining-balance method. For the year ended December 31, 2023, Eland should record depreciation expense on this machine of
a) $65,000.
b) $75,000.
c) $130,000.
d) $150,000.
Difficulty: Medium
Learning Objective: Identify how depreciation methods are selected; calculate and recognize depreciation using straight-line, diminishing balance, activity, and other methods.
Section Reference: Depreciation—Methods of Allocation and Calculation
Learning Objective: Explain and apply the accounting procedures for partial periods and a change in depreciation rate.
Section Reference: Other Depreciation Issues
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic
Feedback: $375,000 x 2 ÷ 5 x 1 ÷ 2 = $75,000
31. On April 1, 2021, Chickadee Corp. purchased new machinery for $400,000. The machinery has an estimated useful life of ten years, a residual value of $20,000, and depreciation is calculated using the double-declining-balance method. Chickadee’s year end is December 31. The accumulated depreciation on this machinery at March 31, 2023, should be
a) $102,500.
b) $131,200.
c) $141,600.
d) $182,400.
Difficulty: Medium
Learning Objective: Identify how depreciation methods are selected; calculate and recognize depreciation using straight-line, diminishing balance, activity, and other methods.
Section Reference: Depreciation—Methods of Allocation and Calculation
Learning Objective: Explain and apply the accounting procedures for partial periods and a change in depreciation rate.
Section Reference: Other Depreciation Issues
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic
Feedback: 2022 ($400,000 x 2 ÷ 10 x 9 ÷ 12) = $60,000
2022 ($400,000 – $60,000) x 2 ÷ 10 = $68,000
2023 ($400,000 – $60,000 – $68,000) x 2 ÷ 10 x 3 ÷ 12 = $13,600
Acc Dep = $60,000 + $68,000 + $13,600 = $141,600
32. Mercato Corp. purchased machinery for $135,000 on June 30, 2023. It is estimated that it has a useful life of 8 years, a residual value of $15,000, and total production of 200,000 units. During 2023, this machinery produced 22,000 units. The Corporation has a December 31 year end. Using the double-declining-balance method, the 2023 depreciation expense will be (round to the nearest whole number)
a) $19,688.
b) $17,500.
c) $15,000.
d) $16,875.
Difficulty: Medium
Learning Objective: Identify how depreciation methods are selected; calculate and recognize depreciation using straight-line, diminishing balance, activity, and other methods.
Section Reference: Depreciation—Methods of Allocation and Calculation
Learning Objective: Explain and apply the accounting procedures for partial periods and a change in depreciation rate.
Section Reference: Other Depreciation Issues
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic
Feedback: $135,000 x 1 ÷ 8 x 2 x 1 ÷ 2 = $16,875
33. Mercato Corp. purchased equipment for $135,000 on January 1, 2023. It is estimated that it has a useful life of 10 years, a residual value of $15,000, and total production of 200,000 units. During 2023, this machinery produced 22,000 units. The Corporation has a December 31 year end. Using the units of production depreciation method, the 2023 depreciation expense will be
a) $12,000
b) $13,200
c) $24,000
d) $27,000
Difficulty: Medium
Learning Objective: Identify how depreciation methods are selected; calculate and recognize depreciation using straight-line, diminishing balance, activity, and other methods.
Section Reference: Depreciation—Methods of Allocation and Calculation
Learning Objective: Explain and apply the accounting procedures for partial periods and a change in depreciation rate.
Section Reference: Other Depreciation Issues
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic
Feedback: ($135,000 – $15,000) ÷ 200,000 x 22,000 = $13,200
34. Depletion expense
a) is usually part of cost of goods sold.
b) includes tangible equipment costs in the depletion base.
c) excludes intangible development costs from the depletion base.
d) excludes restoration costs from the depletion base.
Difficulty: Easy
Learning Objective: Explain the accounting issues for depletion of mineral resources.
Section Reference: Depletion of Mineral Resources
CPA: Financial Reporting
Bloomcode: Knowledge
AACSB: Analytic
35. The most common method of recording depletion for accounting purposes is the
a) single-declining method.
b) double-declining method.
c) straight-line method.
d) units of production method.
Difficulty: Easy
Learning Objective: Explain the accounting issues for depletion of mineral resources.
Section Reference: Depletion of Mineral Resources
CPA: Financial Reporting
Bloomcode: Knowledge
AACSB: Analytic
36. When all or a portion of shareholders’ capital investments are returned to them, this is called a(n)
a) return dividend.
b) liquidating dividend.
c) stock dividend.
d) investment dividend.
Difficulty: Easy
Learning Objective: Explain the accounting issues for depletion of mineral resources.
Section Reference: Depletion of Mineral Resources
CPA: Financial Reporting
Bloomcode: Knowledge
AACSB: Analytic
37. In January 2023, Camel Corporation purchased a mine for $2,550,000 with removable ore estimated by geological surveys at 1 million tonnes. The property has an estimated (residual) value of $150,000 after the ore has been extracted. The company incurred $750,000 in development costs preparing the mine for production. During 2023, 250,000 tonnes were removed, and 200,000 tonnes were sold. What is the amount of depletion that Camel should record for 2023?
a) $480,000
b) $600,000
c) $787,500
d) $840,000
Difficulty: Medium
Learning Objective: Explain the accounting issues for depletion of mineral resources.
Section Reference: Depletion of Mineral Resources
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic
Feedback: [($2,550,000 – $150,000 + $750,000) ÷ 1,000,000] × 250,000 = $787,500
38. In 2023, Elk Corporation purchased a mine for $200 million (of this, $30 million was applicable to the land). An independent evaluation estimated the mine's reserves at 7.5 million tonnes. During 2023, Elk extracted 900,000 tonnes. Elk’s depletion expense for 2023 is
a) $200,000.
b) $18,000,000.
c) $20,400,000.
d) $24,000,000.
Difficulty: Medium
Learning Objective: Explain the accounting issues for depletion of mineral resources.
Section Reference: Depletion of Mineral Resources
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic
Feedback: [($200,000,000 – $30,000,000) ÷ 7,500,000] x 900,000 = $20,400,000
39. Roan Corp. acquired a tract of land containing an extractable natural resource. The company is required by the government 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 6,200,000 million tonnes, and that the land will have a value of $1,200,000 after restoration. Relevant cost information follows:
Land $8,000,000
Estimated restoration costs 2,100,000
If Roan maintains no inventories, what is the depletion charge per tonne of extracted resource?
a) $1.00
b) $1.32
c) $1.44
d) $1.63
Difficulty: Medium
Learning Objective: Explain the accounting issues for depletion of mineral resources.
Section Reference: Depletion of Mineral Resources
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic
Feedback: ($8,000,000 + $2,100,000 – $1,200,000) ÷ 6,200,000 = $1.44
40. The term “depletion” relates to
a) the allocation of costs relating to current assets.
b) the allocation of costs of natural resources.
c) the allocation of costs of property, plant, and equipment.
d) the allocation of costs of intangible capital assets.
Difficulty: Easy
Learning Objective: Explain the accounting issues for depletion of mineral resources.
Section Reference: Depletion of Mineral Resources
CPA: Financial Reporting
Bloomcode: Knowledge
AACSB: Analytic
41. Calahan Corp pays a $3 per share dividend on 1,500,000 outstanding shares. The company currently has $1,850,000 in retained earnings and $5,600,000 in common shares. What is the return of capital per share? (Round to 2 decimal places)
a) $1.23
b) $1.77
c) $3.00
d) $3.73
Difficulty: Medium
Learning Objective: Explain the accounting issues for depletion of mineral resources.
Section Reference: Depletion of Mineral Resources
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic
Feedback: [($3 x 1,500,000) = $4,500,000] – $1,850,000 = $2,650,000; $2,650,000 ÷ 1,500,000 = $1.77
42. On January 1, 2018, Rabbit Corp. acquired machinery that it depreciated using the straight-line method with an estimated useful life of 15 years and no residual value. On January 1, 2023, Rabbit estimated that the remaining life of this machinery was six years with no residual value. This change should be accounted for
a) as a prior period adjustment.
b) as the cumulative effect of a change in accounting principle in 2023.
c) by setting future annual depreciation equal to one-sixth of the book value on January 1, 2023.
d) by continuing to depreciate the machinery over the original 15-year life.
Difficulty: Medium
Learning Objective: Explain and apply the accounting procedures for partial periods and a change in depreciation rate.
Section Reference: Other Depreciation Issues
CPA: Financial Reporting
Bloomcode: Analysis
AACSB: Analytic
43. Changes in the depreciation rate are accounted for as a(n)
a) adjustment to current and future periods.
b) adjustment to the current period only.
c) adjustment to future periods only.
d) catch-up adjustment to prior periods.
Difficulty: Easy
Learning Objective: Explain and apply the accounting procedures for partial periods and a change in depreciation rate.
Section Reference: Other Depreciation Issues
CPA: Financial Reporting
Bloomcode: Knowledge
AACSB: Analytic
44. On July 1, 2020, Puppy Corp. purchased a machine for $500,000. The machine was estimated to have a useful life of ten years with an estimated residual value of $28,000. During 2023, it became apparent that the machine would become uneconomical after December 31, 2024, and that the machine would have no salvage value. Accumulated depreciation on this machine at December 31, 2022, was $118,000, using the straight-line method. The depreciation expense for 2023 should be
a) $95,500.
b) $82,000.
c) $76,400.
d) $191,000.
Difficulty: Medium
Learning Objective: Explain and apply the accounting procedures for partial periods and a change in depreciation rate.
Section Reference: Other Depreciation Issues
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic
Feedback: ($500,000 – $118,000) ÷ 2 = $191,000
45. On January 3, 2016, Hippo Corp. purchased a machine for $600,000. The machine was being depreciated using the straight-line method over an estimated useful life of ten years, with no residual value. At the beginning of 2023, the company paid $150,000 to overhaul the machine. As a result of this improvement, the company estimated that the useful life of the machine would be extended an additional five years (15 years total). The depreciation expense for 2023 should be
a) $41,250.
b) $50,000.
c) $60,000.
d) $66,000.
Difficulty: Medium
Learning Objective: Explain and apply the accounting procedures for partial periods and a change in depreciation rate.
Section Reference: Other Depreciation Issues
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic
Feedback: Accumulated depreciation to end of 2022 = ($600,000 ÷ 10) × 7 = $420,000
Carrying value: $600,000 – $420,000 + $150,000 = $330,000; $330,000 ÷ 8 = $41,250
46. On January 1, 2018, Rhino Corp. purchased a machine for $850,000. The machine was being depreciated using the straight-line method over an estimated useful life of eight years, with a $50,000 residual value. At the beginning of 2023, the company determined that the machine’s useful life was underestimated, it should have been 10 years; however, this would result in $0 residual value. The depreciation expense for 2023 should be
a) $70,000.
b) $80,000.
c) $63,750.
d) $85,000.
Difficulty: Medium
Learning Objective: Explain and apply the accounting procedures for partial periods and a change in depreciation rate.
Section Reference: Other Depreciation Issues
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic
Feedback: Accumulated depreciation to the end of 2022 = ($850,000 – $50,000) ÷ 8) × 5 = $500,000
Carrying value: $850,000 – $500,000 = $350,000; $350,000 ÷ 5 = $70,000
47. On May 1, 2014, Platypus Ltd. purchased a new machine for $132,000. At the time of acquisition, the machine was estimated to have a useful life of ten years and an estimated residual value of $6,000. The company has recorded monthly depreciation using the straight-line method. On March 1, 2023, the machine was sold for $18,000. The loss to be recognized from the sale is
a) $0.
b) $2,700.
c) $6,000.
d) $8,700.
Difficulty: Medium
Learning Objective: Explain and apply the accounting procedures for partial periods and a change in depreciation rate.
Section Reference: Other Depreciation Issues
Learning Objective: Account for derecognition of property, plant, and equipment, and explain and apply the accounting standards for long-lived assets that are held for sale.
Section Reference: Held for Sale and Derecognition
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic
Feedback: ($132,000 – $6,000) ÷ (10 × 12) = $1,050 per month
$18,000 – [$132,000 – ($1,050 × 106 mo.)] = $2,700 loss
48. On June 1, 2021, Morgan Manufacturing acquired a machine for $100,000 with an estimated useful life of five years and an estimated residual value of $10,000. The company uses the double-declining-method of depreciation and takes a full year’s depreciation in the year of acquisition and none in the year of disposition. If the machine were disposed of for $16,000 on May 1, 2023, the loss on disposal would be
a) $20,000.
b) $26,400.
c) $24,000.
d) $36,000.
Difficulty: Medium
Learning Objective: Explain and apply the accounting procedures for partial periods and a change in depreciation rate.
Section Reference: Other Depreciation Issues
Learning Objective: Account for derecognition of property, plant, and equipment, and explain and apply the accounting standards for long-lived assets that are held for sale.
Section Reference: Held for Sale and Derecognition
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic
Feedback: 2021 – $100,000 x 2 ÷ 5 = $40,000; 2022 ($100,000 – $40,000) x 2 ÷ 5 = $24,000
BV now $100,000 – $40,000 – $24,000 = $36,000
Loss on disposal is $36,000 – $16,000 = $20,000
49. A change in the estimates of the expected pattern of consumption of an asset’s benefits, useful life, and residual value will require adjustments to depreciation expense related to that asset. Which of the following is the correct treatment of a change in estimate?
a) The company should go back and “correct” its records.
b) The company should make a “catch-up” adjustment for any accumulated difference.
c) The company should account for a change in estimate prospectively.
d) The company should not make any change to its records; the original estimate must be used.
Difficulty: Easy
Learning Objective: Explain and apply the accounting procedures for partial periods and a change in depreciation rate.
Section Reference: Other Depreciation Issues
Learning Objective: Account for derecognition of property, plant, and equipment, and explain and apply the accounting standards for long-lived assets that are held for sale.
Section Reference: Held for Sale and Derecognition
CPA: Financial Reporting
Bloomcode: Knowledge
AACSB: Analytic
50. ASPE requires that assets must be assessed for indications of impairment
a) at the end of each reporting period.
b) at the end of every quarter.
c) when events and circumstances indicate that asset's carrying amount may not be recoverable.
d) whenever the method of depreciation has changed.
Difficulty: Easy
Learning Objective: Explain the issues and apply the accounting standards for capital asset impairment under both IFRS and ASPE.
Section Reference: Impairment
CPA: Financial Reporting
Bloomcode: Knowledge
AACSB: Analytic
51. IFRS requires that assets must be assessed for indications of impairment
a) at the end of every quarter.
b) at the end of each reporting period.
c) when events and circumstances indicate that asset's carrying amount may not be recoverable.
d) whenever the method of depreciation has changed.
Difficulty: Easy
Learning Objective: Explain the issues and apply the accounting standards for capital asset impairment under both IFRS and ASPE.
Section Reference: Impairment
CPA: Financial Reporting
Bloomcode: Knowledge
AACSB: Analytic
52. Which of the following is NOT likely to be an indicator of possible asset impairment?
a) evidence of obsolescence or physical damage
b) a significant decrease in the asset's market value
c) the book value of the entity’s net assets is greater than the entity’s market capitalization
d) costs incurred for asset acquisition or operation are significantly lower than originally expected
Difficulty: Easy
Learning Objective: Explain the issues and apply the accounting standards for capital asset impairment under both IFRS and ASPE.
Section Reference: Impairment
CPA: Financial Reporting
Bloomcode: Comprehension
AACSB: Analytic
53. The cost recovery impairment model
a) uses undiscounted cash flows in its determination of impairment.
b) uses discounted cash flows in its determination of impairment.
c) is the method used under IFRS.
d) requires the calculation of value in use.
Difficulty: Easy
Learning Objective: Explain the issues and apply the accounting standards for capital asset impairment under both IFRS and ASPE.
Section Reference: Impairment
CPA: Financial Reporting
Bloomcode: Knowledge
AACSB: Analytic
54. The rational entity impairment model
a) does not allow the reversal of previously recognized impairment losses.
b) is the method used under ASPE.
c) uses undiscounted cash flows in its determination of impairment.
d) compares the asset’s carrying value with its recoverable amount.
Difficulty: Easy
Learning Objective: Explain the issues and apply the accounting standards for capital asset impairment under both IFRS and ASPE.
Section Reference: Impairment
CPA: Financial Reporting
Bloomcode: Knowledge
AACSB: Analytic
55. Which of the following best describes the concept of cash-generating units (CGU)?
a) Their cash flows are dependent on those of other CGUs.
b) The individual assets that are included in the CGU do not generate cash flows on their own.
c) A CGU is the largest identifiable group of assets that generates cash inflows predominantly independent from other CGUs.
d) IFRS does not recognize the concept of CGUs.
Difficulty: Easy
Learning Objective: Explain the issues and apply the accounting standards for capital asset impairment under both IFRS and ASPE.
Section Reference: Impairment
CPA: Financial Reporting
Bloomcode: Comprehension
AACSB: Analytic
56. For a company that uses ASPE, the required year-end journal entry to record an impairment loss includes
a) a debit to Loss on Impairment and a credit to Accumulated Impairment Losses.
b) a debit to Other Comprehensive Income and a credit to Accumulated Impairment Losses.
c) a debit to Loss on Impairment and a credit to the related asset.
d) a debit to Other Comprehensive Income and a credit to the related asset.
Difficulty: Easy
Learning Objective: Explain the issues and apply the accounting standards for capital asset impairment under both IFRS and ASPE.
Section Reference: Impairment
CPA: Financial Reporting
Bloomcode: Knowledge
AACSB: Analytic
57. Monkey Shines Ltd., a Canadian public corporation, owns equipment for which the following year-end information is available:
Carrying amount (book value) $120,000
Value in use 102,000
Fair value less disposal costs 108,000
The recoverable amount to be used in the determination of impairment is
a) $102,000.
b) $108,000.
c) $120,000.
d) Cannot be determined from the information given.
Difficulty: Medium
Learning Objective: Explain the issues and apply the accounting standards for capital asset impairment under both IFRS and ASPE.
Section Reference: Impairment
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic
Feedback: higher of value in use and FV less disposal costs
58. Gibbon Corp., a Canadian public corporation, owns equipment for which the following year-end information is available:
Carrying amount (book value) $59,000
Recoverable amount 52,000
Fair value less disposal costs 55,000
Which of the following best describes the proper accounting treatment for Gibbon's equipment?
a) It is not impaired and a loss should not be recognized.
b) It is impaired and a loss must be recognized, with no reversal possible.
c) It is not impaired, but a loss must be recognized.
d) It is impaired and a loss must be recognized, but the loss may be reversed in future periods.
Difficulty: Easy
Learning Objective: Explain the issues and apply the accounting standards for capital asset impairment under both IFRS and ASPE.
Section Reference: Impairment
CPA: Financial Reporting
Bloomcode: Comprehension
AACSB: Analytic
Feedback: Since recoverable amount (higher of value in use and FV less disposal costs) is lower than BV, there is impairment.
59. Ash Industries has several assets as part of a cash-generating unit that have limited use due to changing market trends and declining demand for the product produced by these assets. Management estimates that the carrying value of these assets is $85,000 and the assets have no other use. The company intends on producing this product for three more years prior to disposing of the assets. The net future cash flows related to the product production and sale of the equipment is $87,500, while the present value of the cash flows is $81,750. The fair value less the cost of disposal of the assets is estimated at $71,000. What is the value of the impairment loss under the rational entity model?
a) $0, there is no impairment loss
b) $3,250
c) $5,250
d) $14,000
Difficulty: Medium
Learning Objective: Explain the issues and apply the accounting standards for capital asset impairment under both IFRS and ASPE.
Section Reference: Impairment
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic
Feedback: $85,000 – $81,750 = $3,250
60. Oak Industries has several assets as part of a cash-generating unit that have limited use due to changing market trends and declining demand for the product produced by these assets. Management estimates that the carrying value of these assets is $85,000 and the assets have no other use. The company intends on producing this product for three more years prior to disposing of the assets. The net future cash flows related to the product production and sale of the equipment is $87,500, while the present value of the cash flows is $81,750. The fair value less the cost of disposal of the assets is estimated at $71,000. What is the value of the impairment loss under the cost recovery impairment model?
a) $0, there is no impairment loss
b) $3,250
c) $5,250
d) $14,000
Difficulty: Medium
Learning Objective: Explain the issues and apply the accounting standards for capital asset impairment under both IFRS and ASPE.
Section Reference: Impairment
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic
Feedback: The expected cash flows from the assets of $87,500 exceeds the carrying value of the assets ($85,000). Therefore, there is no impairment loss.
61. Long-lived assets that are held for sale
a) continue to be depreciated.
b) are carried at the higher of book value and fair values less costs of disposal.
c) are generally not re-measured at each balance sheet date.
d) are reported separately from other assets.
Difficulty: Easy
Learning Objective: Account for derecognition of property, plant, and equipment, and explain and apply the accounting standards for long-lived assets that are held for sale.
Section Reference: Held for Sale and Derecognition
CPA: Financial Reporting
Bloomcode: Knowledge
AACSB: Analytic
62. Depreciation should be discontinued when an asset has been
a) derecognized or taken out of service.
b) derecognized or classified as held for sale.
c) taken out of service.
d) taken out of service or classified as held for sale.
Difficulty: Easy
Learning Objective: Account for derecognition of property, plant, and equipment, and explain and apply the accounting standards for long-lived assets that are held for sale.
Section Reference: Held for Sale and Derecognition
CPA: Financial Reporting
Bloomcode: Knowledge
AACSB: Analytic
63. The sale of a depreciable asset resulting in a loss indicates that the proceeds from the sale were
a) less than book value.
b) greater than cost.
c) greater than book value.
d) less than current market value.
Difficulty: Easy
Learning Objective: Account for derecognition of property, plant, and equipment, and explain and apply the accounting standards for long-lived assets that are held for sale.
Section Reference: Held for Sale and Derecognition
CPA: Financial Reporting
Bloomcode: Comprehension
AACSB: Analytic
64. One of Spade Corp.’s assets was expropriated by government authorities. The following additional information is available:
Carrying value at the time of expropriation $600,000
Cash received $1,500,000
Under ASPE, this situation would be reflected in the company's financial statements as a $900,000
a) gain that would be included in other comprehensive income.
b) gain that would be included in net income.
c) gain from discontinued operations.
d) gain that would appear on the statement of shareholders’ equity.
Difficulty: Medium
Learning Objective: Account for derecognition of property, plant, and equipment and explain and apply the accounting standards for long-lived assets that are held for sale.
Section Reference: Long-Lived Assets to Be Disposed of by Sale
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic
65. On January 1, 2013, Antelope Ltd. purchased a building for $800,000. At this time, the building had an estimated residual value of $300,000 and an estimated useful life of 20 years. The company has recorded monthly depreciation using the straight-line method. On January 1, 2023, it is decided to put the building up for sale for $1,200,000. At December 31, 2023, the building is still for sale. The correct depreciation to record for 2023 is
a) $0.
b) $25,000.
c) $40,000.
d) $60,000.
Difficulty: Medium
Learning Objective: Account for derecognition of property, plant, and equipment and explain and apply the accounting standards for long-lived assets that are held for sale.
Section Reference: Long-Lived Assets to Be Disposed of by Sale
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic
Feedback: $0 (no depreciation on property held for sale)
66. Golden Goose Corp. has a piece of equipment, which is being held for sale, and has a carrying value of $100,000. When the decision to sell was made, the equipment had been written down from a carrying value of $180,000. At December 31, 2023, it is estimated that the fair value less disposal costs (net realizable value) is $130,000. For the calendar year 2023, Golden Goose should recognize a recovery (gain) of
a) $0.
b) $30,000.
c) $50,000.
d) $80,000.
Difficulty: Medium
Learning Objective: Account for derecognition of property, plant, and equipment, and explain and apply the accounting standards for long-lived assets that are held for sale.
Section Reference: Held for Sale and Derecognition
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic
Feedback: Gain is below the amount of the cumulative loss previously recognized.
67. On January 1, 2023, the Accumulated Depreciation—Machinery account of Bonobo Corp. showed a balance of $760,000. At the end of 2023, after the adjusting entries were posted, it showed a balance of $820,000. During 2023, one of the machines that cost $240,000 was sold for $118,000 cash. This resulted in a loss of $7,000. Assuming that no other assets were disposed of during the year, depreciation expense for 2023 was
a) $189,000.
b) $182,000.
c) $180,000.
d) $175,000.
Difficulty: Medium
Learning Objective: Account for derecognition of property, plant, and equipment, and explain and apply the accounting standards for long-lived assets that are held for sale.
Section Reference: Held for Sale and Derecognition
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic
Feedback: ($820,000 – $760,000) + [$240,000 – ($118,000 + $7,000)] = $175,000
68. During 2023, Jersey Ltd. sold equipment that had originally cost $206,000 for $127,600. This resulted in a gain of $9,600. The balance in the Accumulated Depreciation—Equipment was $660,000 on January 1, 2023, and $630,000 on December 31, 2023. No other equipment was disposed of during 2023. Depreciation expense for 2023 was
a) $20,000.
b) $58,000.
c) $59,600.
d) $101,000.
Difficulty: Medium
Learning Objective: Account for derecognition of property, plant, and equipment, and explain and apply the accounting standards for long-lived assets that are held for sale.
Section Reference: Held for Sale and Derecognition
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic
Feedback: $630,000 – {$660,000 – [$206,000 – ($127,600 – $9,600)]} = $58,000
69. The following information is available for an asset that is classified as held for sale:
Accumulated depreciation (at March 31, 2023) $24,300
Asset cost 50,000
If the asset were sold on April 1, 2023 for $27,600, there would be
a) a loss of $1,900.
b) a gain of $1,400.
c) a gain of $1,900.
d) a loss of $22,400.
Difficulty: Medium
Learning Objective: Account for derecognition of property, plant, and equipment, and explain and apply the accounting standards for long-lived assets that are held for sale.
Section Reference: Held for Sale and Derecognition
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic
Feedback: $27,600 – ($50,000 – $24,300) = $1,900 gain
70. On January 1, 2015, Owl Corporation purchased equipment for $76,000, having a useful life of ten years and an estimated residual value of $4,000. Owl has recorded monthly depreciation using the straight-line method. On December 31, 2023, the equipment was sold for $14,000. The gain to be recognized from the sale is
a) $14,000.
b) $6,800.
c) $2,800.
d) $0.
Difficulty: Medium
Learning Objective: Account for derecognition of property, plant, and equipment, and explain and apply the accounting standards for long-lived assets that are held for sale.
Section Reference: Held for Sale and Derecognition
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic
Feedback: ($76,000 – $4,000) ÷ (10 × 12) = $600 per month
$14,000 – [$76,000 – ($600 × 108 mo.)] = $2,800
71. On April 1, 2023, Ropert Limited sold some equipment for $58,000 cash. The original cost on January 1, 2017 was $150,000. Accumulated depreciation at December 31, 2022 (the company’s year end) was $90,000. The equipment was being depreciated over 10 years on a straight-line basis with no residual value. What is the gain or loss on sale of the equipment?
a)$250 loss
b)$2,000 loss
c)$1,750 gain
d)$5,500 gain
Difficulty: Medium
Learning Objective: Account for derecognition of property, plant, and equipment, and explain and apply the accounting standards for long-lived assets that are held for sale.
Section Reference: Held for Sale and Derecognition
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic
Feedback: Accumulated Depreciation at April 1, 2023: $90,000+(150,000 ÷ 10 x 3 ÷ 12) = $93,750. Adjusted carrying value: $150,000 – $93,750 = $56,250; $58,000 – $56,250 = $1,750 gain
72. Which of the following must be recorded in the accounting records when an asset that is NOT held for sale is derecognized?
a) depreciation up until the date of derecognition
b) removal of the asset
c) gain or loss on derecognition
d) All of these items must be recorded in the accounting records.
Difficulty: Easy
Learning Objective: Account for derecognition of property, plant, and equipment, and explain and apply the accounting standards for long-lived assets that are held for sale.
Section Reference: Held for Sale and Derecognition
CPA: Financial Reporting
Bloomcode: Knowledge
AACSB: Analytic
73. A general description of the depreciation methods applicable to major classes of depreciable assets
a) is not a current practice in financial reporting.
b) is not essential to a fair presentation of financial position.
c) is needed in financial reporting when company policy differs from income tax policy.
d) should be included in corporate financial statements or notes thereto.
Difficulty: Easy
Learning Objective: Describe the types of disclosures required for property, plant, and equipment, and provide an analysis of investment in capital assets.
Section Reference: Presentation, Disclosure, and Analytics
CPA: Financial Reporting
Bloomcode: Knowledge
AACSB: Analytic
74. The asset turnover ratio is calculated by dividing
a) net income by ending total assets.
b) net sales by average total assets.
c) net sales by ending total assets.
d) net income by average total assets.
Difficulty: Easy
Learning Objective: Describe the types of disclosures required for property, plant, and equipment, and provide an analysis of investment in capital assets.
Section Reference: Presentation, Disclosure, and Analytics
CPA: Financial Reporting
Bloomcode: Knowledge
AACSB: Analytic
75. The rate of return on assets (ROA) is calculated by dividing
a) average total assets by net income.
b) net revenue by average total assets.
c) net income by average total assets.
d) net income by net revenue.
Difficulty: Easy
Learning Objective: Describe the types of disclosures required for property, plant, and equipment, and provide an analysis of investment in capital assets.
Section Reference: Presentation, Disclosure, and Analytics
CPA: Financial Reporting
Bloomcode: Knowledge
AACSB: Analytic
76. For 2023, Walrus Company reported net revenues, average total assets, and net income of $180,000, $24,000, and $100,000 respectively. Walrus Company’s asset turnover ratio for 2023 was
a) 1.8.
b) 3.8.
c) 7.5.
d) 8.0.
Difficulty: Medium
Learning Objective: Describe the types of disclosures required for property, plant, and equipment, and provide an analysis of investment in capital assets.
Section Reference: Presentation, Disclosure, and Analytics
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic
Feedback: $180,000 ÷ $24,000 = 7.5 times
77. In 2023, Elephant Corporation's financial statements included the following information:
Net income $19,000
Sales 98,000
Total assets, January 1 85,000
Total assets, December 31 112,000
Inventory 70,000
Elephant's return on assets (ROA) for 2023 was (round to one decimal place)
a) 21.0%.
b) 19.3%.
c) 17.2%.
d) 0.99%.
Difficulty: Medium
Learning Objective: Describe the types of disclosures required for property, plant, and equipment, and provide an analysis of investment in capital assets.
Section Reference: Presentation, Disclosure, and Analytics
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic
Feedback: $19,000 ÷ [($85,000 + $112,000) ÷ 2] = 19.3%
Use the following data for questions 78–80.
Wren Corp. reported the following data on its most recent financial statements:
Net revenues $312,500
Net income 58,200
Total assets, January 1 174,280
Total assets, December 31 168,420
78. What is Wren Corp.’s asset turnover ratio? (Round to 2 decimal places)
a) 1.82
b) 1.79
c) 0.35
d) 0.34
Difficulty: Medium
Learning Objective: Describe the types of disclosures required for property, plant, and equipment, and provide an analysis of investment in capital assets.
Section Reference: Presentation, Disclosure, and Analytics
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic
Feedback: $312,500 ÷ [($174,280 + $168,420) ÷ 2] = 1.82
79. What is Wren Corp.’s profit margin ratio? (Round to 2 decimal places)
a) 33.97%
b) 18.62%
c) 18.24%
d) 5.37%
Difficulty: Medium
Learning Objective: Describe the types of disclosures required for property, plant, and equipment, and provide an analysis of investment in capital assets.
Section Reference: Presentation, Disclosure, and Analytics
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic
Feedback: ($58,200 ÷ $312,500) x 100 = 18.62%
80. What is Wren Corp.’s rate of return on assets (ROA)? (Round to 2 decimal places)
a) 18.24%
b) 18.62%
c) 33.97%
d) 34.56%
Difficulty: Medium
Learning Objective: Describe the types of disclosures required for property, plant, and equipment, and provide an analysis of investment in capital assets.
Section Reference: Presentation, Disclosure, and Analytics
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic
Feedback: [$58,200 ÷ ($174,280 + $168,420) ÷ 2] x 100 = 33.97%
81. Which of the following statements regarding depreciation is correct?
a) Depreciation provides funds to replace assets.
b) Depreciation is a predictor of the fair value of assets.
c) Depreciation involves current cash outflows.
d) Depreciation is similar to other expenses in terms of its treatment on the income statement.
Difficulty: Easy
Learning Objective: Describe the types of disclosures required for property, plant, and equipment, and provide an analysis of investment in capital assets.
Section Reference: Presentation, Disclosure, and Analytics
CPA: Financial Reporting
Bloomcode: Knowledge
AACSB: Analytic
82. Disclosures relating to PP&E assets are
a) identical under IFRS and ASPE.
b) less extensive under IFRS.
c) less extensive under ASPE.
d) more extensive under ASPE.
Difficulty: Easy
Learning Objective: Identify differences in accounting between IFRS and ASPE, and what changes are expected in the near future.
Section Reference: A Comparison of IFRS and ASPE
CPA: Financial Reporting
Bloomcode: Knowledge
AACSB: Analytic
*83. A major objective of capital cost allowance for tax depreciation is to
a) reduce the amount of depreciation expense claimed for income tax purposes.
b) assure that the amount of depreciation for income tax and book purposes will be the same.
c) help taxpayers achieve a faster write-off of their capital assets.
d) require taxpayers to use the actual economic lives of assets in calculating tax depreciation.
Difficulty: Easy
Learning Objective: Calculate capital cost allowance in routine and non-routine situations.
Section Reference: Capital Cost Allowance Method (Appendix 11A)
CPA: Financial Reporting
Bloomcode: Comprehension
AACSB: Analytic
*84. Under the capital cost allowance system, which of the following is NOT relevant?
a) the capital cost of the asset
b) the asset class
c) the date of purchase in the fiscal year
d) the asset’s residual value
Difficulty: Easy
Learning Objective: Calculate capital cost allowance in routine and non-routine situations.
Section Reference: Capital Cost Allowance Method (Appendix 11A)
CPA: Financial Reporting
Bloomcode: Comprehension
AACSB: Analytic
*85. On January 1, 2023, Seal Corp. purchased a machine costing $250,000. The machine is in an asset class for tax purposes with a 30% CCA rate. It has an estimated $40,000 residual value at the end of its five-year useful life. The CCA deduction for tax purposes for the year 2023 is
a) $112,500.
b) $31,500
c) $37,500.
d) $75,000.
Difficulty: Medium
Learning Objective: Calculate capital cost allowance in routine and non-routine situations.
Section Reference: Capital Cost Allowance Method (Appendix 11A)
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic
Feedback: $250,000 × 30% × 1.5 = $112,500
Use the following information to answer questions *86–*88. The information below pertains to the next three questions.
Tarantula Corp. is a publicly traded company and reports the following information about an equipment purchase made in 2023:
Date of purchase March 31, 2023
Capital cost $200,000
Estimated useful life 10 years
Estimated residual value $20,000
CCA Class Class 10 (30%)
Tarantula uses straight-line depreciation to the nearest month for accounting purposes.
*86. Assuming Tarantula always takes the maximum CCA, what is the CCA for this specific asset purchase in 2023?
a) $22,500
b) $90,000
c) $45,000
d) $60,000
Difficulty: Medium
Learning Objective: Calculate capital cost allowance in routine and non-routine situations.
Section Reference: Capital Cost Allowance Method (Appendix 11A)
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic
Feedback: $200,000 x 30% x 1.5 = $90,000
*87. Assume that at the end of calendar 2021, the UCC for this asset class is $83,300. Tarantula sells everything in the asset class on January 2, 2022 for $90,000, and does not replace it. The recapture of CCA or terminal loss would be
a) $60,500 terminal loss.
b) $56,000 recapture.
c) $6,700 terminal loss.
d) $6,700 recapture.
Difficulty: Medium
Learning Objective: Calculate capital cost allowance in routine and non-routine situations.
Section Reference: Capital Cost Allowance Method (Appendix 11A)
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic
Feedback: $83,300 (UCC) – $90,000 (sale price) = $6,700 recapture
*88. Assuming Tarantula always takes the maximum CCA, what is the difference between the CCA claimed and the depreciation expense recorded in the financial statements for calendar 2023?
a) $60,000 more CCA claimed than depreciation recorded
b) $76,500 more CCA claimed than depreciation recorded
c) $65,000 less CCA claimed than depreciation recorded
d) $75,000 more CCA claimed than depreciation recorded
Difficulty: Medium
Learning Objective: Calculate capital cost allowance in routine and non-routine situations.
Section Reference: Capital Cost Allowance Method (Appendix 11A)
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic
Feedback: CCA claimed $200,000 x 30% x 1.5 = $90,000. Depreciation expenses recorded ($200,000 – $20,000) ÷ 10 x 9 ÷ 12 = $13,500; $90,000 – $13,500 = $76,500 more CCA claimed than depreciation recorded.
Exercises
Ex. 11-89 Depreciation as a cost allocation
Explain what depreciation is and how it is used or applied. Can it be used to determine the value of an asset? Why or why not? Does depreciation accounting provide cash? If not, what does provide cash? In relation to cash, what does depreciation accounting do?
Solution 11-89
Depreciation is the decline in service potentials or in future economic benefits of a PP&E asset due to physical or economic factors. Depreciation—or amortization, as it is also called—is a means of cost allocation. It is the process of allocating the depreciable amount of a PP&E asset to expense in a systematic manner to those periods expected to benefit from its use. While it is true that an asset’s value changes between the time it is purchased and the time it is sold or scrapped, most companies use a cost allocation approach rather than a valuation approach because objectively measuring the changes in an assets’ value every reporting period is often difficult and usually costly. Depreciation accounting does not provide cash. Revenues provide cash. Depreciation accounting retains cash by reducing income taxes and dividends.
Difficulty: Easy
Learning Objective: Understand the importance of depreciation, impairment, and disposition from a business perspective.
Section Reference: The importance of depreciation, impairment, and disposition from a business perspective.
CPA: Communication
CPA: Financial Reporting
Bloomcode: Comprehension
AACSB: Communication
Ex. 11-90 Componentization and depreciation of PP&E assets
You are the accountant for a manufacturing company. You have just been advised of the acquisition of a new machine. You have received a memo that only gives you the following information:
Grinding Equipment
Model: XZ-1-1000
Cost: $1,250,000
Instructions
To be able to properly account for this asset, list and briefly describe what additional information you require.
Solution 11-90
The information should include details on the machine’s
- components
- depreciable amount
- depreciation period (useful life)
- usage pattern
The machine may include different parts that may have different usage and maintenance patterns. If so, and if these parts are significant, they should be accounted for separately, so these patterns can be captured in the depreciation process.
The depreciable amount will likely not be the same as the given cost of $1,250,000, since it will have to be adjusted for residual value(s), if any.
The depreciation period will be affected by the date that the machine is installed and ready for use.
Finally, the usage pattern will drive the decision of which depreciation method to use: straight-line, declining balance, or units of production.
Difficulty: Easy
Learning Objective: Understand the importance of depreciation, impairment, and disposition from a business perspective.
Section Reference: The Importance of Depreciation, Impairment, and Disposition from a Business Perspective
CPA: Financial Reporting
Bloomcode: Knowledge
AACSB: Analytic
Ex. 11-91 Accounting for depreciation IFRS vs. ASPE
Alberta Company acquires a piece of equipment on April 1 with a total cost of $25,000. The company estimates that the equipment has an estimated useful life of 3 years with a residual value of $1,000 and a total life of 5 years with no salvage value. Alberta Company has a December 31 year end and uses straight line depreciation.
Instructions:
a) Assume that Alberta Company is a publicly traded company. What is the depreciable value of the equipment? Record the entry for the depreciation charge at year end.
b) If Alberta Company uses ASPE, does the depreciable value change? If so, what would the value be? Record the year-end entry using ASPE.
Solution 11-91
a) The depreciable value of the equipment under IFRS is as follows:
Cost $25,000
Residual value 1,000
Depreciable amount $24,000
December 31
Depreciation expense 6,000
Accumulated depreciation—equipment 6,000
($24,000 / 3 years x 9 / 12 = $6,000)
b) Under ASPE, since the expected salvage value is $0 the full $25,000 is depreciated over the assets expected life of 5 years.
December 31
Depreciation expense 3,750
Accumulated depreciation—equipment 3,750
($25,000 / 5 years x 9 / 12 = $3,750)
Difficulty: Medium
Learning Objective: Explain the concept of depreciation and identify the factors to consider when determining depreciation charges.
Section Reference: Factors Considered in the Depreciation Process
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic
Ex. 11-92 True or false?
Place T or F in front of each of the following statements.
1. The choice of depreciation method is specified in GAAP and does not require the use of professional judgement.
2. Depreciation is the process of allocating the cost of assets in a manner that is consistent with the desired effect on income.
3. Changes in the depreciation rate due to changes in the estimate of the asset's useful life are accounted for in the current and future periods.
4. Gains and losses from the disposal of property, plant, and equipment are always reported as part of other comprehensive income.
5. The term "recoverable amount" with respect to a capital asset's impairment has the same definition under ASPE and IFRS.
6. Once a loss has been recognized, IFRS prohibits the subsequent reversal of that loss.
7. Only assets with cash flows that are independent from those of other assets are included in a cash-generating unit (CGU).
8. When using the straight-line method, an asset's residual value is deducted in the calculation of depreciation expense.
9. An asset that has been depreciated to its residual value can continue to be depreciated until it reaches a net book value of zero.
Solution 11-92
1. F
2. F
3. T
4. F
5. F
6. F
7. T
8. T
9. F
Difficulty: Easy
(1,2,8,9) Learning Objective: Identify how depreciation methods are selected; calculate and recognize depreciation using the straight-line, decreasing charge, and activity methods.
Section Reference: Depreciation—Methods of Allocation and Calculation
(3) Learning Objective: Explain and apply the accounting procedures for partial periods and a change in depreciation rate.
Section Reference: Other Depreciation Issues
(5,6,7) Learning Objective: Explain the issues and apply the accounting standards for capital asset impairment under both IFRS and ASPE.
Section Reference: Impairment
(4) Learning Objective: Account for derecognition of property, plant, and equipment and explain and apply the accounting standards for long-lived assets that are held for sale.
Section Reference: Long-Lived Assets to Be Disposed of by Sale
CPA: Financial Reporting
Bloomcode: Knowledge
AACSB: Analytic
*Ex. 11-93 Calculate depreciation and CCA
Five identical vehicles that cost $500,000 (total) are acquired on April 1, 2022. Their estimated residual value is $20,000 and expected life is eight years. These assets are Class 10 with a maximum CCA rate of 30%. The company has a December 31 year end.
Instructions
Calculate the depreciation expense/CCA (to the nearest dollar) by each of the following methods:
a) Straight-line for 2022
b) Double-declining-balance for 2023
c) Maximum capital cost allowance for 2023
*Solution 11-93
a) ($500,000 – $20,000) ÷ 8 × 9 ÷ 12 = $45,000
b) 2022: 25% × $500,000 × 9 ÷ 12 = $93,750
2023: 25% × $406,250 = $101,563
c) 2022: 30% × $500,000 × 1.5 = $225,000
2023: 30% × $275,000 = $82,500
Difficulty: Medium
Learning Objective: Identify how depreciation methods are selected; calculate and recognize depreciation using the straight-line, diminishing balance, activity, and other methods.
Section Reference: Depreciation—Methods of Allocation and Calculation
Learning Objective: Explain and apply the accounting procedures for partial periods and a change in depreciation rate.
Section Reference: Other Depreciation Issues
Learning Objective: Calculate capital cost allowance in routine and non-routine situations.
Section Reference: Capital Cost Allowance Method (Appendix 11A)
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic
*Ex. 11-94 Calculate depreciation and CCA
A machine costing $400,000 is acquired on October 1, 2022. Its estimated residual value is $40,000 and its expected life is eight years. The company has a calendar year end. The asset is a Class 8 asset with a maximum CCA rate of 20%.
Instructions
Calculate depreciation expense/CCA for 2022 and 2023 by each of the following methods:
a) Double declining-balance
b) Capital cost allowance
*Solution 11-94
a) 2022: 25% × $400,000 × 3 ÷ 12 = $25,000
2023: 25% × $375,000 = $93,750
b) 2022: 20% × $400,000 × 1.5 = $120,000
2023: 20% × $280,000 = $56,000
Difficulty: Medium
Learning Objective: Identify how depreciation methods are selected; calculate and recognize depreciation using the straight-line, decreasing charge, and activity methods.
Section Reference: Depreciation—Methods of Allocation and Calculation
Learning Objective: Explain and apply the accounting procedures for partial periods and a change in depreciation rate.
Section Reference: Other Depreciation Issues
Learning Objective: Calculate capital cost allowance in routine and non-routine situations.
Section Reference: Capital Cost Allowance Method (Appendix 11A)
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic
Ex. 11-95 Asset depreciation and disposition
Answer each of the following questions.
1. On January 2, 2022, a machine was purchased for $180,000. It has an estimated useful life of ten years and an estimated residual value of $14,000. Depreciation for 2023, using the double-declining-balance method, is $______.
2. A vehicle purchased for $50,000 has an estimated useful life of five years and a residual value of $3,800. It is expected to be driven 210,000 kilometres over its useful life. The asset was driven 45,000 kilometres in the second year. Depreciation for the second year, using the units of production method, is $______.
3. A machine costing $72,000, with an estimated useful life of five years and a residual value of $12,000, is depreciated by the straight-line method. This asset is sold for $50,000 at the end of the second year of use. The gain or loss on the disposal is $______.
Solution 11-95
1. Year 1 depreciation = $180,000 x 2 ÷ 10 = $36,000; NBV now $144,000
Year 2 depreciation = $144,000 x 2 ÷ 10 = $28,800
2. Depreciation per km = ($50,000 – $3,800) ÷ 210,000 = $0.22
Year 2 depreciation = $0.22 x 45,000 = $9,900
3. $2,000 G
Annual depreciation is ($72,000 – $12,000) ÷ 5 = $12,000
BV at time of sale = $72,000 – (2 x $12,000) = $48,000
Gain on disposal = $50,000 – $48,000 = $2,000
Difficulty: Medium
Learning Objective: Identify how depreciation methods are selected; calculate and recognize depreciation using the straight-line, decreasing charge, and activity methods.
Section Reference: Depreciation—Methods of Allocation and Calculation
Learning Objective: Account for derecognition of property, plant, and equipment and explain and apply the accounting standards for long-lived assets that are held for sale.
Section Reference: Long-Lived Assets to Be Disposed of by Sale
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic
Ex. 11-96 Calculate depletion expense
Halcour Corporation acquired the right to mine a piece of land at a cost to lease of $600,000. The related excavation costs were $1,000,000, while developmental costs were an additional $8,000,000, all of which will contribute to Halcour extracting 25,000 tonnes. In the first year of operations Halcour mined and sold 5,000 tonnes, while in its second year the company extracted 6,500 tonnes but only sold 6,000 tonnes.
Instructions
Prepare the journal entry to record depletion expense for the first two years.
Solution 11-96
Depletion cost per tonne:
($600,000 + $1,000,000 + $8,000,000) ÷ 25,000 tonnes = $384 per tonne
Year 1: 5,000 tonnes × $384 = $1,920,000
Inventory 1,920,000
Accumulated depletion 1,920,000
Year 2: 6,500 tonnes × $384 = $2,496,000
Inventory 2,496,000
Accumulated depletion 2,496,000
Difficulty: Medium
Learning Objective: Explain the accounting issues for depletion of mineral resources.
Section Reference: Depletion of Mineral Resources
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic
Ex. 11-97 Liquidating dividends
Tantulum Mining Corp. has the following account balances related to its mining operations:
Accumulated depreciation – mineral property $3,500,000
Common shares, unlimited # authorized, 1,500,000 issued 6,100,000
Retained earnings 2,370,000
Net income 975,000
The retained earnings account represents the balance at the beginning of the period, January 1. The company declares and pays a dividend of $3.50 / share at its December 31 year end.
Instructions
Provide the journal entry to record the dividend payment on December 31. What other dividend related information should be disclosed to the shareholders?
Solution 11-97
Dividend to be paid: $3.50 x 1,500,000 shares = $5,250,000
December 31
Retained earnings *$3,345,000
Common shares **$1,905,000
Cash $5,250,000
*Retained Earnings: $2,370,000 + $975,000 = $3,345,000
**Common Shares: $5,250,000 – $3,345,000 = $1,905,000
Tantulum should disclose the following information to its shareholders. The $3.50 dividend per share represents $2.23 / share return on investment ($3,345,000 / 1,500,000 shares) and a liquidating dividend or return on capital of $1.27 ($1,905,000 / 1,500,000 shares).
Difficulty: Medium
Learning Objective: Explain the accounting issues for depletion of mineral resources.
Section Reference: Depletion of Mineral Resources
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic
Ex. 11-98 Revising depreciation
JB Corporation purchased equipment costing $135,000 on January 1, 2021. At that time the useful life of the equipment was estimated to be 12 years and the residual value was estimated to be $7,500. Depreciation up to December 31, 2022 has been recorded using the straight-line method and the company operates on a calendar year basis. On January 1, 2023, the estimated useful life was revised to a total of 10 years and the residual value was revised to $8,000.
Instructions
Prepare the journal entry to record the depreciation expense for 2023. (Show calculations.)
Solution 11-98
$135,000 – $7,500
(———————–— = $10,625) x 2 = $21,250 accumulated depreciation at December 31, 2022
12 years
Equipment cost | $135,000 |
Less: Accumulated depreciation | 21,250 |
Carrying amount of equipment at December 31, 2022 | 113,750 |
Less revised estimated residual value | 8,000 |
Costs to be depreciated | $105,750 |
Revised depreciation = $105,750 ÷ (10 − 2) years remaining life = $13,219 per year | |
The entry to record depreciation in 2023:
Depreciation Expense | 13,219 | |
Accumulated Depreciation—Machinery | 13,219 |
Difficulty: Medium
Learning Objective: Explain and apply the accounting procedures for partial periods and a change in depreciation rate.
Section Reference: Other Depreciation Issues
CPA: Communication
CPA: Financial Reporting
Bloomcode: Application
AACSB: Communication
AACSB: Analytic
Ex. 11-99 Rational entity impairment model
Cougar Corp.'s balance sheet includes the following asset:
Equipment $95,000
Less: accumulated depreciation (25,000)
Book value (carrying amount) $70,000
After performing its annual review for impairment, Cougar obtains the following data:
Asset’s value in use $58,000
Fair value less disposal costs 62,000
Instructions
Assuming Cougar uses the rational entity impairment model,
a) Calculate the recoverable amount.
b) Calculate the impairment loss.
c) Prepare the entry to record the impairment loss.
Solution 11-99
a) Recoverable amount: $62,000, the higher of the asset's value in use of $58,000 and its fair value less disposal costs of $62,000.
b) Impairment loss:
Carrying amount $70,000
Recoverable amount 62,000
Impairment loss $8,000
c) Journal entry:
Loss on impairment 8,000
Accumulated impairment loss—equipment 8,000
Difficulty: Medium
Learning Objective: Explain the issues and apply the accounting standards for capital asset impairment under both IFRS and ASPE.
Section Reference: Impairment
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic
Ex. 11-100 Impairment
Assume the same information as in Ex. 11-99 above, except for the following:
Cougar's review for impairment indicates the following:
Asset’s value in use $64,000
Fair value less disposal costs 73,000
Instructions
a) Calculate the recoverable amount.
b) Calculate the impairment loss.
Solution 11-100
a) Recoverable amount: $73,000, the higher of the asset's value in use of $64,000 and its fair value less disposal costs of $73,000.
b) Impairment loss:
Carrying amount $70,000
Recoverable amount 73,000
Impairment loss none
Because the recoverable amount is higher than the asset's carrying amount, there is no impairment loss.
Difficulty: Medium
Learning Objective: Explain the issues and apply the accounting standards for capital asset impairment under both IFRS and ASPE.
Section Reference: Impairment
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic
Ex. 11-101 Held for sale assets and depreciation
Explain why assets that are held for sale are not depreciated while they are held.
Solution 11-101
Assets that are held for sale are not depreciated while they are held as it would be inconsistent to amortize assets that are not in use, that are likely to be sold, and that are carried at the equivalent of the lower of (amortized) cost and net realizable value. In many respects, these assets are closer to inventory than capital assets.
Difficulty: Easy
Learning Objective: Account for derecognition of property, plant, and equipment and explain and apply the accounting standards for long-lived assets that are held for sale.
Section Reference: Impairment
CPA: Communication
CPA: Financial Reporting
Bloomcode: Comprehension
AACSB: Communication
PROBLEMS
*Pr. 11-102 Calculate depreciation and CCA
On July 2, 2022, Vicuna Inc. purchased equipment for $720,000. This equipment has an estimated useful life of six years and an estimated residual value of $30,000. Depreciation is taken for the portion of the year the asset is used. The asset is a Class 8 asset with a maximum CCA rate of 20%. Vicuna has a December year end.
Instructions
a) Complete the schedule below by determining the depreciation expense/CCA and year-end book values/UCC for 2022 and 2023 using the
1. double-declining-balance method.
2. capital cost allowance method (using maximum rate).
Double-Declining-Balance Method 2022 2023
Depreciation expense for year
Accumulated depreciation
Year-end book value
Capital Cost Allowance Method 2022 2023
CCA for year
End of year UCC
Total CCA claimed
b) Critical Thinking: Assume Vicuna is also considering using straight-line depreciation. Which method of depreciation do you think Vicuna would prefer to use, either the double declining balance method or the straight-line method and why? Provide any necessary calculations to support your rationale.
*Solution 11-102
a) Double-Declining-Balance Method 2022 2023
Depreciation expense for year $120,000 $200,000
Accumulated depreciation, end of year 120,000 320,000
Year-end book value 600,000 400,000
Capital Cost Allowance Method 2022 2023
CCA for year *$216,000 **$100,800
End of year UCC 504,000 403,200
*$720,000 x 20% x 1.5 = $216,000
** ($720,000 – $216,000) x 20% = $100,800
b) Straight-line Depreciation
Depreciation Expense 57,500 $115,000
Year one: ($720,000 – $30,000)/ 6 x 6 / 12 = $57,500
Year two: ($720,000 – $30,000)/ 6 = $115,000
Vicuna would prefer to use the straight-line method; it will produce the highest net income. See below:
2022 2023
Double declining balance method—depreciation expense $120,000 $200,000
Straight line depreciation method—depreciation expense $ 57,500 $115,000
Net increase in net income using the straight-line method $ 62,500 $ 85,000
Difficulty: Medium
Learning Objective: Identify how depreciation methods are selected; calculate and recognize depreciation using the straight-line, diminishing balance, activity, and other methods.
Section Reference: Depreciation—Methods of Allocation and Calculation
Learning Objective: Explain and apply the accounting procedures for partial periods and a change in depreciation rate.
Section Reference: Other Depreciation Issues
Learning Objective: Calculate capital cost allowance in routine and non-routine situations.
Section Reference: Capital Cost Allowance Method (Appendix 11A)
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic
Pr. 11-103 Calculating and recording depletion
Brighton Inc. is a nickel mining company in North West Ontario. It has incurred the following costs related to the acquisition and the right to use an additional 1,500 hectares of land:
Leasing costs: $775,000
Exploration and evaluation costs: $1,348,000
Development costs incurred to open the mine: $43,000,000
These costs have been capitalized and Brighton estimates that the mine will produce 6,500 tonnes of ore.
Instructions
- Journalize any necessary entries to record depletion for year one assuming that 30% of the mine’s nickel is extracted.
- Prepare a partial balance sheet at the end of year one to reflect how the mine will be presented in the financial statements.
Solution 11-103
- Total cost of the mine: $775,000 + $1,250,000 + $43,100,000 = $45,123,000
Depletion cost / unit: $45,123,000/6,500 = $6,942 / tonne
Year one: 6,500 x 30% = 1,950 tonnes were mined; 1,950 tonnes x $6,942 = $13,536,900
Journal Entry:
Inventory 13,536,900
Accumulated depletion 13,536,900
b)
Brighton Inc.
Balance Sheet (partial)
Non-Current Assets
Property, Plant, and Equipment:
Mine $45,123,000
Accumulated depletion 13,536,900
$31,586,100
Difficulty: Medium
Learning Objective: Explain the accounting issues for depletion of mineral resources.
Section Reference: Depletion of Mineral Resources
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic
Pr. 11-104 Cost recovery impairment model, revision of depreciation
Rhino Corporation is a manufacturer of automobile parts. Its capital assets include specialized equipment that is being used in the finishing stage of its manufacturing process.
The equipment was purchased in 2020and is being depreciated using the units of production method. By December 31, 2021, the book (carrying) value was $430,000 (after depreciation expense had been recorded). However, at that time, Rhino became aware of new technology that would make the equipment obsolete within the next five years. An appraisal puts the equipment's future undiscounted net cash flows at $390,000 and its fair value at $300,000. While considering its options for the eventual replacement, Rhino will continue using the equipment, but will change to straight-line depreciation.
Instructions
Assuming Rhino is a private Canadian corporation,
a) Prepare the journal entry, if any, to record the impairment loss at December 31, 2021.
b) Prepare the journal entries to record 2022 and 2023 depreciation.
Solution 11-104
a)
Recoverability test: Carrying value $430,000 – undiscounted net cash flows $390,000 = – 40,000, therefore asset impaired.
Loss on impairment 130,000
Accumulated impairment losses—equipment 130,000
(Carrying value $430,000 – fair value $300,000 = $130,000 impairment loss)
b)
2022 depreciation:
Depreciation expense 60,000
Accumulated depreciation—equipment 60,000
($300,000 ÷ 5 years = $60,000)
2023 depreciation:
Depreciation expense 60,000
Accumulated depreciation—equipment 60,000
($300,000 ÷ 5 years = $60,000)
Difficulty: Medium
Learning Objective: Explain and apply the accounting procedures for partial periods and a change in depreciation rate.
Section Reference: Other Depreciation Issues
Learning Objective: Explain the issues and apply the accounting standards for capital asset impairment under both IFRS and ASPE.
Section Reference: Impairment
CPA: Financial Reporting
Bloomcode: Analysis
AACSB: Analytic
Pr. 11-105 Differences between the rational entity versus cost recovery methods
Explain the core difference between the rational entity model (IFRS) and the cost recovery impairment method (ASPE).
Solution 11-105
The rational entity (IFRS) approach better reflects the economic circumstances underlying the asset’s usefulness to the entity, capturing both the declines and recoveries in value. The cost recovery (ASPE) approach waits until circumstances indicate that conditions are very bad before recognizing impairment. It does not take into account the time value of money in the recoverability test. It is not neutral because, after recognizing impairment, it does not allow for later recognition of any recovery. That is, no reversals of impairment loss are permitted. Overall, the rational entity model used under IFRS provides better information for users: it provides better representational faithfulness as it is more neutral; it is more relevant; it provides more timely information; and it better reflects the time value of money and the fair value of impaired assets.
Difficulty: Easy
Learning Objective: Explain the issues and apply the accounting standards for capital asset impairment under both IFRS and ASPE.
Section Reference: Impairment
CPA: Communication
CPA: Financial Reporting
Bloomcode: Comprehension
AACSB: Communication
AACSB: Analytic
Pr. 11-106 Loss on impairment
On January 1, 2021, Phonetic Company purchased on credit machinery costing $146,000 and incurred $5,000 in installation costs. The machinery has an estimated useful life of 15 years and a residual value of $10,000. The company uses the straight-line method of depreciation. At the end of 2022, Phonetic recorded depreciation and assessed the asset, determining a recoverable amount of $122,000. Phonetic sold the equipment to Voilex Corporation on June 30, 2023, for $120,000.
Instructions
Prepare the necessary entries assuming Phonetic has a December 31 year-end. (Show calculations.)
Solution 11-106
2021 Jan 1 Machinery 151,000
Accounts Payable 151,000
($146,000 + $5,000)
Dec 31 Depreciation Expense 9,400
Accumulated Depreciation—Machinery 9,400
[($151,000 – $10,000) ÷ 15]
2022 Dec 31 Depreciation Expense 9,400
Accumulated Depreciation—Machinery 9,400
[($151,000 – $10,000) ÷ 15]
Dec 31 Loss on Impairment 10,200
Accumulated Impairment Losses—Machinery 10,200
Carrying value: $151,000 – $9,400 – $9,400 = $132,200
Impairment loss: $132,200 – $122,000 = $10,200
2023 Jun 30 Depreciation Expense 4,308
Accumulated Depreciation—Machinery 4,308
[($122,000 – $10,000) ÷ (15 – 2 years)] x 6/12
Jun 30 Cash 120,000
Accumulated Depreciation—Machinery 23,108
Accumulated Impairment Losses – Machinery 10,200
Gain on Disposal of Machinery 2,308
Machinery 151,000
Accumulated depreciation = $9,400 + $9,400 + $4,308 = $23,108
Accumulated impairment loss = $10,200
Carrying value = $151,000 – $33,308 = $117,692
Gain on disposal = $120,000 – $117,692 = $2,308
Difficulty: Medium
Learning Objective: Explain the issues and apply the accounting standards for capital asset impairment under both IFRS and ASPE.
Section Reference: Impairment
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic
Pr. 11-107 Impairment losses – cash-generating units rational entity model
Tractors Inc. manufactures agricultural implements for commercial farms. As a result of recent technological advances, the market demand for one of its garden tractors has been steadily declining. The following assets are used in the manufacturing process:
Cost Accumulated Depreciation Carrying Value
Small Tools $ 12,500 $ 7,500 $ 5,000
Specialized Machinery 75,250 55,500 19,750
Standard Machinery 125,000 102,500 22,500
Tractors Inc. is currently testing these assets for impairment. It determines that the small tools and specialized machinery have no other use and as a result no resale value. While the standard machinery could be sold today for $25,000, Tractors Inc. plans to keep producing the garden tractors for three more years. It expects net cash flows from production to be $10,000 yearly and that it can sell the standard machinery for $17,500 at the end of year three. The fair value of these assets less the cost of disposal is estimated at $27,000. The current interest rate is 5%.
Instructions
- Assume that Tractors Inc. follows IFRS and uses the rational entity model. Is there an impairment loss? If so, how would it be allocated to the assets in the cash-generating unit?
- Provide any related or required journal entry. Round your answers to the nearest dollar.
Solution 11-107
- Carrying amount of the CGU* $47,250
Recoverable amount** 42,349
Impairment loss $ 4,901
Small Tools $ 5,000 x $4,901 / $24,750 = $ 990 loss allocation
Specialized Machinery $19,750 x $4,901 / $24,750 = $3,911 loss allocation
Total $24,750
- Journal entry to record the impairment loss:
Loss on impairment 4,901
Accumulated impairment losses—equipment 990
Accumulated impairment losses—machinery 3,911
*$5,000 + $19,750 + $22,500 = $47,250
**PV of Total Cash Flows: $42,349 = $27,232 + $15,117
PV of cash flows: N 3, PMT – $10,000, I/Y 5%, FV 0 = $27,232
PV of lump sum: N3, I/Y 5%, FV – $17,500 = $15,117
Difficulty: Medium
Learning Objective: Explain the issues and apply the accounting standards for capital asset impairment under both IFRS and ASPE.
Section Reference: Impairment
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic
Pr. 11-108 Impairment losses – cash-generating units cost recovery model
Tractors Inc. manufactures agricultural implements for commercial farms. As a result of recent technological advances, the market demand for one of its garden tractors has been steadily declining. The following assets are used in the manufacturing process:
Cost Accumulated Depreciation Carrying Value
Small Tools $12,500 $ 7,500 $ 5,000
Specialized Machinery $75,250 $55,500 $19,750
Standard Machinery $125,000 $102,500 $22,500
Tractors Inc. is currently testing these assets for impairment. It determines that the small tools and specialized machinery have no other use and as a result no resale value. While the standard machinery could be sold today for $ 25,000, Tractors Inc. plans to keep producing the garden tractors for three more years. It expects net cash flows from production to be $10,000 yearly and that it can sell the standard machinery for $17,500 at the end of year three. The fair value of these assets less the cost of disposal is estimated at $27,000. The current interest rate is 5%.
Instructions
- Assume that Tractors Inc., follows ASPE and uses the cost recovery impairment model. Is there an impairment loss?
- Critical Thinking: How does ASPE differ from IFRS when calculating or determining an impairment loss? Would your answer in part a above be different if Tractor’s Inc. was a publicly traded company? If yes, demonstrate how or what would be different.
Solution 11-108
- Carrying amount of the CGU* $47,250
Recoverable amount** $47,500
*$5,000 + $19,750 + $22,500 = $47,250
**Undiscounted future cash flows: ($10,000 x 3) + $17,500 = $47,500
No there is not an impairment loss.
- ASPE uses the cost recovery model; whereby, the carrying value of the assets is compared to the undiscounted cash flows expected from the later use and subsequent disposal of the asset group. The undiscounted cash flows are expected to be $47,500 which is higher than the current carrying value of the assets at $47,250. Therefore, there is no impairment loss.
If Tractors Inc. was a publicly traded company, it would be required to use the rationale entity model to determine impairment. In that case there would be an impairment loss calculated as follows:
Carrying amount of the CGU* $47,250
Recoverable amount** 42,349
Impairment loss $ 4,901
*$5,000 + $19,750 + $22,500 = $47,250
**PV of Total Cash Flows: $42,349 =$27,232 + $15,117
PV of cash flows: N 3, PMT – $10,000, I/Y 5%, FV 0 = $27,232
PV of lump sum: N3, I/Y 5%, FV – $17,500 = $15,117
Difficulty: Medium
Learning Objective: Explain the issues and apply the accounting standards for capital asset impairment under both IFRS and ASPE.
Section Reference: Impairment
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic
Pr. 11-109 Calculation of ratios
Vulture Ltd. provides the following selected information for the calendar years 2023 and 2022:
2023 2022
Net revenue $320,000
Net income 75,000
Accounts receivable 33,000 $ 26,000
Inventory 61,000 55,000
Total assets 210,000 176,000
Total liabilities 84,000 74,000
Instructions
For 2023, calculate the following ratios to two decimals:
a) Asset turnover ratio
b) Profit margin ratio
c) Rate of return on assets
Solution 11-109
a) Asset turnover ratio = net revenue ÷ average total assets
Average total assets = ($210,000 + $176,000) ÷ 2 = $193,000
ATR = $320,000 ÷ $193,000 = 1.66
b) Profit margin ratio = net income ÷ net revenue x 100
PMR = $75,000 ÷ $320,000 x 100 = 23.44%
c) Rate of return on assets = net income ÷ average total assets x 100
ROA = $75,000 ÷ $193,000 x 100 = 38.86%
Difficulty: Medium
Learning Objective: Describe the types of disclosures required for property, plant, and equipment and analysis of investment in capital assets.
Section Reference: Presentation and Disclosure
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic
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Intermediate Accounting v1 13e | Canada | Test Bank
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