Complete Test Bank Ch11 Property, Plant, And Equipment And - Answer Key + Test Bank | Intermediate Accounting 10e by J. David Spiceland, Mark W. Nelson, Wayne Thomas. DOCX document preview.
Intermediate Accounting, 10e (Spiceland)
Chapter 11 Property, Plant, and Equipment and Intangible Assets:
Utilization and Disposition
1) The three factors in cost allocation of a depreciable asset are service life, allocation base, and allocation method.
Difficulty: 1 Easy
Topic: Measuring cost allocation
Learning Objective: 11-01 Explain the concept of cost allocation as it pertains to property, plant, and equipment and intangible assets.
Bloom's: Remember
AACSB: Reflective Thinking
AICPA/Accessibility: BB Critical Thinking; FN Measurement / Keyboard Navigation
2) The physical life of a depreciable asset is bounded by its service life.
Difficulty: 1 Easy
Topic: Measuring cost allocation
Learning Objective: 11-01 Explain the concept of cost allocation as it pertains to property, plant, and equipment and intangible assets.
Bloom's: Remember
AACSB: Reflective Thinking
AICPA/Accessibility: BB Critical Thinking; FN Measurement / Keyboard Navigation
3) An asset is depreciated over whichever is longer, the asset's service life or physical life.
Difficulty: 1 Easy
Topic: Measuring cost allocation
Learning Objective: 11-01 Explain the concept of cost allocation as it pertains to property, plant, and equipment and intangible assets.
Bloom's: Remember
AACSB: Reflective Thinking
AICPA/Accessibility: Keyboard Navigation
4) An asset's residual value is the amount the company expects to receive for the asset at the end of its service life, less any anticipated disposal costs.
Difficulty: 1 Easy
Topic: Measuring cost allocation
Learning Objective: 11-01 Explain the concept of cost allocation as it pertains to property, plant, and equipment and intangible assets.
Bloom's: Remember
AACSB: Reflective Thinking
AICPA/Accessibility: Keyboard Navigation
5) Any method of depreciation should be both systematic and rational.
Difficulty: 1 Easy
Topic: Measuring cost allocation
Learning Objective: 11-01 Explain the concept of cost allocation as it pertains to property, plant, and equipment and intangible assets.
Bloom's: Remember
AACSB: Reflective Thinking
AICPA/Accessibility: BB Critical Thinking; FN Measurement / Keyboard Navigation
6) Total depreciation is the same over the life of an asset regardless of the method of depreciation used.
Difficulty: 1 Easy
Topic: Measuring cost allocation
Learning Objective: 11-01 Explain the concept of cost allocation as it pertains to property, plant, and equipment and intangible assets.
Bloom's: Understand
AACSB: Reflective Thinking
AICPA/Accessibility: BB Critical Thinking; FN Measurement / Keyboard Navigation
7) Advocates of accelerated depreciation methods argue that their use tends to level out the total cost of ownership of an asset over its benefit period if one considers both depreciation and repair and maintenance costs.
Difficulty: 1 Easy
Topic: Depreciation—Basics and compare methods
Learning Objective: 11-02 Determine periodic depreciation using both time-based and activity-based methods and account for dispositions.
Bloom's: Understand
AACSB: Reflective Thinking
AICPA/Accessibility: BB Critical Thinking; FN Measurement / Keyboard Navigation
8) An asset's book value is computed as its original cost minus residual value, less accumulated depreciation.
Difficulty: 1 Easy
Topic: Depreciation—Basics and compare methods
Learning Objective: 11-02 Determine periodic depreciation using both time-based and activity-based methods and account for dispositions.
Bloom's: Remember
AACSB: Reflective Thinking
AICPA/Accessibility: Keyboard Navigation
9) Activity-based methods of depreciation are appropriate for assets whose service life is a function of use rather than time.
Difficulty: 1 Easy
Topic: Depreciation—Basics and compare methods
Learning Objective: 11-02 Determine periodic depreciation using both time-based and activity-based methods and account for dispositions.
Bloom's: Remember
AACSB: Reflective Thinking
AICPA/Accessibility: BB Critical Thinking; FN Measurement / Keyboard Navigation
10) Once it selects a depreciation method for existing assets, a company must consistently use the same method of depreciation for all subsequent fixed asset acquisitions.
Difficulty: 1 Easy
Topic: Depreciation—Basics and compare methods
Learning Objective: 11-02 Determine periodic depreciation using both time-based and activity-based methods and account for dispositions.
Bloom's: Remember
AACSB: Reflective Thinking
AICPA/Accessibility: BB Critical Thinking; FN Measurement / Keyboard Navigation
11) As a planned depreciation schedule, a company may use double-declining-balance depreciation for approximately the first half of an asset's service life and then switch to the straight-line method for the remaining life of the asset.
Difficulty: 2 Medium
Topic: Depreciation—Basics and compare methods
Learning Objective: 11-02 Determine periodic depreciation using both time-based and activity-based methods and account for dispositions.
Bloom's: Understand
AACSB: Reflective Thinking
AICPA/Accessibility: Keyboard Navigation
12) A company must use the same depreciation method for both financial reporting and income tax reporting purposes.
Difficulty: 1 Easy
Topic: Depreciation—Basics and compare methods
Learning Objective: 11-02 Determine periodic depreciation using both time-based and activity-based methods and account for dispositions.
Bloom's: Remember
AACSB: Reflective Thinking
AICPA/Accessibility: Keyboard Navigation
13) A gain is recognized on the disposal of an asset when the asset's book value is greater than the consideration received.
Difficulty: 1 Easy
Topic: Disposition of PPE and intangible assets
Learning Objective: 11-02 Determine periodic depreciation using both time-based and activity-based methods and account for dispositions.
Bloom's: Remember
AACSB: Reflective Thinking
AICPA/Accessibility: Keyboard Navigation
14) A loss is recognized on the disposal of an asset when the asset's fair value is less than the consideration received.
Difficulty: 1 Easy
Topic: Disposition of PPE and intangible assets
Learning Objective: 11-02 Determine periodic depreciation using both time-based and activity-based methods and account for dispositions.
Bloom's: Remember
AACSB: Reflective Thinking
AICPA/Accessibility: Keyboard Navigation
15) A gain on the disposal of an asset indicates that the asset was sold for more than its fair value.
Difficulty: 2 Medium
Topic: Disposition of PPE and intangible assets
Learning Objective: 11-02 Determine periodic depreciation using both time-based and activity-based methods and account for dispositions.
Bloom's: Understand
AACSB: Reflective Thinking
AICPA/Accessibility: Keyboard Navigation
16) A loss on the disposal of an asset indicates that management likely has not efficiently used the asset over its service life.
Difficulty: 2 Medium
Topic: Disposition of PPE and intangible assets
Learning Objective: 11-02 Determine periodic depreciation using both time-based and activity-based methods and account for dispositions.
Bloom's: Understand
AACSB: Reflective Thinking
AICPA/Accessibility: Keyboard Navigation
17) Property, plant, or equipment classified as held for sale is reported at whichever is lower, the asset's book value or the asset's fair value less cost to sell.
Difficulty: 1 Easy
Topic: Disposition of PPE and intangible assets
Learning Objective: 11-02 Determine periodic depreciation using both time-based and activity-based methods and account for dispositions.
Bloom's: Remember
AACSB: Reflective Thinking
AICPA/Accessibility: Keyboard Navigation
18) Under group and composite depreciation methods, gains and losses on the disposal of individual assets need not be computed.
Difficulty: 1 Easy
Topic: Depreciation—Group and composite methods
Learning Objective: 11-02 Determine periodic depreciation using both time-based and activity-based methods and account for dispositions.
Bloom's: Remember
AACSB: Reflective Thinking
AICPA/Accessibility: BB Critical Thinking; FN Measurement / Keyboard Navigation
19) Depletion of the cost of natural resources usually is determined using the units-of-production method.
Difficulty: 1 Easy
Topic: Depletion of natural resources
Learning Objective: 11-03 Calculate the periodic depletion of a natural resource.
Bloom's: Remember
AACSB: Reflective Thinking
AICPA/Accessibility: Keyboard Navigation
20) Equipment that will be used to extract natural resources should be depreciated over its useful life or the life of the natural resource, whichever is shorter, assuming the equipment has no alternative use.
Difficulty: 1 Easy
Topic: Depletion of natural resources
Learning Objective: 11-03 Calculate the periodic depletion of a natural resource.
Bloom's: Remember
AACSB: Reflective Thinking
AICPA/Accessibility: Keyboard Navigation
21) Depletion is treated as a period cost and expensed at the time the natural resource is extracted.
Difficulty: 1 Easy
Topic: Depletion of natural resources
Learning Objective: 11-03 Calculate the periodic depletion of a natural resource.
Bloom's: Remember
AACSB: Reflective Thinking
AICPA/Accessibility: Keyboard Navigation
22) Statutory depletion is the maximum amount of depletion that may be reported in financial statements prepared according to GAAP.
Difficulty: 1 Easy
Topic: Depletion of natural resources
Learning Objective: 11-03 Calculate the periodic depletion of a natural resource.
Bloom's: Remember
AACSB: Reflective Thinking
AICPA/Accessibility: BB Critical Thinking; FN Measurement / Keyboard Navigation
23) The cost of an intangible asset with a finite useful life is amortized.
Difficulty: 1 Easy
Topic: Intangible assets subject to amortization
Learning Objective: 11-04 Calculate the periodic amortization of an intangible asset.
Bloom's: Remember
AACSB: Reflective Thinking
AICPA/Accessibility: Keyboard Navigation
24) For intangible assets used in the manufacture of a product, amortization is a product cost and is included in the cost of inventory.
Difficulty: 1 Easy
Topic: Intangible assets subject to amortization
Learning Objective: 11-04 Calculate the periodic amortization of an intangible asset.
Bloom's: Remember
AACSB: Reflective Thinking
AICPA/Accessibility: Keyboard Navigation
25) Software development costs are amortized based on the lesser of (a) the ratio of current revenues to current and anticipated revenues or (b) straight-line.
Difficulty: 1 Easy
Topic: Intangible assets subject to amortization
Learning Objective: 11-04 Calculate the periodic amortization of an intangible asset.
Bloom's: Remember
AACSB: Reflective Thinking
AICPA/Accessibility: Keyboard Navigation
26) The capitalized cost of cloud computing arrangements is amortized over the software's expected useful life.
Difficulty: 1 Easy
Topic: Intangible assets subject to amortization
Learning Objective: 11-04 Calculate the periodic amortization of an intangible asset.
Bloom's: Remember
AACSB: Reflective Thinking
AICPA/Accessibility: Keyboard Navigation
27) The cost of an intangible asset with an indefinite useful life is amortized over the lesser of the asset's legal life or 20 years.
Difficulty: 1 Easy
Topic: Intangible assets subject to amortization
Learning Objective: 11-04 Calculate the periodic amortization of an intangible asset.
Bloom's: Remember
AACSB: Reflective Thinking
AICPA/Accessibility: Keyboard Navigation
28) A change in the estimated recoverable units used to compute depletion requires retroactive adjustments to the financial statements.
Difficulty: 2 Medium
Topic: Changes in estimates
Learning Objective: 11-05 Explain the appropriate accounting treatment required when a change is made in the service life or residual value of property, plant, and equipment and intangible assets.
Bloom's: Understand
AACSB: Reflective Thinking
AICPA/Accessibility: BB Critical Thinking; FN Measurement / Keyboard Navigation
29) Changes in the estimates involved in depreciation, depletion, and amortization require retroactive restatement of financial statements.
Difficulty: 1 Easy
Topic: Changes in estimates
Learning Objective: 11-05 Explain the appropriate accounting treatment required when a change is made in the service life or residual value of property, plant, and equipment and intangible assets.
Bloom's: Remember
AACSB: Reflective Thinking
AICPA/Accessibility: BB Critical Thinking; FN Measurement / Keyboard Navigation
30) Generally accepted accounting principles allow a company to change from one depreciation method to another if the company can justify the change.
Difficulty: 1 Easy
Topic: Changes in depreciation method
Learning Objective: 11-06 Explain the appropriate accounting treatment required when a change in depreciation, amortization, or depletion method is made.
Bloom's: Remember
AACSB: Reflective Thinking
AICPA/Accessibility: Keyboard Navigation
31) A change from one depreciation method to another is accounted for retroactively.
Difficulty: 1 Easy
Topic: Changes in depreciation method
Learning Objective: 11-06 Explain the appropriate accounting treatment required when a change in depreciation, amortization, or depletion method is made.
Bloom's: Remember
AACSB: Reflective Thinking
AICPA/Accessibility: Keyboard Navigation
32) When an error in calculating depreciation in a prior year is discovered, prior years' financial statements are retrospectively restated.
Difficulty: 1 Easy
Topic: Error correction
Learning Objective: 11-07 Explain the appropriate treatment required when an error in accounting for property, plant, and equipment and intangible assets is discovered.
Bloom's: Remember
AACSB: Reflective Thinking
AICPA/Accessibility: Keyboard Navigation
33) An understatement of depreciation expense in a prior year is corrected by overstating depreciation expense in the current year by the same amount.
Difficulty: 1 Easy
Topic: Error correction
Learning Objective: 11-07 Explain the appropriate treatment required when an error in accounting for property, plant, and equipment and intangible assets is discovered.
Bloom's: Remember
AACSB: Reflective Thinking
AICPA/Accessibility: Keyboard Navigation
34) The correction for overstating depreciation expense in a prior year includes a prior period adjustment to increase the beginning balance of retained earnings in the current year.
Difficulty: 3 Hard
Topic: Error correction
Learning Objective: 11-07 Explain the appropriate treatment required when an error in accounting for property, plant, and equipment and intangible assets is discovered.
Bloom's: Analyze
AACSB: Analytical Thinking
AICPA/Accessibility: Keyboard Navigation
35) Property, plant, and equipment and finite-life intangible assets must be tested for impairment at least once a year.
Difficulty: 1 Easy
Topic: Impairment—PPE and finite-life intangibles
Learning Objective: 11-08 Identify situations that involve a significant impairment of the value of property, plant, and equipment and intangible assets and describe the required accounting procedures.
Bloom's: Remember
AACSB: Reflective Thinking
AICPA/Accessibility: BB Critical Thinking; FN Measurement / Keyboard Navigation
36) Property, plant, and equipment are considered impaired when the undiscounted sum of estimated future cash flows from the asset is less than the asset's book value.
Difficulty: 1 Easy
Topic: Impairment—PPE and finite-life intangibles
Learning Objective: 11-08 Identify situations that involve a significant impairment of the value of property, plant, and equipment and intangible assets and describe the required accounting procedures.
Bloom's: Remember
AACSB: Reflective Thinking
AICPA/Accessibility: Keyboard Navigation
37) An impairment loss for property, plant, and equipment is measured as the asset's book value less the undiscounted sum of estimated future cash flows from the asset.
Difficulty: 1 Easy
Topic: Impairment—PPE and finite-life intangibles
Learning Objective: 11-08 Identify situations that involve a significant impairment of the value of property, plant, and equipment and intangible assets and describe the required accounting procedures.
Bloom's: Remember
AACSB: Reflective Thinking
AICPA/Accessibility: Keyboard Navigation
38) Intangible assets with indefinite useful lives should be tested for impairment annually or more frequently if events or changes in circumstances indicate that it is more likely than not that the asset is impaired.
Difficulty: 1 Easy
Topic: Impairment—Indefinite-life intangible assets
Learning Objective: 11-08 Identify situations that involve a significant impairment of the value of property, plant, and equipment and intangible assets and describe the required accounting procedures.
Bloom's: Remember
AACSB: Reflective Thinking
AICPA/Accessibility: Keyboard Navigation
39) For intangible assets with indefinite useful lives, estimated future cash flows generally are not used as part of the recoverability test.
Difficulty: 1 Easy
Topic: Impairment—Indefinite-life intangible assets
Learning Objective: 11-08 Identify situations that involve a significant impairment of the value of property, plant, and equipment and intangible assets and describe the required accounting procedures.
Bloom's: Remember
AACSB: Reflective Thinking
AICPA/Accessibility: Keyboard Navigation
40) A goodwill impairment loss is indicated when the fair value of the reporting unit is less than its book value.
Difficulty: 1 Easy
Topic: Impairment—Indefinite-life intangible assets
Learning Objective: 11-08 Identify situations that involve a significant impairment of the value of property, plant, and equipment and intangible assets and describe the required accounting procedures.
Bloom's: Remember
AACSB: Reflective Thinking
AICPA/Accessibility: Keyboard Navigation
41) A goodwill impairment loss in the current period can be recovered in a future period if events and circumstances indicate that factors associated with the impairment loss are no longer present.
Difficulty: 1 Easy
Topic: Impairment—Indefinite-life intangible assets
Learning Objective: 11-08 Identify situations that involve a significant impairment of the value of property, plant, and equipment and intangible assets and describe the required accounting procedures.
Bloom's: Remember
AACSB: Reflective Thinking
AICPA/Accessibility: Keyboard Navigation
42) Expenditures to repair, maintain, improve, or expand existing PPE are recorded as additional depreciation expense in the current period.
Difficulty: 1 Easy
Topic: Subsequent expenditures—PPE
Learning Objective: 11-09 Discuss the accounting treatment of repairs and maintenance, additions, improvements, and rearrangements to property, plant, and equipment and intangible assets.
Bloom's: Remember
AACSB: Reflective Thinking
AICPA/Accessibility: Keyboard Navigation
43) Expenditures made to maintain a given level of benefits provided by an asset typically are expensed as incurred.
Difficulty: 1 Easy
Topic: Subsequent expenditures—PPE
Learning Objective: 11-09 Discuss the accounting treatment of repairs and maintenance, additions, improvements, and rearrangements to property, plant, and equipment and intangible assets.
Bloom's: Remember
AACSB: Reflective Thinking
AICPA/Accessibility: Keyboard Navigation
44) The cost of additions made to existing PPE usually are capitalized if those additions are expected to increase future benefits.
Difficulty: 1 Easy
Topic: Subsequent expenditures—PPE
Learning Objective: 11-09 Discuss the accounting treatment of repairs and maintenance, additions, improvements, and rearrangements to property, plant, and equipment and intangible assets.
Bloom's: Remember
AACSB: Reflective Thinking
AICPA/Accessibility: Keyboard Navigation
45) Expenditures made to restructure assets without addition, replacement, or improvement are typically expensed as incurred.
Difficulty: 1 Easy
Topic: Subsequent expenditures—PPE
Learning Objective: 11-09 Discuss the accounting treatment of repairs and maintenance, additions, improvements, and rearrangements to property, plant, and equipment and intangible assets.
Bloom's: Remember
AACSB: Reflective Thinking
AICPA/Accessibility: Keyboard Navigation
46) The costs incurred to defend an intangible right should be capitalized, regardless of whether the defense is successful or not.
Difficulty: 1 Easy
Topic: Subsequent expenditures—Intangible rights
Learning Objective: 11-09 Discuss the accounting treatment of repairs and maintenance, additions, improvements, and rearrangements to property, plant, and equipment and intangible assets.
Bloom's: Remember
AACSB: Reflective Thinking
AICPA/Accessibility: Keyboard Navigation
47) International Financial Reporting Standards (IFRS) require goodwill to be tested for impairment at least annually.
Difficulty: 1 Easy
Topic: IFRS Impairment—PPE-Intangibles-Goodwill
Learning Objective: 11-10 Discuss the primary differences between U.S. GAAP and IFRS with respect to the utilization and impairment of property, plant, and equipment and intangible assets.
Bloom's: Remember
AACSB: Reflective Thinking; Diversity
AICPA/Accessibility: BB Global; FN Measurement / Keyboard Navigation
48) According to International Financial Reporting Standards (IFRS), property, plant, and equipment must be valued at cost less accumulated depreciation.
Difficulty: 1 Easy
Topic: IFRS valuation—PPE and intangibles
Learning Objective: 11-10 Discuss the primary differences between U.S. GAAP and IFRS with respect to the utilization and impairment of property, plant, and equipment and intangible assets.
Bloom's: Understand
AACSB: Reflective Thinking; Diversity
AICPA/Accessibility: BB Global; FN Measurement / Keyboard Navigation
49) Component depreciation, required under International Financial Reporting Standards (IFRS), is allowed but rarely used by U.S. companies.
Difficulty: 1 Easy
Topic: IFRS—Depreciation
Learning Objective: 11-10 Discuss the primary differences between U.S. GAAP and IFRS with respect to the utilization and impairment of property, plant, and equipment and intangible assets.
Bloom's: Understand
AACSB: Reflective Thinking
AICPA/Accessibility: BB Global; FN Measurement / Keyboard Navigation
50) A company that prepares its financial statements according to International Financial Reporting Standards (IFRS) must calculate amortization of capitalized software development costs in the same way as under U.S. GAAP.
Difficulty: 1 Easy
Topic: Impairment—PPE and finite-life intangibles
Learning Objective: 11-10 Discuss the primary differences between U.S. GAAP and IFRS with respect to the utilization and impairment of property, plant, and equipment and intangible assets.
Bloom's: Remember
AACSB: Reflective Thinking; Diversity
AICPA/Accessibility: Keyboard Navigation
51) Biological assets are valued at fair value less estimated costs to sell under International Financial Reporting Standards (IFRS).
Difficulty: 1 Easy
Topic: Impairment—PPE and finite-life intangibles
Learning Objective: 11-10 Discuss the primary differences between U.S. GAAP and IFRS with respect to the utilization and impairment of property, plant, and equipment and intangible assets.
Bloom's: Understand
AACSB: Reflective Thinking; Diversity
AICPA/Accessibility: BB Global; FN Measurement / Keyboard Navigation
52) According to International Financial Reporting Standards (IFRS), an impairment loss for property, plant, and equipment is required only when an asset's book value exceeds the undiscounted sum of the asset's estimated future cash flows.
Difficulty: 1 Easy
Topic: IFRS Impairment—PPE-Intangibles-Goodwill
Learning Objective: 11-10 Discuss the primary differences between U.S. GAAP and IFRS with respect to the utilization and impairment of property, plant, and equipment and intangible assets.
Bloom's: Understand
AACSB: Reflective Thinking; Diversity
AICPA/Accessibility: BB Global; FN Measurement / Keyboard Navigation
53) According to International Financial Reporting Standards (IFRS), the impairment loss for an indefinite-life intangible asset other than goodwill is the difference between book value and the recoverable amount.
Difficulty: 1 Easy
Topic: IFRS Impairment—PPE-Intangibles-Goodwill
Learning Objective: 11-10 Discuss the primary differences between U.S. GAAP and IFRS with respect to the utilization and impairment of property, plant, and equipment and intangible assets.
Bloom's: Remember
AACSB: Reflective Thinking; Diversity
AICPA/Accessibility: BB Global; FN Measurement / Keyboard Navigation
54) According to International Financial Reporting Standards (IFRS), the costs to successfully defend an intangible right normally are capitalized and amortized.
Difficulty: 1 Easy
Topic: IFRS—Cost of defending intangible rights
Learning Objective: 11-10 Discuss the primary differences between U.S. GAAP and IFRS with respect to the utilization and impairment of property, plant, and equipment and intangible assets.
Bloom's: Understand
AACSB: Reflective Thinking; Diversity
AICPA/Accessibility: BB Global; FN Measurement / Keyboard Navigation
55) MACRS (modified accelerated cost recovery system) depreciation is equivalent to sum-of-the-years'-digits depreciation.
Difficulty: 1 Easy
Topic: Tax depreciation—MACRS—Chap App A
Learning Objective: Appendix 11A Comparison with MACRS (Tax Depreciation).
Bloom's: Remember
AACSB: Reflective Thinking
AICPA/Accessibility: BB Critical Thinking; FN Measurement / Keyboard Navigation
56) By the replacement depreciation method, depreciation is recorded when assets are replaced.
Difficulty: 1 Easy
Topic: Retirement and replacement—Chap App B
Learning Objective: Appendix 11B Retirement and Replacement Methods of Depreciation.
Bloom's: Remember
AACSB: Reflective Thinking
AICPA/Accessibility: BB Critical Thinking; FN Measurement / Keyboard Navigation
57) The factors that need to be determined to compute depreciation are an asset's:
A) Cost, residual value, and physical life.
B) Cost, replacement value, and service life.
C) Fair value, residual value, and economic life.
D) Cost, residual value, and service life.
Difficulty: 1 Easy
Topic: Measuring cost allocation
Learning Objective: 11-01 Explain the concept of cost allocation as it pertains to property, plant, and equipment and intangible assets.
Bloom's: Remember
AACSB: Reflective Thinking
AICPA/Accessibility: BB Critical Thinking; FN Measurement / Keyboard Navigation
58) The allocation base for an asset is:
A) Its service life.
B) The excess of its cost over residual value.
C) The difference between its replacement value and cost.
D) The amount allowable under MACRS.
Difficulty: 1 Easy
Topic: Measuring cost allocation
Learning Objective: 11-01 Explain the concept of cost allocation as it pertains to property, plant, and equipment and intangible assets.
Bloom's: Remember
AACSB: Reflective Thinking
AICPA/Accessibility: BB Critical Thinking; FN Measurement / Keyboard Navigation
59) An asset that has an estimated physical life of six years and an estimated service life of four years should be depreciated over:
A) Four years.
B) Five years.
C) Six years.
D) Any of these choices can be chosen by management.
Difficulty: 1 Easy
Topic: Measuring cost allocation
Learning Objective: 11-01 Explain the concept of cost allocation as it pertains to property, plant, and equipment and intangible assets.
Bloom's: Remember
AACSB: Reflective Thinking
AICPA/Accessibility: BB Critical Thinking; FN Measurement / Keyboard Navigation
60) Depreciation, depletion, and amortization:
A) All refer to the process of allocating the cost of long-term assets used in the business over future periods.
B) All generally use the same methods of cost allocation.
C) Are all handled the same in arriving at taxable income.
D) All of these answer choices are correct.
Difficulty: 1 Easy
Topic: Measuring cost allocation
Learning Objective: 11-01 Explain the concept of cost allocation as it pertains to property, plant, and equipment and intangible assets.
Bloom's: Remember
AACSB: Reflective Thinking
AICPA/Accessibility: BB Critical Thinking; FN Measurement / Keyboard Navigation
61) Which of the following typically refers to the process of allocating the cost of long-term intangible assets used in the business over future periods?
A) Depreciation.
B) Amortization.
C) Depletion.
D) Impairment.
Difficulty: 1 Easy
Topic: Measuring cost allocation
Learning Objective: 11-01 Explain the concept of cost allocation as it pertains to property, plant, and equipment and intangible assets.
Bloom's: Remember
AACSB: Reflective Thinking; Knowledge Application
AICPA/Accessibility: BB Critical Thinking; FN Measurement / Keyboard Navigation
62) Which of the following typically would cause the service life of an asset to be less than its physical life?
A) The company no longer provides the products or services associated with the use of the asset.
B) Suppliers may develop new technologies that are more efficient.
C) The expected rate of technological change may shorten service life.
D) All of these answer choices are correct.
Difficulty: 1 Easy
Topic: Measuring cost allocation
Learning Objective: 11-01 Explain the concept of cost allocation as it pertains to property, plant, and equipment and intangible assets.
Bloom's: Remember
AACSB: Reflective Thinking
AICPA/Accessibility: BB Critical Thinking; FN Measurement / Keyboard Navigation
63) The allocation base of an asset refers to which of the following?
A) The asset's initial capitalized cost.
B) The number of years over which the asset's cost will be allocated.
C) The asset's initial capitalized cost minus residual value.
D) The method used to allocate the asset's cost across years.
Difficulty: 1 Easy
Topic: Measuring cost allocation
Learning Objective: 11-01 Explain the concept of cost allocation as it pertains to property, plant, and equipment and intangible assets.
Bloom's: Remember
AACSB: Reflective Thinking
AICPA/Accessibility: BB Critical Thinking; FN Measurement / Keyboard Navigation
64) The overriding principle for all depreciation methods is that the method must be:
A) Conservative and economic.
B) Systematic and rational.
C) Consistent and conservative.
D) Significant and material.
Difficulty: 1 Easy
Topic: Measuring cost allocation
Learning Objective: 11-01 Explain the concept of cost allocation as it pertains to property, plant, and equipment and intangible assets.
Bloom's: Remember
AACSB: Reflective Thinking
AICPA/Accessibility: BB Critical Thinking; FN Measurement / Keyboard Navigation
65) Depreciation:
A) Is always considered a period cost.
B) Could be a product cost or a period cost depending on the use of the asset.
C) Is usually based on the declining-balance method.
D) Per books is usually higher than MACRS in the early years of an asset's life.
Difficulty: 2 Medium
Topic: Measuring cost allocation
Learning Objective: 11-01 Explain the concept of cost allocation as it pertains to property, plant, and equipment and intangible assets.
Bloom's: Remember
AACSB: Reflective Thinking
AICPA/Accessibility: BB Critical Thinking; FN Measurement / Keyboard Navigation
66) Assuming an asset is used evenly over a four-year service life, which method of depreciation will always result in the largest amount of depreciation in the first year?
A) Straight-line.
B) Units-of-production.
C) Double-declining-balance.
D) Sum-of-the-years'-digits.
Difficulty: 2 Medium
Topic: Depreciation—Basics and compare methods
Learning Objective: 11-02 Determine periodic depreciation using both time-based and activity-based methods and account for dispositions.
Bloom's: Understand
AACSB: Reflective Thinking
AICPA/Accessibility: BB Critical Thinking; FN Measurement / Keyboard Navigation
67) In the first year of an asset's life, which of the following methods has the smallest depreciation?
A) Straight-line.
B) Declining-balance.
C) Sum-of-the-years'-digits.
D) All of the other choices result in the same amount of depreciation.
Difficulty: 2 Medium
Topic: Depreciation—Basics and compare methods
Learning Objective: 11-02 Determine periodic depreciation using both time-based and activity-based methods and account for dispositions.
Bloom's: Understand
AACSB: Reflective Thinking
AICPA/Accessibility: BB Critical Thinking; FN Measurement / Keyboard Navigation
68) Cutter Enterprises purchased equipment for $72,000 on January 1, 2021. The equipment is expected to have a five-year life and a residual value of $6,000.
Using the straight-line method, depreciation for 2021 would be:
A) $13,200.
B) $14,400.
C) $72,000.
D) None of the other answer choices are correct.
Difficulty: 1 Easy
Topic: Depreciation—Straight-line method
Learning Objective: 11-02 Determine periodic depreciation using both time-based and activity-based methods and account for dispositions.
Bloom's: Apply
AACSB: Knowledge Application
AICPA/Accessibility: FN Measurement / Keyboard Navigation
69) Cutter Enterprises purchased equipment for $72,000 on January 1, 2021. The equipment is expected to have a five-year life and a residual value of $6,000.
Using the straight-line method, the book value at December 31, 2021, would be:
A) $57,600.
B) $51,600.
C) $58,800.
D) $52,800.
Difficulty: 2 Medium
Topic: Depreciation—Straight-line method
Learning Objective: 11-02 Determine periodic depreciation using both time-based and activity-based methods and account for dispositions.
Bloom's: Apply
AACSB: Knowledge Application
AICPA/Accessibility: FN Measurement / Keyboard Navigation
70) Cutter Enterprises purchased equipment for $72,000 on January 1, 2021. The equipment is expected to have a five-year life and a residual value of $6,000.
Using the straight-line method, depreciation for 2022 and the equipment's book value at December 31, 2022, would be:
A) $14,400 and $43,200 respectively.
B) $28,800 and $37,200 respectively.
C) $13,200 and $39,600 respectively.
D) $13,200 and $45,600 respectively.
Difficulty: 3 Hard
Topic: Depreciation—Straight-line method
Learning Objective: 11-02 Determine periodic depreciation using both time-based and activity-based methods and account for dispositions.
Bloom's: Apply
AACSB: Knowledge Application
AICPA/Accessibility: FN Measurement / Keyboard Navigation
71) Cutter Enterprises purchased equipment for $72,000 on January 1, 2021. The equipment is expected to have a five-year life and a residual value of $6,000.
Using the double-declining-balance method, depreciation for 2021 and the book value at December 31, 2021, would be:
A) $26,400 and $45,600 respectively.
B) $28,800 and $43,200 respectively.
C) $28,800 and $37,200 respectively.
D) $26,400 and $39,600 respectively.
Difficulty: 2 Medium
Topic: Depreciation—Declining-balance method
Learning Objective: 11-02 Determine periodic depreciation using both time-based and activity-based methods and account for dispositions.
Bloom's: Apply
AACSB: Knowledge Application
AICPA/Accessibility: FN Measurement / Keyboard Navigation
72) Cutter Enterprises purchased equipment for $72,000 on January 1, 2021. The equipment is expected to have a five-year life and a residual value of $6,000.
Using the double-declining-balance method, depreciation for 2022 would be:
A) $28,800.
B) $18,240.
C) $17,280.
D) None of these answer choices are correct.
Difficulty: 3 Hard
Topic: Depreciation—Declining-balance method
Learning Objective: 11-02 Determine periodic depreciation using both time-based and activity-based methods and account for dispositions.
Bloom's: Apply
AACSB: Knowledge Application
AICPA/Accessibility: FN Measurement / Keyboard Navigation
73) Cutter Enterprises purchased equipment for $72,000 on January 1, 2021. The equipment is expected to have a five-year life and a residual value of $6,000.
Using the double-declining-balance method, the book value at December 31, 2022, would be:
A) $14,400.
B) $24,960.
C) $27,360.
D) $25,920.
Difficulty: 3 Hard
Topic: Depreciation—Declining-balance method
Learning Objective: 11-02 Determine periodic depreciation using both time-based and activity-based methods and account for dispositions.
Bloom's: Apply
AACSB: Knowledge Application
AICPA/Accessibility: FN Measurement / Keyboard Navigation
74) Cutter Enterprises purchased equipment for $72,000 on January 1, 2021. The equipment is expected to have a five-year life and a residual value of $6,000.
Using the sum-of-the-years'-digits method, depreciation for 2021 and book value at December 31, 2021, would be: (Do not round depreciation rate per year)
A) $22,000 and $44,000 respectively.
B) $22,000 and $50,000 respectively.
C) $24,000 and $48,000 respectively.
D) $24,000 and $42,000 respectively.
Difficulty: 3 Hard
Topic: Depreciation—Sum-of-the-years'-digits method
Learning Objective: 11-02 Determine periodic depreciation using both time-based and activity-based methods and account for dispositions.
Bloom's: Apply
AACSB: Knowledge Application
AICPA/Accessibility: FN Measurement / Keyboard Navigation
75) Cutter Enterprises purchased equipment for $72,000 on January 1, 2021. The equipment is expected to have a five-year life and a residual value of $6,000.
Using the sum-of-the-years'-digits method, depreciation for 2022 and book value at December 31, 2022, would be: (Do not round depreciation rate per year)
A) $19,200 and $30,800 respectively.
B) $17,600 and $26,400 respectively.
C) $19,200 and $28,800 respectively.
D) $17,600 and $32,400 respectively.
Difficulty: 3 Hard
Topic: Depreciation—Sum-of-the-years'-digits method
Learning Objective: 11-02 Determine periodic depreciation using both time-based and activity-based methods and account for dispositions.
Bloom's: Apply
AACSB: Knowledge Application
AICPA/Accessibility: FN Measurement / Keyboard Navigation
76) On June 30, 2021, Prego Equipment purchased a precision laser-guided steel punch that has an expected capacity of 300,000 units and no residual value. The cost of the machine was $450,000 and is to be depreciated using the units-of-production method. During the six months of 2021, 24,000 units of product were produced. At the beginning of 2022, engineers estimated that the machine can realistically be used to produce only another 230,000 units. During 2022, 70,000 units were produced.
Prego would report depreciation in 2021 of:
A) $36,000.
B) $43,900.
C) $18,000.
D) $21,950.
Difficulty: 2 Medium
Topic: Depreciation—Units-of-production method
Learning Objective: 11-02 Determine periodic depreciation using both time-based and activity-based methods and account for dispositions.
Bloom's: Apply
AACSB: Knowledge Application
AICPA/Accessibility: FN Measurement / Keyboard Navigation
77) On June 30, 2021, Prego Equipment purchased a precision laser-guided steel punch that has an expected capacity of 300,000 units and no residual value. The cost of the machine was $450,000 and is to be depreciated using the units-of-production method. During the six months of 2021, 24,000 units of product were produced. At the beginning of 2022, engineers estimated that the machine can realistically be used to produce only another 230,000 units. During 2022, 70,000 units were produced.
Prego would report depreciation in 2022 of:
A) $135,230.
B) $126,000.
C) $108,000.
D) $105,000.
Difficulty: 3 Hard
Topic: Changes in estimates; Depreciation—Units-of-production method
Learning Objective: 11-02 Determine periodic depreciation using both time-based and activity-based methods and account for dispositions.; 11-05 Explain the appropriate accounting treatment required when a change is made in the service life or residual value of property, plant, and equipment and intangible assets.
Bloom's: Apply
AACSB: Knowledge Application
AICPA/Accessibility: FN Measurement / Keyboard Navigation
78) Archie Co. purchased a framing machine for $45,000 on January 1, 2021. The machine is expected to have a four-year life, with a residual value of $5,000 at the end of four years.
Using the straight-line method, depreciation for 2021 and book value at December 31, 2021, would be:
A) $10,000 and $30,000 respectively.
B) $11,250 and $28,750 respectively.
C) $10,000 and $35,000 respectively.
D) $11,250 and $33,750 respectively.
Difficulty: 2 Medium
Topic: Depreciation—Straight-line method
Learning Objective: 11-02 Determine periodic depreciation using both time-based and activity-based methods and account for dispositions.
Bloom's: Apply
AACSB: Knowledge Application
AICPA/Accessibility: FN Measurement / Keyboard Navigation
79) Archie Co. purchased a framing machine for $45,000 on January 1, 2021. The machine is expected to have a four-year life, with a residual value of $5,000 at the end of four years.
Using the straight-line method, depreciation for 2022 and book value at December 31, 2022, would be:
A) $10,000 and $20,000 respectively.
B) $10,000 and $25,000 respectively.
C) $11,250 and $17,500 respectively.
D) $11,250 and $22,500 respectively.
Difficulty: 2 Medium
Topic: Depreciation—Straight-line method
Learning Objective: 11-02 Determine periodic depreciation using both time-based and activity-based methods and account for dispositions.
Bloom's: Apply
AACSB: Knowledge Application
AICPA/Accessibility: FN Measurement / Keyboard Navigation
80) Archie Co. purchased a framing machine for $45,000 on January 1, 2021. The machine is expected to have a four-year life, with a residual value of $5,000 at the end of four years.
Using the double-declining-balance method, depreciation for 2021 and book value at December 31, 2021, would be:
A) $22,500 and $22,500 respectively.
B) $22,500 and $17,500 respectively.
C) $20,000 and $25,000 respectively.
D) $20,000 and $20,000 respectively.
Difficulty: 2 Medium
Topic: Depreciation—Declining-balance method
Learning Objective: 11-02 Determine periodic depreciation using both time-based and activity-based methods and account for dispositions.
Bloom's: Apply
AACSB: Knowledge Application
AICPA/Accessibility: FN Measurement / Keyboard Navigation
81) Archie Co. purchased a framing machine for $45,000 on January 1, 2021. The machine is expected to have a four-year life, with a residual value of $5,000 at the end of four years.
Using the double-declining-balance method, depreciation for 2022 and book value at December 31, 2022, would be:
A) $10,000 and $5,000 respectively.
B) $10,000 and $10,000 respectively.
C) $11,250 and $6,250 respectively.
D) $11,250 and $11,250 respectively.
Difficulty: 3 Hard
Topic: Depreciation—Declining-balance method
Learning Objective: 11-02 Determine periodic depreciation using both time-based and activity-based methods and account for dispositions.
Bloom's: Apply
AACSB: Knowledge Application
AICPA/Accessibility: FN Measurement / Keyboard Navigation
82) Archie Co. purchased a framing machine for $45,000 on January 1, 2021. The machine is expected to have a four-year life, with a residual value of $5,000 at the end of four years.
Using the sum-of-the-years'-digits method, depreciation for 2021 and book value at December 31, 2021, would be:
A) $18,000 and $27,000 respectively.
B) $16,000 and $29,000 respectively.
C) $16,000 and $24,000 respectively.
D) $18,000 and $22,000 respectively.
Difficulty: 2 Medium
Topic: Depreciation—Sum-of-the-years'-digits method
Learning Objective: 11-02 Determine periodic depreciation using both time-based and activity-based methods and account for dispositions.
Bloom's: Apply
AACSB: Knowledge Application
AICPA/Accessibility: FN Measurement / Keyboard Navigation
83) Archie Co. purchased a framing machine for $45,000 on January 1, 2021. The machine is expected to have a four-year life, with a residual value of $5,000 at the end of four years.
Using the sum-of-the years'-digits method, depreciation for 2022 and book value at December 31, 2022, would be:
A) $13,500 and $13,500 respectively.
B) $13,500 and $8,500 respectively.
C) $12,000 and $17,000 respectively.
D) $12,000 and $12,000 respectively.
Difficulty: 3 Hard
Topic: Depreciation—Sum-of-the-years'-digits method
Learning Objective: 11-02 Determine periodic depreciation using both time-based and activity-based methods and account for dispositions.
Bloom's: Apply
AACSB: Knowledge Application
AICPA/Accessibility: FN Measurement / Keyboard Navigation
84) On September 30, 2021, Bricker Enterprises purchased a machine for $200,000. The estimated service life is 10 years with a $20,000 residual value. Bricker records partial-year depreciation based on the number of months in service.
Depreciation for 2021 using the straight-line method is:
A) $13,500.
B) $15,000.
C) $4,500.
D) $5,000.
Difficulty: 2 Medium
Topic: Depreciation—Straight-line method
Learning Objective: 11-02 Determine periodic depreciation using both time-based and activity-based methods and account for dispositions.
Bloom's: Apply
AACSB: Knowledge Application
AICPA/Accessibility: FN Measurement / Keyboard Navigation
85) On September 30, 2021, Bricker Enterprises purchased a machine for $200,000. The estimated service life is 10 years with a $20,000 residual value. Bricker records partial-year depreciation based on the number of months in service.
Depreciation for 2021, using the double-declining-balance method, would be:
A) $40,000.
B) $10,000.
C) $36,000.
D) $9,000.
Difficulty: 2 Medium
Topic: Depreciation—Declining-balance method
Learning Objective: 11-02 Determine periodic depreciation using both time-based and activity-based methods and account for dispositions.
Bloom's: Apply
AACSB: Knowledge Application
AICPA/Accessibility: FN Measurement / Keyboard Navigation
86) On September 30, 2021, Bricker Enterprises purchased a machine for $200,000. The estimated service life is 10 years with a $20,000 residual value. Bricker records partial-year depreciation based on the number of months in service.
Depreciation for 2022, using the double-declining-balance method, would be:
A) $32,000.
B) $34,000.
C) $38,000.
D) $40,000.
Difficulty: 3 Hard
Topic: Depreciation—Declining-balance method
Learning Objective: 11-02 Determine periodic depreciation using both time-based and activity-based methods and account for dispositions.
Bloom's: Apply
AACSB: Knowledge Application
AICPA/Accessibility: FN Measurement / Keyboard Navigation
87) On September 30, 2021, Bricker Enterprises purchased a machine for $200,000. The estimated service life is 10 years with a $20,000 residual value. Bricker records partial-year depreciation based on the number of months in service.
Depreciation (to the nearest dollar) for 2021, using sum-of-the-years'-digits method, would be:
A) $9,091.
B) $24,545.
C) $27,273.
D) $8,182.
Difficulty: 3 Hard
Topic: Depreciation—Sum-of-the-years'-digits method
Learning Objective: 11-02 Determine periodic depreciation using both time-based and activity-based methods and account for dispositions.
Bloom's: Apply
AACSB: Knowledge Application
AICPA/Accessibility: FN Measurement / Keyboard Navigation
88) On September 30, 2021, Bricker Enterprises purchased a machine for $200,000. The estimated service life is 10 years with a $20,000 residual value. Bricker records partial-year depreciation based on the number of months in service.
Depreciation (to the nearest dollar) for 2022, using sum-of-the-years'-digits method, would be:
A) $31,909.
B) $29,455.
C) $35,456.
D) $54,000.
Difficulty: 3 Hard
Topic: Depreciation—Sum-of-the-years'-digits method
Learning Objective: 11-02 Determine periodic depreciation using both time-based and activity-based methods and account for dispositions.
Bloom's: Apply
AACSB: Knowledge Application
AICPA/Accessibility: FN Measurement / Keyboard Navigation
89) Jennings Advertising, Inc. reported the following in its December 31, 2021, balance sheet:
Equipment | $ | 500,000 |
|
Less: Accumulated depreciation—equipment | $ | 135,000 |
|
In a disclosure note, Jennings indicates that it uses straight-line depreciation over 10 years and estimates salvage value at 10% of cost. What is the average age of the equipment owned by Jennings?
A) 2.7 years.
B) 3 years.
C) 7 years.
D) 7.3 years.
Difficulty: 3 Hard
Topic: Depreciation—Straight-line method
Learning Objective: 11-02 Determine periodic depreciation using both time-based and activity-based methods and account for dispositions.
Bloom's: Apply
AACSB: Knowledge Application
AICPA/Accessibility: FN Measurement / Keyboard Navigation
90) Gulf Consulting Co. reported the following on its December 31, 2021, balance sheet:
Equipment (at cost) $700,000
In a disclosure note, Gulf indicates that it uses straight-line depreciation over five years and estimates salvage value as 10% of cost. Gulf's equipment averages 3.5 years at December 31, 2021. What is the book value of Gulf's equipment at December 31, 2021?
A) $490,000.
B) $441,000.
C) $259,000.
D) $210,000.
Difficulty: 3 Hard
Topic: Depreciation—Straight-line method
Learning Objective: 11-02 Determine periodic depreciation using both time-based and activity-based methods and account for dispositions.
Bloom's: Apply
AACSB: Knowledge Application
AICPA/Accessibility: FN Measurement / Keyboard Navigation
91) Asset C3PO has a depreciable base of $16.5 million and a service life of 10 years. What would the accumulated depreciation be at the end of year five under the sum-of-the-years'-digits method?
A) $4.5 million.
B) $8.25 million.
C) $12 million.
D) None of these answer choices are correct.
Difficulty: 3 Hard
Topic: Depreciation—Sum-of-the-years'-digits method
Learning Objective: 11-02 Determine periodic depreciation using both time-based and activity-based methods and account for dispositions.
Bloom's: Apply
AACSB: Knowledge Application
AICPA/Accessibility: FN Measurement / Keyboard Navigation
92) When selling property, plant, and equipment for cash:
A) The seller recognizes a gain or loss for the difference between the cash received and the fair value of the asset sold.
B) The seller recognizes a gain or loss for the difference between the cash received and the book value of the asset sold.
C) The seller recognizes losses, but not gains.
D) None of these answer choices are correct.
Difficulty: 2 Medium
Topic: Disposition of PPE and intangible assets
Learning Objective: 11-02 Determine periodic depreciation using both time-based and activity-based methods and account for dispositions.
Bloom's: Understand
AACSB: Reflective Thinking
AICPA/Accessibility: FN Measurement / Keyboard Navigation
93) Gains on the cash sales of property, plant, and equipment:
A) Are the excess of the book value over the cash proceeds.
B) Are part of cash flows from operations.
C) Are reported on a net-of-tax basis if material.
D) Are the excess of the cash proceeds over the book value of the assets sold.
Difficulty: 1 Easy
Topic: Disposition of PPE and intangible assets
Learning Objective: 11-02 Determine periodic depreciation using both time-based and activity-based methods and account for dispositions.
Bloom's: Remember
AACSB: Reflective Thinking
AICPA/Accessibility: BB Critical Thinking; FN Measurement / Keyboard Navigation
94) Losses on the cash sales of property, plant, and equipment:
A) Are the excess of the book value over the cash proceeds.
B) Are part of cash flows from operations.
C) Are reported on a net-of-tax basis if material.
D) Are the excess of the cash proceeds over the book value of the assets sold.
Difficulty: 1 Easy
Topic: Disposition of PPE and intangible assets
Learning Objective: 11-02 Determine periodic depreciation using both time-based and activity-based methods and account for dispositions.
Bloom's: Remember
AACSB: Reflective Thinking
AICPA/Accessibility: BB Critical Thinking; FN Measurement / Keyboard Navigation
95) When a company reports a gain on the sale of a depreciable asset, which of the following is always true?
A) The company sold the asset for more than its fair value.
B) The company sold the asset for more than its book value.
C) The company sold the asset before its useful life was over.
D) The company sold the asset for more than it was worth.
Difficulty: 1 Easy
Topic: Disposition of PPE and intangible assets
Learning Objective: 11-02 Determine periodic depreciation using both time-based and activity-based methods and account for dispositions.
Bloom's: Remember
AACSB: Reflective Thinking
AICPA/Accessibility: Keyboard Navigation
96) When a company reports a loss on the sale of a depreciable asset, which of the following is always true?
A) The company sold the asset for less than accumulated depreciation.
B) The company sold the asset for less than fair value.
C) The company sold the asset for less than book value.
D) The company sold the asset before the useful life was over.
Difficulty: 1 Easy
Topic: Disposition of PPE and intangible assets
Learning Objective: 11-02 Determine periodic depreciation using both time-based and activity-based methods and account for dispositions.
Bloom's: Remember
AACSB: Reflective Thinking
AICPA/Accessibility: Keyboard Navigation
97) A company decides to sell equipment it has owned and operated for the past five years. The equipment's original estimated useful life was eight years. Management calculates the loss on the sale as the equipment's original purchase price minus its selling price. Which of the following statements is correct?
A) Management should calculate the loss as the present value of expected decrease in cash flows from selling the equipment.
B) Management should subtract the equipment's accumulated depreciation from the original purchase price before calculating any loss.
C) Management should not record any loss on the sale of equipment if that equipment has been used in operations.
D) Management's calculation is correct.
Difficulty: 1 Easy
Topic: Disposition of PPE and intangible assets
Learning Objective: 11-02 Determine periodic depreciation using both time-based and activity-based methods and account for dispositions.
Bloom's: Remember
AACSB: Reflective Thinking
AICPA/Accessibility: Keyboard Navigation
98) An asset was acquired on January 1, 2021, for $15,000 with an estimated four-year life and $1,000 residual value. The company uses straight-line depreciation. Calculate the gain or loss if the asset was sold on December 31, 2023, for $5,000.
A) $500 gain.
B) $3,000 loss.
C) $1,500 gain.
D) $500 loss.
Difficulty: 2 Medium
Topic: Disposition of PPE and intangible assets; Depreciation—Straight-line method
Learning Objective: 11-02 Determine periodic depreciation using both time-based and activity-based methods and account for dispositions.
Bloom's: Apply
AACSB: Knowledge Application
AICPA/Accessibility: FN Measurement / Keyboard Navigation
99) Equipment was acquired on January 1, 2021, for $15,000 with an estimated four-year life and $1,000 residual value. The company uses straight-line depreciation. Record the gain or loss if the equipment was sold on December 31, 2023, for $5,000.
A)
Cash | $5,000 |
|
Accumulated Depreciation | $10,500 |
|
Equipment |
| $15,000 |
Gain |
| $500 |
B)
Cash | $5,000 |
|
Equipment |
| $4,500 |
Gain |
| $500 |
C)
Cash | $5,000 |
|
Equipment |
| $3,500 |
Gain |
| $1,500 |
D)
Cash | $5,000 |
|
Accumulated Depreciation | $7,000 |
|
Loss | $3,000 |
|
Equipment |
| $15,000 |
Difficulty: 2 Medium
Topic: Disposition of PPE and intangible assets; Depreciation—Straight-line method
Learning Objective: 11-02 Determine periodic depreciation using both time-based and activity-based methods and account for dispositions.
Bloom's: Analyze
AACSB: Analytical Thinking
AICPA/Accessibility: FN Measurement / Keyboard Navigation
100) An asset was acquired on August 1, 2021, for $22,000 with an estimated five-year life and $2,000 residual value. The company uses straight-line depreciation. Calculate the gain or loss if the asset was sold on April 30, 2023, for $13,000. Partial-year depreciation is calculated based on the number of months the asset is in service.
A) $3,000 gain.
B) $2,000 loss.
C) $6,000 gain.
D) $4,000 loss.
Difficulty: 3 Hard
Topic: Disposition of PPE and intangible assets; Depreciation—Straight-line method
Learning Objective: 11-02 Determine periodic depreciation using both time-based and activity-based methods and account for dispositions.
Bloom's: Apply
AACSB: Knowledge Application
AICPA/Accessibility: FN Measurement / Keyboard Navigation
101) An asset was acquired on October 1, 2021, for $78,000 with an estimated five-year life and $13,000 residual value. The company uses units-of-production depreciation and expects the asset to produce 20,000 units. Calculate the gain or loss if the asset was sold on March 31, 2024, for $58,000. Actual production was: 2021 = 500 units; 2022 = 3,000 units; 2023 = 3,500 units; 2024 = 1,000 units.
A) $11,200 gain.
B) $19,000 gain.
C) $6,000 gain.
D) $12,500 gain.
Difficulty: 3 Hard
Topic: Disposition of PPE and intangible assets; Depreciation—Units-of-production method
Learning Objective: 11-02 Determine periodic depreciation using both time-based and activity-based methods and account for dispositions.
Bloom's: Apply
AACSB: Knowledge Application
AICPA/Accessibility: FN Measurement / Keyboard Navigation
102) An asset was acquired on September 30, 2021, for $100,000 with an estimated five-year life and $20,000 residual value. The company uses double-declining-balance depreciation. Calculate the gain or loss if the asset was sold on December 31, 2022, for $50,000. Partial-year depreciation is to be calculated.
A) $1,200 gain.
B) $14,000 gain.
C) $16,000 loss.
D) $4,000 loss.
Difficulty: 3 Hard
Topic: Disposition of PPE and intangible assets; Depreciation—Declining-balance method
Learning Objective: 11-02 Determine periodic depreciation using both time-based and activity-based methods and account for dispositions.
Bloom's: Apply
AACSB: Knowledge Application
AICPA/Accessibility: FN Measurement / Keyboard Navigation
103) An asset acquired January 1, 2021, for $15,000 with an estimated 10-year life and no residual value is being depreciated in an equipment group asset account that has an average service life of eight years. The asset is sold on December 31, 2022, for $6,000. The entry to record the sale would be:
A)
Cash | $6,000 |
|
Loss on sale of equipment | $9,000 |
|
Equipment |
| $15,000 |
B)
Cash | $6,000 |
|
Equipment |
| $6,000 |
C)
Cash | $6,000 |
|
Accumulated depreciation | $3,750 |
|
Loss on sale of equipment | $5,250 |
|
Equipment |
| $15,000 |
D)
Cash | $6,000 |
|
Accumulated depreciation | $9,000 |
|
Equipment |
| $15,000 |
Difficulty: 3 Hard
Topic: Depreciation—Group and composite methods
Learning Objective: 11-02 Determine periodic depreciation using both time-based and activity-based methods and account for dispositions.
Bloom's: Analyze
AACSB: Analytical Thinking
AICPA/Accessibility: FN Measurement / Keyboard Navigation
104) The process of allocating the cost of natural resources over their useful life is known as:
A) Depreciation.
B) Depletion.
C) Amortization.
D) Consumption.
Difficulty: 1 Easy
Topic: Depletion of natural resources
Learning Objective: 11-03 Calculate the periodic depletion of a natural resource.
Bloom's: Remember
AACSB: Reflective Thinking
AICPA/Accessibility: BB Critical Thinking; FN Measurement / Keyboard Navigation
105) An activity-based method is most often used to allocate the cost of a natural resource over its useful life because:
A) This method generally results in the highest amount of assets in the earlier years.
B) This is the simplest method, and natural resource activity is hard to estimate.
C) The usefulness of natural resources generally is directly related to the amount of the resources extracted.
D) This method generally results in the highest amount of assets in the later years.
Difficulty: 2 Medium
Topic: Depletion of natural resources
Learning Objective: 11-03 Calculate the periodic depletion of a natural resource.
Bloom's: Understand
AACSB: Reflective Thinking
AICPA/Accessibility: BB Critical Thinking; FN Measurement / Keyboard Navigation
106) The cost of natural resources is expensed in the period:
A) The resource is harvested and becomes ready for sale.
B) The resource is acquired.
C) The resource is sold.
D) The resource is paid for.
Difficulty: 1 Easy
Topic: Depletion of natural resources
Learning Objective: 11-03 Calculate the periodic depletion of a natural resource.
Bloom's: Remember
AACSB: Reflective Thinking
AICPA/Accessibility: BB Critical Thinking; FN Measurement / Keyboard Navigation
107) Natural resources that have been harvested but not yet sold are accounted for as:
A) Property, plant, and equipment.
B) Cost of goods sold.
C) Operating expense.
D) Inventory.
Difficulty: 1 Easy
Topic: Depletion of natural resources
Learning Objective: 11-03 Calculate the periodic depletion of a natural resource.
Bloom's: Remember
AACSB: Reflective Thinking
AICPA/Accessibility: BB Critical Thinking; FN Measurement / Keyboard Navigation
108) Clark Oil and Gas incurred costs of $15.3 million for the rights to extract resources from a natural gas deposit. The company expects to extract 8 million cubic feet of natural gas during a six-year period. Natural gas extracted during years 1 and 2 were 800,000 and 1,600,000 cubic feet, respectively. What was total depletion for year 1 and year 2, assuming the company uses the units-of-production method?
A) $5.10 million.
B) $3.06 million.
C) $8.00 million.
D) $4.59 million.
Difficulty: 1 Easy
Topic: Depletion of natural resources
Learning Objective: 11-03 Calculate the periodic depletion of a natural resource.
Bloom's: Apply
AACSB: Knowledge Application
AICPA/Accessibility: FN Measurement / Keyboard Navigation
109) On March 31, 2021, M. Belotti purchased the right to remove gravel from an old rock quarry. The gravel is to be sold as roadbed for highway construction. The cost of the quarry rights was $164,000, with estimated salable rock of 20,000 tons. During 2021, Belotti loaded and sold 4,000 tons of rock and estimated that 16,000 tons remained at December 31, 2021. At January 1, 2022, Belotti estimated that 20,000 tons still remained. During 2022, Belotti loaded and sold 8,000 tons. Belotti uses the units-of-production method.
Belotti would record depletion in 2021 of:
A) $41,000.
B) $32,800.
C) $30,750.
D) $24,600.
Difficulty: 2 Medium
Topic: Depletion of natural resources
Learning Objective: 11-03 Calculate the periodic depletion of a natural resource.
Bloom's: Apply
AACSB: Knowledge Application
AICPA/Accessibility: FN Measurement / Keyboard Navigation
110) On March 31, 2021, M. Belotti purchased the right to remove gravel from an old rock quarry. The gravel is to be sold as roadbed for highway construction. The cost of the quarry rights was $164,000, with estimated salable rock of 20,000 tons. During 2021, Belotti loaded and sold 4,000 tons of rock and estimated that 16,000 tons remained at December 31, 2021. At January 1, 2022, Belotti estimated that 20,000 tons still remained. During 2022, Belotti loaded and sold 8,000 tons. Belotti uses the units-of-production method.
Belotti would record depletion in 2022 of:
A) $54,667.
B) $65,600.
C) $52,480.
D) $55,760.
Difficulty: 2 Medium
Topic: Depletion of natural resources; Changes in estimates
Learning Objective: 11-03 Calculate the periodic depletion of a natural resource.; 11-05 Explain the appropriate accounting treatment required when a change is made in the service life or residual value of property, plant, and equipment and intangible assets.
Bloom's: Apply
AACSB: Knowledge Application
AICPA/Accessibility: FN Measurement / Keyboard Navigation
111) On February 12, 2021, Forest Incorporated purchased the right to remove timber from a 10,000-acre tract of land over the next three years, and the company estimates no residual value. The timber is to be sold as lumber for new home construction. The cost of the timber rights was $240,000, with estimated salable timber feet of 750,000. During 2021 and 2022, Forest harvested and sold 600,000 feet of timber. What is the book value of the timber rights at the end of 2022, assuming the company uses the units-of-production method?
A) $48,000.
B) $80,000.
C) $160,000.
D) $192,000.
Difficulty: 1 Easy
Topic: Depletion of natural resources
Learning Objective: 11-03 Calculate the periodic depletion of a natural resource.; 11-05 Explain the appropriate accounting treatment required when a change is made in the service life or residual value of property, plant, and equipment and intangible assets.
Bloom's: Apply
AACSB: Knowledge Application
AICPA/Accessibility: FN Measurement / Keyboard Navigation
112) A company purchased land containing mineral deposits for $6,400,000 on January 1, 2021. The company expects to mine 1,600,000 tons of mineral over the next six years. The company has also purchased mining equipment for $800,000. The equipment has an estimated residual value of $160,000 and an expected life of 10 years and can be used at other mining sites. By the end of 2021, the company has mined and sold 240,000 tons. Management calculates depreciation of the equipment to be $96,000 [($800,000 − $160,000) × (240,000 tons/1,600,000 tons)]. Which of the following statements is correct?
A) Management should depreciate the equipment evenly over six years.
B) Management should not subtract the residual value in calculating depreciation.
C) Management should depreciate the equipment over 10 years.
D) Management's calculation is correct.
Difficulty: 3 Hard
Topic: Depletion of natural resources; Depreciation—Units-of-production method
Learning Objective: 11-02 Determine periodic depreciation using both time-based and activity-based methods and account for dispositions.; 11-03 Calculate the periodic depletion of a natural resource.
Bloom's: Apply
AACSB: Knowledge Application
AICPA/Accessibility: Keyboard Navigation
113) Foreman Mining purchased land containing a copper deposit for $2,300,000 on January 7, 2021. The company expects to mine 600,000 tons of copper over the next 10 years, and the land is expected to have a residual value of $1,400,000. The company has also purchased mining equipment for $400,000 that will be used only at this site over the 10 years with an estimated residual value of $52,000. By the end of the first year, the company has mined and sold 50,000 tons of copper. What is the cost attributed to copper inventory for 2021, assuming the company uses the units-of-production method?
A) $109,800.
B) $124,800.
C) $104,000.
D) $75,000.
Difficulty: 3 Hard
Topic: Depletion of natural resources; Depreciation—Units-of-production method
Learning Objective: 11-02 Determine periodic depreciation using both time-based and activity-based methods and account for dispositions.; 11-03 Calculate the periodic depletion of a natural resource.
Bloom's: Apply
AACSB: Knowledge Application
AICPA/Accessibility: FN Measurement / Keyboard Navigation
114) On April 23, 2021, Trevors Mining entered into an agreement with the state of California to obtain the rights to operate a mineral mine in California for $12 million. Additional costs and purchases included the following:
Preparation of site for excavation | $ | 4,800,000 |
|
Mining equipment |
| 360,000 |
|
Construction of various structures on site |
| 240,000 |
|
After the minerals are removed from the mine, the equipment will be sold for an estimated residual value of $60,000. The structures will be torn down. The mine is expected to produce 1,400,000 tons of ore. After the ore is removed, the land will revert back to the state of California. During 2021, Trevors extracted 210,000 tons of ore from the mine. What total amount would be charged to depletion of the mine and depreciation of the mining equipment and structures for 2021, assuming that Trevors uses the units-of-production method for both depletion and depreciation? (Round your final calculations to the nearest whole thousand dollars.)
A) $2,601,000.
B) $2,520,000.
C) $2,610,000.
D) $2,565,000.
Difficulty: 3 Hard
Topic: Depletion of natural resources; Depreciation—Units-of-production method
Learning Objective: 11-02 Determine periodic depreciation using both time-based and activity-based methods and account for dispositions.; 11-03 Calculate the periodic depletion of a natural resource.
Bloom's: Apply
AACSB: Knowledge Application
AICPA/Accessibility: FN Measurement / Keyboard Navigation
115) The legal life of a patent is:
A) 40 years.
B) 20 years.
C) Life of the inventor plus 50 years.
D) Indefinite.
Difficulty: 1 Easy
Topic: Intangible assets subject to amortization
Learning Objective: 11-04 Calculate the periodic amortization of an intangible asset.
Bloom's: Remember
AACSB: Reflective Thinking
AICPA/Accessibility: BB Critical Thinking / Keyboard Navigation
116) If an intangible asset has a legal life of eight years but contractually the usefulness is limited to six years, a company will amortize the cost over:
A) Eight years.
B) Six years.
C) Seven years.
D) Either six or eight years is allowed.
Difficulty: 1 Easy
Topic: Intangible assets subject to amortization
Learning Objective: 11-04 Calculate the periodic amortization of an intangible asset.
Bloom's: Understand
AACSB: Reflective Thinking
AICPA/Accessibility: BB Critical Thinking / Keyboard Navigation
117) Intangible assets that have an indefinite useful life:
A) Are those with no foreseeable limit on the period of time over which the asset is expected to contribute to the cash flows of the entity.
B) Are those with no legal, contractual, or economic factors that are expected to limit their useful life to a company.
C) Are those whose acquisition costs are not amortized over their useful life.
D) All of these answer choices are correct.
Difficulty: 2 Medium
Topic: Intangible assets not subject to amortization
Learning Objective: 11-04 Calculate the periodic amortization of an intangible asset.
Bloom's: Remember
AACSB: Reflective Thinking
AICPA/Accessibility: BB Critical Thinking / Keyboard Navigation
118) Amortization of capitalized computer software costs is:
A) Either the percentage-of-revenue method or the straight-line method at the company's option.
B) The greater of the percentage-of-revenue method or the straight-line method.
C) The lesser of the percentage-of-revenue method or the straight-line method.
D) Based on neither the percentage-of-revenue nor the straight-line method.
Difficulty: 2 Medium
Topic: Intangible assets subject to amortization
Learning Objective: 11-04 Calculate the periodic amortization of an intangible asset.
Bloom's: Remember
AACSB: Reflective Thinking
AICPA/Accessibility: Keyboard Navigation
119) Axcel Software began a new development project in 2020. The project reached technological feasibility on June 30, 2021, and was available for release to customers at the beginning of 2022. Development costs incurred prior to June 30, 2021, were $3,200,000, and costs incurred from June 30 to the product release date were $1,400,000. The 2022 revenues from the sale of the new software were $4,000,000, and the company anticipates additional revenues of $6,000,000. The economic life of the software is estimated at four years. Amortization of the software development costs for the year 2022 would be:
A) $0.
B) $350,000.
C) $1,840,000.
D) $560,000.
Difficulty: 3 Hard
Topic: Intangible assets subject to amortization
Learning Objective: 11-04 Calculate the periodic amortization of an intangible asset.
Bloom's: Apply
AACSB: Knowledge Application
AICPA/Accessibility: Keyboard Navigation
120) Micropolis Technology began a new development project in 2020. The project reached technological feasibility on September 1, 2021, and was available for release to customers at the beginning of 2022. Development costs incurred prior to September 1, 2021, were $4,200,000, and costs incurred from June 30 to the product release date were $1,800,000. The 2022 revenues from the sale of the new software were $3,000,000, and the company anticipates additional revenues of $12,000,000. The economic life of the software is estimated at three years. Amortization of the software development costs for the year 2022 would be:
A) $1,400,000.
B) $360,000.
C) $600,000.
D) $2,000,000.
Difficulty: 3 Hard
Topic: Intangible assets subject to amortization
Learning Objective: 11-04 Calculate the periodic amortization of an intangible asset.
Bloom's: Apply
AACSB: Knowledge Application
AICPA/Accessibility: Keyboard Navigation
121) Short Corporation acquired Hathaway, Inc., for $52,000,000. The fair value of all Hathaway's identifiable tangible and intangible assets was $48,000,000. Short will amortize any goodwill over the maximum number of years allowed. What is the annual amortization of goodwill for this acquisition?
A) $100,000.
B) $400,000.
C) $200,000.
D) $0.
Difficulty: 3 Hard
Topic: Intangible assets not subject to amortization
Learning Objective: 11-04 Calculate the periodic amortization of an intangible asset.
Bloom's: Apply
AACSB: Knowledge Application
AICPA/Accessibility: FN Measurement / Keyboard Navigation
122) Brad Corporation acquired Lail Inc. As part of the acquisition, Brad records goodwill of $4,000,000. Brad estimates that this goodwill can be attributed to acquisition of trained employees ($800,000), loyal customers ($1,200,000), company location ($500,000), and synergies with Brad's existing operations ($1,500,000). Brad expects these benefits to be realized over the next 10 years. At the end of the first year, management calculates amortization of the goodwill to be $400,000 ($4,000,000 ÷ 10 years). Which of the following statements is correct?
A) Management should not amortize any goodwill.
B) Management should calculate amortization based only on the value of trained employees and loyal customers.
C) Management should calculate amortization based only on company location and synergies with existing operations.
D) Management's calculation is correct.
Difficulty: 2 Medium
Topic: Intangible assets not subject to amortization
Learning Objective: 11-04 Calculate the periodic amortization of an intangible asset.
Bloom's: Apply
AACSB: Knowledge Application
AICPA/Accessibility: Keyboard Navigation
123) Granite Enterprises acquired a patent from Southern Research Corporation on January 1, 2021, for $4 million. The patent will be used for five years, even though its legal life is 20 years. Rocky Corporation has made a commitment to purchase the patent from Granite for $200,000 at the end of five years. Compute Granite's patent amortization for 2021, assuming the straight-line method is used.
A) $380,000.
B) $400,000.
C) $760,000.
D) $800,000.
Difficulty: 2 Medium
Topic: Intangible assets subject to amortization
Learning Objective: 11-04 Calculate the periodic amortization of an intangible asset.
Bloom's: Apply
AACSB: Knowledge Application
AICPA/Accessibility: FN Measurement / Keyboard Navigation
124) At the beginning of the year, a company purchases a patent for $2,400,000. The remaining legal life of the patent is 12 years, but management estimates that the patent will generate additional revenue for the next 16 years because there are currently no known competitors. At the end of the first year, management calculates straight-line amortization to be $150,000 ($2,400,000 ÷ 16 years). Which of the following statements is correct?
A) Management should amortize the asset over 20 years.
B) Management should amortize the asset over 12 years.
C) Management should not amortize the asset until its useful life becomes more evident.
D) Management's calculation is correct.
Difficulty: 2 Medium
Topic: Intangible assets subject to amortization
Learning Objective: 11-04 Calculate the periodic amortization of an intangible asset.
Bloom's: Apply
AACSB: Knowledge Application
AICPA/Accessibility: Keyboard Navigation
125) In January 2021, Vega Corporation purchased a patent at a cost of $200,000. Legal and filing fees of $50,000 were paid to acquire the patent. The company estimated a 10-year useful life for the patent and uses the straight-line amortization method for all intangible assets. In January 2024, Vega spent $40,000 in legal fees for an unsuccessful defense of the patent and the patent is no longer usable. The amount charged to income (expense and loss) in 2024 related to the patent should be:
A) $40,000.
B) $65,000.
C) $215,000.
D) $25,000.
Initial value of patent: $200,000 + $50,000 = | $ | 250,000 |
|
|
Less: Amortization for three years |
| (75,000 | ) | [($250,000 ÷ 10) × 3 = $75,000] |
Book value in 2024 | $ | 175,000 |
|
|
Plus: Legal fees for unsuccessful defense |
| 40,000 |
|
|
Total expense and loss | $ | 215,000 |
|
|
Difficulty: 3 Hard
Topic: Intangible assets subject to amortization; Subsequent expenditures – Intangible rights
Learning Objective: 11-04 Calculate the periodic amortization of an intangible asset.; 11-09 Discuss the accounting treatment of repairs and maintenance, additions, improvements, and rearrangements to property, plant, and equipment and intangible assets.
Bloom's: Apply
AACSB: Knowledge Application
AICPA/Accessibility: FN Measurement / Keyboard Navigation
126) On January 1, 2021, Tabitha Designs purchased a patent for $240,000 giving it exclusive rights to manufacture a new type of synthetic clothing. While the patent had a remaining legal life of 15 years at the time of purchase, Tabitha expects the useful life to be only eight more years. In addition, Tabitha purchased equipment related to production of the new clothing for $140,000. The equipment has a physical life of 10 years, but Tabitha plans to use the equipment only over the patent's service life and then sell it for an estimated $20,000. Tabitha uses straight-line for all long-term assets. The amount to expense in 2024 related to the patent and equipment should be:
A) $40,000.
B) $38,000.
C) $45,000.
D) $31,000.
Difficulty: 2 Medium
Topic: Intangible assets subject to amortization; Depreciation–Straight-line method
Learning Objective: 11-02 Determine periodic depreciation using both time-based and activity-based methods and account for dispositions.; 11-04 Calculate the periodic amortization of an intangible asset.
Bloom's: Apply
AACSB: Knowledge Application
AICPA/Accessibility: FN Measurement / Keyboard Navigation
127) Russell Enterprises acquired a franchise from Michael Incorporated for $300,000. The franchise agreement is for a period of six years. Russell uses straight-line to amortize all intangible assets. What would be the reported book value of the franchise two years after the purchase?
A) $300,000.
B) $250,000.
C) $200,000.
D) $100,000.
Difficulty: 1 Easy
Topic: Intangible assets subject to amortization
Learning Objective: 11-04 Calculate the periodic amortization of an intangible asset.
Bloom's: Apply
AACSB: Knowledge Application
AICPA/Accessibility: FN Measurement / Keyboard Navigation
128) On January 3, 2021, Tracer Incorporated purchased a patent for $450,000 to manufacture a new type of chair. The patent has a remaining legal life of 12 years. Tracer plans to manufacture the chair for eight years and then sell the patent for $50,000. The company amortizes intangible assets using the straight-line method. On December 29, 2023, Tracer decides to sell the patent for $325,000. Assuming the company has a December 31 year-end, what is the gain or loss recorded on the sale of the patent?
A) $12,500 gain.
B) $25,000 gain.
C) $58,333 loss.
D) $25,000 loss.
Difficulty: 3 Hard
Topic: Disposition of PPE and intangible assets; Intangible assets subject to amortization
Learning Objective: 11-02 Determine periodic depreciation using both time-based and activity-based methods and account for dispositions.; 11-04 Calculate the periodic amortization of an intangible asset.
Bloom's: Apply
AACSB: Knowledge Application
AICPA/Accessibility: FN Measurement / Keyboard Navigation
129) On June 2, 2021, Tabitha Co. purchased a franchise for $560,000 by signing a five-year contract. At the end of the five years, the franchise right reverts back to the seller.
On September 1, 2023, Tabitha decides to sell the franchise right for $323,000. The company amortizes intangible assets using the straight-line method and records partial-year amortization based on the number of months in service. Assuming the company has a December 31 year-end, what is the gain or loss recorded on the sale of the patent?
A) $15,000 gain.
B) $13,000 loss.
C) $237,000 loss.
D) $99,000 gain.
Difficulty: 3 Hard
Topic: Disposition of PPE and intangible assets; Intangible assets subject to amortization
Learning Objective: 11-02 Determine periodic depreciation using both time-based and activity-based methods and account for dispositions.; 11-04 Calculate the periodic amortization of an intangible asset.
Bloom's: Apply
AACSB: Knowledge Application
AICPA/Accessibility: FN Measurement / Keyboard Navigation
130) Accounting for a change in the estimated service life of equipment:
A) Is handled prospectively.
B) Requires retroactive restatement of prior year's financial statements.
C) Requires a prior period adjustment.
D) Is handled currently as a change in accounting principle.
Difficulty: 1 Easy
Topic: Changes in estimates
Learning Objective: 11-05 Explain the appropriate accounting treatment required when a change is made in the service life or residual value of property, plant, and equipment and intangible assets.
Bloom's: Remember
AACSB: Reflective Thinking
AICPA/Accessibility: BB Critical Thinking; FN Measurement / Keyboard Navigation
131) A change in the estimated useful life and residual value of machinery in the current year is handled as:
A) A retrospective change back to the date of acquisition as though the current estimated life and residual value had been used all along.
B) A prospective change from the current year through the remainder of its useful life, using the new estimates.
C) A cumulative adjustment to income in the current year for the difference in depreciation under the new versus old estimates.
D) All of these answer choices are incorrect.
Difficulty: 1 Easy
Topic: Changes in estimates
Learning Objective: 11-05 Explain the appropriate accounting treatment required when a change is made in the service life or residual value of property, plant, and equipment and intangible assets.
Bloom's: Remember
AACSB: Reflective Thinking
AICPA/Accessibility: BB Critical Thinking; FN Measurement / Keyboard Navigation
132) Tatsuo Corporation purchased farm equipment on January 1, 2019, for $280,000. In 2019 and 2020, Tatsuo depreciated the asset on a straight-line basis with an estimated useful life of five years and a $90,000 residual value. In 2021, due to changes in technology, Tatsuo revised the residual value to $30,000 but still plans to use the equipment for the full five years. What depreciation would Tatsuo record for the year 2021 on this equipment?
A) $52,000.
B) $58,000.
C) $50,000.
D) $28,000.
Difficulty: 2 Medium
Topic: Changes in estimates
Learning Objective: 11-05 Explain the appropriate accounting treatment required when a change is made in the service life or residual value of property, plant, and equipment and intangible assets.
Bloom's: Apply
AACSB: Knowledge Application
AICPA/Accessibility: FN Measurement / Keyboard Navigation
133) Herman Apparel has purchased equipment on January 1, 2018, for $560,000. In 2018–2020, Herman depreciated the asset on a straight-line basis with an estimated useful life of eight years and an $80,000 residual value. In 2021, Herman has started to change its business strategy and now believes that the equipment will be used for only another two years (five years total) but does not believe the residual value has changed. What depreciation would Herman record for the year 2021 on this equipment?
A) $150,000.
B) $175,000.
C) $124,000.
D) $96,000.
Difficulty: 2 Medium
Topic: Changes in estimates
Learning Objective: 11-05 Explain the appropriate accounting treatment required when a change is made in the service life or residual value of property, plant, and equipment and intangible assets.
Bloom's: Apply
AACSB: Knowledge Application
AICPA/Accessibility: FN Measurement / Keyboard Navigation
134) Nanki Corporation purchased equipment on January 1, 2019, for $650,000. In 2019 and 2020, Nanki depreciated the asset on a straight-line basis with an estimated useful life of eight years and a $10,000 residual value. In 2021, due to changes in technology, Nanki revised the useful life to a total of six years with no residual value. What depreciation would Nanki record for the year 2021 on this equipment?
A) $108,333.
B) $106,667.
C) $122,500.
D) None of these answer choices are correct.
Difficulty: 3 Hard
Topic: Changes in estimates
Learning Objective: 11-05 Explain the appropriate accounting treatment required when a change is made in the service life or residual value of property, plant, and equipment and intangible assets.
Bloom's: Apply
AACSB: Knowledge Application
AICPA/Accessibility: FN Measurement / Keyboard Navigation
135) Fellingham Corporation purchased equipment on January 1, 2019, for $200,000. The company estimated the equipment would have a useful life of 10 years with a $20,000 residual value. Fellingham uses the straight-line depreciation method. Early in 2021, Fellingham reassessed the equipment's condition and determined that its total useful life would be only six years in total and that it would have no salvage value. How much would Fellingham report as depreciation on this equipment for 2021?
A) $24,000.
B) $27,333.
C) $36,000.
D) $41,000.
Difficulty: 3 Hard
Topic: Changes in estimates
Learning Objective: 11-05 Explain the appropriate accounting treatment required when a change is made in the service life or residual value of property, plant, and equipment and intangible assets.
Bloom's: Apply
AACSB: Knowledge Application
AICPA/Accessibility: FN Measurement / Keyboard Navigation
136) A change from the straight-line method to the double-declining-balance method of depreciation is handled as:
A) A retrospective change back to the date of acquisition as though the current estimated life had been used all along.
B) A cumulative adjustment to income in the current year for the difference in depreciation under the new versus old useful life estimates.
C) A prospective change from the current year through the remainder of its useful life.
D) None of these answer choices are correct.
Difficulty: 1 Easy
Topic: Changes in depreciation method
Learning Objective: 11-06 Explain the appropriate accounting treatment required when a change in depreciation, amortization, or depletion method is made.
Bloom's: Remember
AACSB: Reflective Thinking
AICPA/Accessibility: BB Critical Thinking; FN Measurement / Keyboard Navigation
137) Murgatroyd Co. purchased equipment on January 1, 2019, for $900,000, estimating a five-year useful life and $100,000 residual value. In 2019 and 2020, Murgatroyd depreciated the asset using the double-declining-balance method. In 2021, Murgatroyd changed to straight-line depreciation for this equipment. What depreciation would Murgatroyd record for the year 2021 on this equipment?
A) $74,667.
B) $108,000.
C) $92,333.
D) $160,000.
Difficulty: 3 Hard
Topic: Changes in depreciation method
Learning Objective: 11-06 Explain the appropriate accounting treatment required when a change in depreciation, amortization, or depletion method is made.
Bloom's: Apply
AACSB: Knowledge Application
AICPA/Accessibility: FN Measurement / Keyboard Navigation
138) Broadway Ltd. purchased equipment on January 1, 2019, for $800,000, estimating a five-year useful life and no residual value. In 2019 and 2020, Broadway depreciated the asset using the straight-line method. In 2021, Broadway changed to sum-of-years'-digits depreciation for this equipment. What depreciation would Broadway record for the year 2021 on this equipment?
A) $120,000.
B) $160,000.
C) $200,000.
D) $240,000.
Difficulty: 3 Hard
Topic: Changes in depreciation method
Learning Objective: 11-06 Explain the appropriate accounting treatment required when a change in depreciation, amortization, or depletion method is made.
Bloom's: Apply
AACSB: Knowledge Application
AICPA/Accessibility: FN Measurement / Keyboard Navigation
139) On January 1, 2019, Al's Sporting Goods purchased store fixtures at a cost of $180,000. The anticipated service life was 10 years with no residual value. Al's has been using the double-declining-balance method, but in 2021 adopted the straight-line method because the company believes it provides a better measure of income. Al's has a December 31 year-end. The journal entry to record depreciation for 2021 is:
A)
Depreciation expense | $23,040 |
|
Accumulated depreciation |
| $23,040 |
B)
Depreciation expense | $14,400 |
|
Accumulated depreciation |
| $14,400 |
C)
Accumulated depreciation | $28,800 |
|
Retained earnings |
| $28,800 |
D) No entry
DDB |
|
|
|
2019: $180,000 × 20% = | $ | 36,000 |
|
2020: ($180,000 – $36,000) × 20% = |
| 28,800 |
|
| $ | 64,800 |
|
2021: Straight-Line |
|
|
|
($180,000 – $64,800) ÷ 8 = | $ | 14,400 |
|
Difficulty: 3 Hard
Topic: Changes in depreciation method
Learning Objective: 11-06 Explain the appropriate accounting treatment required when a change in depreciation, amortization, or depletion method is made.
Bloom's: Apply
AACSB: Knowledge Application
AICPA/Accessibility: FN Measurement / Keyboard Navigation
140) A major addition to equipment should have been capitalized in the year 2021 but was incorrectly expensed. Which of the following is (are) true?
A) Income in 2021 is understated.
B) Income in future years is overstated.
C) Assets in 2021 are understated.
D) All of these answer choices are true.
Difficulty: 2 Medium
Topic: Error correction
Learning Objective: 11-07 Explain the appropriate treatment required when an error in accounting for property, plant, and equipment and intangible assets is discovered.
Bloom's: Analyze
AACSB: Analytical Thinking
AICPA/Accessibility: BB Critical Thinking; FN Measurement / Keyboard Navigation
141) If a material error is discovered in an accounting period subsequent to the period in which the error is made:
A) No adjustments are made.
B) No prior years' financial statements are restated, but corrections are made in future years.
C) Any previous years' financial statements are retrospectively restated to reflect the correction.
D) No prior years' financial statements are restated, but prior effects are corrected in the current balance of retained earnings.
Difficulty: 1 Easy
Topic: Error correction
Learning Objective: 11-07 Explain the appropriate treatment required when an error in accounting for property, plant, and equipment and intangible assets is discovered.
Bloom's: Remember
AACSB: Reflective Thinking
AICPA/Accessibility: BB Critical Thinking; FN Measurement / Keyboard Navigation
142) An asset should be written down if there has been an impairment of value that is:
A) Relevant and objectively determined.
B) Material and market driven.
C) Unplanned and sudden.
D) Significant.
Difficulty: 1 Easy
Topic: Impairment—PPE and finite-life intangibles; Impairment—Indefinite-life intangible assets
Learning Objective: 11-08 Identify situations that involve a significant impairment of the value of property, plant, and equipment and intangible assets and describe the required accounting procedures.
Bloom's: Remember
AACSB: Reflective Thinking
AICPA/Accessibility: BB Critical Thinking; FN Measurement / Keyboard Navigation
143) Recognition of impairment for property, plant, and equipment is required if book value exceeds:
A) Fair value.
B) Present value of expected cash flows.
C) Undiscounted expected cash flows.
D) Accumulated depreciation.
Difficulty: 1 Easy
Topic: Impairment—PPE and finite-life intangibles
Learning Objective: 11-08 Identify situations that involve a significant impairment of the value of property, plant, and equipment and intangible assets and describe the required accounting procedures.
Bloom's: Remember
AACSB: Reflective Thinking
AICPA/Accessibility: BB Critical Thinking; FN Measurement / Keyboard Navigation
144) Which of the following represents an event that indicates an asset's book value may not be recoverable?
A) A significant adverse change in how the asset is being used or in its physical condition.
B) A significant adverse change in legal factors or in the business climate.
C) A realization that the asset will be disposed of significantly before the end of its estimated useful life.
D) All of these answer choices are correct.
Difficulty: 2 Medium
Topic: Impairment—PPE and finite-life intangibles
Learning Objective: 11-08 Identify situations that involve a significant impairment of the value of property, plant, and equipment and intangible assets and describe the required accounting procedures.
Bloom's: Remember
AACSB: Reflective Thinking
AICPA/Accessibility: BB Critical Thinking; FN Measurement / Keyboard Navigation
145) The amount of impairment loss is the excess of book value over:
A) Amortized cost.
B) Undiscounted future cash flows.
C) Fair value.
D) Future revenues.
Difficulty: 1 Easy
Topic: Impairment—PPE and finite-life intangibles; Impairment—Indefinite-life intangible assets
Learning Objective: 11-08 Identify situations that involve a significant impairment of the value of property, plant, and equipment and intangible assets and describe the required accounting procedures.
Bloom's: Remember
AACSB: Reflective Thinking
AICPA/Accessibility: BB Critical Thinking; FN Measurement / Keyboard Navigation
146) Accounting for impairment losses that involve recoverability:
A) Involves a two-step process for recoverability and measurement.
B) Applies to depreciable assets.
C) Applies to assets with finite lives.
D) All of these answer choices are correct.
Difficulty: 1 Easy
Topic: Impairment—PPE and finite-life intangibles
Learning Objective: 11-08 Identify situations that involve a significant impairment of the value of property, plant, and equipment and intangible assets and describe the required accounting procedures.
Bloom's: Remember
AACSB: Reflective Thinking
AICPA/Accessibility: BB Critical Thinking; FN Measurement / Keyboard Navigation
147) In testing for recoverability of property, plant, and equipment, an impairment loss is required if the:
A) Asset's book value exceeds the undiscounted sum of expected future cash flows.
B) Undiscounted sum of its expected future cash flows exceeds the asset's book value.
C) Present value of expected future cash flows exceeds its book value.
D) All of these answer choices are incorrect.
Difficulty: 1 Easy
Topic: Impairment—PPE and finite-life intangibles
Learning Objective: 11-08 Identify situations that involve a significant impairment of the value of property, plant, and equipment and intangible assets and describe the required accounting procedures.
Bloom's: Remember
AACSB: Reflective Thinking
AICPA/Accessibility: BB Critical Thinking; FN Measurement / Keyboard Navigation
148) An impairment loss has the effect of:
A) Reducing total assets.
B) Increasing liabilities.
C) Reducing total revenues.
D) None of these answer choices are correct.
Difficulty: 1 Easy
Topic: Impairment—PPE and finite-life intangibles; Impairment—Indefinite-life intangible assets
Learning Objective: 11-08 Identify situations that involve a significant impairment of the value of property, plant, and equipment and intangible assets and describe the required accounting procedures.
Bloom's: Understand
AACSB: Reflective Thinking
AICPA/Accessibility: BB Critical Thinking; FN Measurement / Keyboard Navigation
149) At the end of its 2021 fiscal year, a triggering event caused Janero Corporation to perform an impairment test for one of its manufacturing facilities. The following information is available:
Book value | $ | 65 | million |
Estimated undiscounted future cash flows |
| 60 | million |
Fair value |
| 50 | million |
The manufacturing facility is:
A) Impaired because its book value exceeds undiscounted future cash flows.
B) Not impaired because its book value exceeds undiscounted future cash flows.
C) Not impaired because it continues to produce revenue.
D) Impaired because its book value exceeds fair value.
Difficulty: 2 Medium
Topic: Impairment—PPE and finite-life intangibles
Learning Objective: 11-08 Identify situations that involve a significant impairment of the value of property, plant, and equipment and intangible assets and describe the required accounting procedures.
Bloom's: Apply
AACSB: Knowledge Application
AICPA/Accessibility: BB Critical Thinking; FN Measurement / Keyboard Navigation
150) Fryer Inc. owns equipment for which it paid $90 million. At the end of 2021, it had accumulated depreciation on the equipment of $27 million. Due to adverse economic conditions, Fryer's management determined that it should assess whether an impairment loss should be recognized for the equipment. The estimated undiscounted future cash flows to be provided by the equipment total $60 million, and the equipment's fair value at that point is $40 million. Under these circumstances, Fryer:
A) Would record no impairment loss on the equipment.
B) Would record a $3 million impairment loss on the equipment.
C) Would record a $23 million impairment loss on the equipment.
D) None of these answer choices are correct.
Difficulty: 3 Hard
Topic: Impairment—PPE and finite-life intangibles
Learning Objective: 11-08 Identify situations that involve a significant impairment of the value of property, plant, and equipment and intangible assets and describe the required accounting procedures.
Bloom's: Apply
AACSB: Knowledge Application
AICPA/Accessibility: FN Measurement / Keyboard Navigation
151) Wilson Inc. owns equipment for which it paid $70 million. At the end of 2021, it had accumulated depreciation on the equipment of $12 million. Due to adverse economic conditions, Wilson's management determined that it should assess whether an impairment loss should be recognized for the equipment. The estimated undiscounted future cash flows to be provided by the equipment total $60 million, and the equipment's fair value at that point is $50 million. Under these circumstances, Wilson:
A) Would record no impairment loss on the equipment.
B) Would record an $8 million impairment loss on the equipment.
C) Would record a $20 million impairment loss on the equipment.
D) None of these answer choices are correct.
Difficulty: 3 Hard
Topic: Impairment—PPE and finite-life intangibles
Learning Objective: 11-08 Identify situations that involve a significant impairment of the value of property, plant, and equipment and intangible assets and describe the required accounting procedures.
Bloom's: Apply
AACSB: Knowledge Application
AICPA/Accessibility: FN Measurement / Keyboard Navigation
152) Alou Corporation reported the following information at year-end:
| Book Value | Estimated Cash Flows | Fair Value | ||||||||
Building | $ | 500,000 |
| $ | 380,000 |
| $ | 360,000 |
| ||
Patent | $ | 35,000 |
| $ | 40,000 |
| $ | 38,000 |
| ||
Copyright | $ | 40,000 |
| $ | 38,000 |
| $ | 39,000 |
| ||
Machine | $ | 100,000 |
| $ | 120,000 |
| $ | 85,000 |
| ||
Based on the above information, what is the total amount of impairment loss that Alou should record at year-end?
A) $141,000.
B) $126,000.
C) $123,000.
D) $122,000.
Difficulty: 3 Hard
Topic: Impairment—PPE and finite-life intangibles
Learning Objective: 11-08 Identify situations that involve a significant impairment of the value of property, plant, and equipment and intangible assets and describe the required accounting procedures.
Bloom's: Apply
AACSB: Knowledge Application
AICPA/Accessibility: FN Measurement / Keyboard Navigation
153) Oak Inc. has the following information regarding its assets:
| Book Value | Estimated Cash Flows | Fair Value | |||||||||
Equipment | $ | 35,000 |
| $ | 30,000 |
| $ | 28,000 |
| |||
Building | $ | 68,000 |
| $ | 70,000 |
| $ | 65,000 |
| |||
Patent | $ | 30,000 |
| $ | 34,000 |
| $ | 32,000 |
| |||
What amount of loss should be recorded due to asset impairments?
A) $10,000.
B) $9,000.
C) $8,000.
D) $7,000.
Difficulty: 3 Hard
Topic: Impairment—PPE and finite-life intangibles
Learning Objective: 11-08 Identify situations that involve a significant impairment of the value of property, plant, and equipment and intangible assets and describe the required accounting procedures.
Bloom's: Apply
AACSB: Knowledge Application
AICPA/Accessibility: FN Measurement / Keyboard Navigation
154) Jung Inc. owns a patent for which it paid $66 million. At the end of 2021, it had accumulated amortization on the patent of $16 million. Due to adverse economic conditions, Jung's management determined that it should assess whether an impairment loss should be recognized for the patent. The estimated undiscounted future cash flows to be provided by the patent total $43 million, and the patent's fair value at that point is $35 million. Under these circumstances, Jung:
A) Would record no impairment loss on the patent.
B) Would record a $7 million impairment loss on the patent.
C) Would record a $15 million impairment loss on the patent.
D) Would record a $31 million impairment loss on the patent.
Difficulty: 3 Hard
Topic: Impairment—PPE and finite-life intangibles
Learning Objective: 11-08 Identify situations that involve a significant impairment of the value of property, plant, and equipment and intangible assets and describe the required accounting procedures.
Bloom's: Apply
AACSB: Knowledge Application
AICPA/Accessibility: FN Measurement / Keyboard Navigation
155) In 2020, Antle Inc. had acquired Demski Co. and recorded goodwill of $245 million as a result. The net assets (including goodwill) from Antle's acquisition of Demski Co. had a 2021 year-end book value of $580 million. Antle assessed the fair value of Demski reporting unit at this date to be $700 million, while the fair value of all of Demski's identifiable tangible and intangible assets (excluding goodwill) was $550 million. The amount of the impairment loss that Antle would record for goodwill at the end of 2021 is:
A) $150 million.
B) $120 million.
C) $95 million.
D) $0.
Difficulty: 3 Hard
Topic: Impairment—Indefinite-life intangible assets
Learning Objective: 11-08 Identify situations that involve a significant impairment of the value of property, plant, and equipment and intangible assets and describe the required accounting procedures.
Bloom's: Apply
AACSB: Knowledge Application
AICPA/Accessibility: FN Measurement / Keyboard Navigation
156) In 2018, Martin Corp. acquired Glynco and recorded goodwill of $100 million. Martin considers Glynco a separate reporting unit. By the end of 2021, the net assets (including goodwill) of Glynco are $320 million and its estimated fair value is $260 million. The amount of the impairment loss that Martin would record for goodwill at the end of 2021 is:
A) $0.
B) $60 million.
C) $40 million.
D) $160 million.
Difficulty: 2 Medium
Topic: Impairment—Indefinite-life intangible assets
Learning Objective: 11-08 Identify situations that involve a significant impairment of the value of property, plant, and equipment and intangible assets and describe the required accounting procedures.
Bloom's: Apply
AACSB: Knowledge Application
AICPA/Accessibility: Keyboard Navigation
157) In 2018, Martin Corp. acquired Glynco and recorded goodwill of $45 million. Martin considers Glynco a separate reporting unit. By the end of 2021, the net assets (including goodwill) of Glynco are $320 million and its estimated fair value is $260 million. The amount of the impairment loss that Martin would record for goodwill at the end of 2021 is:
A) $0.
B) $60 million.
C) $45 million.
D) $15 million.
Difficulty: 3 Hard
Topic: Impairment—Indefinite-life intangible assets
Learning Objective: 11-08 Identify situations that involve a significant impairment of the value of property, plant, and equipment and intangible assets and describe the required accounting procedures.
Bloom's: Apply
AACSB: Knowledge Application
AICPA/Accessibility: Keyboard Navigation
158) Which of the following types of subsequent expenditures normally is capitalized?
A) Additions.
B) Improvements.
C) Rearrangements.
D) All of these answer choices are normally capitalized.
Difficulty: 1 Easy
Topic: Subsequent expenditures—PPE
Learning Objective: 11-09 Discuss the accounting treatment of repairs and maintenance, additions, improvements, and rearrangements to property, plant, and equipment and intangible assets.
Bloom's: Remember
AACSB: Reflective Thinking
AICPA/Accessibility: BB Critical Thinking; FN Measurement / Keyboard Navigation
159) Which of the following types of subsequent expenditures normally is capitalized?
A) An extension of the useful life of the asset.
B) An increase in the operating efficiency of the asset.
C) An increase in the quality of the goods or services produced by the asset.
D) All of these answer choices are normally capitalized.
Difficulty: 1 Easy
Topic: Subsequent expenditures—PPE
Learning Objective: 11-09 Discuss the accounting treatment of repairs and maintenance, additions, improvements, and rearrangements to property, plant, and equipment and intangible assets.
Bloom's: Remember
AACSB: Reflective Thinking
AICPA/Accessibility: BB Critical Thinking; FN Measurement / Keyboard Navigation
160) A major expenditure increased a truck's life beyond the original estimate of life. GAAP permits the expenditure to be debited to:
A) Repairs.
B) Accumulated depreciation.
C) Major repairs.
D) None of these answer choices are correct.
Difficulty: 2 Medium
Topic: Subsequent expenditures—PPE
Learning Objective: 11-09 Discuss the accounting treatment of repairs and maintenance, additions, improvements, and rearrangements to property, plant, and equipment and intangible assets.
Bloom's: Remember
AACSB: Reflective Thinking
AICPA/Accessibility: BB Critical Thinking; FN Measurement / Keyboard Navigation
161) Adding a refrigeration unit to a delivery truck that previously did not have this capability is an example of:
A) Repairs and maintenance.
B) Improvement.
C) Rearrangement.
D) Addition.
Difficulty: 1 Easy
Topic: Subsequent expenditures—PPE
Learning Objective: 11-09 Discuss the accounting treatment of repairs and maintenance, additions, improvements, and rearrangements to property, plant, and equipment and intangible assets.
Bloom's: Remember
AACSB: Reflective Thinking; Knowledge Application
AICPA/Accessibility: BB Critical Thinking; FN Measurement / Keyboard Navigation
162) The replacement of a major component increased the productive capacity of production equipment from 10 units per hour to 18 units per hour. The expenditure should be debited to:
A) Repairs expense.
B) Maintenance expense.
C) Equipment.
D) Gain from repairs
Difficulty: 1 Easy
Topic: Subsequent expenditures—PPE
Learning Objective: 11-09 Discuss the accounting treatment of repairs and maintenance, additions, improvements, and rearrangements to property, plant, and equipment and intangible assets.
Bloom's: Understand
AACSB: Reflective Thinking
AICPA/Accessibility: BB Critical Thinking; FN Measurement / Keyboard Navigation
163) The cost of an engine tune-up is an example of which of the following expenditures taking place after acquisition of the asset:
A) Additions.
B) Improvements.
C) Maintenance.
D) Rearrangements.
Difficulty: 1 Easy
Topic: Subsequent expenditures—PPE
Learning Objective: 11-09 Discuss the accounting treatment of repairs and maintenance, additions, improvements, and rearrangements to property, plant, and equipment and intangible assets.
Bloom's: Understand
AACSB: Reflective Thinking
AICPA/Accessibility: BB Critical Thinking; FN Measurement / Keyboard Navigation
164) Ryan Company purchased a building on January 1, 2021, for $250,000. In addition, during 2021 the following costs related to the building have been incurred:
Utilities | $ | 12,000 |
|
Property tax |
| 4,000 |
|
Expansion of the building |
| 53,000 |
|
New air-conditioning system |
| 28,000 |
|
General maintenance | $ | 19,000 |
|
The amount of expenditures to capitalize for the year (not including the initial purchase of the building) is:
A) $35,000.
B) $85,000.
C) $81,000.
D) $72,000.
Difficulty: 3 Hard
Topic: Subsequent expenditures—PPE
Learning Objective: 11-09 Discuss the accounting treatment of repairs and maintenance, additions, improvements, and rearrangements to property, plant, and equipment and intangible assets.
Bloom's: Apply
AACSB: Knowledge Application
AICPA/Accessibility: FN Measurement / Keyboard Navigation
165) A company purchased equipment on January 1, 2021, for $70,000. In addition, throughout 2021 the following costs related to the equipment have been incurred:
Routine maintenance | $ | 4,500 |
|
Employee operating costs |
| 14,800 |
|
Utilities cost |
| 3,300 |
|
The amount of expenditures to capitalize for the year is:
A) $70,000.
B) $74,500.
C) $84,800.
D) $92,600.
Difficulty: 3 Hard
Topic: Subsequent expenditures—PPE
Learning Objective: 11-09 Discuss the accounting treatment of repairs and maintenance, additions, improvements, and rearrangements to property, plant, and equipment and intangible assets.
Bloom's: Apply
AACSB: Knowledge Application
AICPA/Accessibility: Keyboard Navigation
166) In 2021, a company purchased two patents. Related information follows:
| Patent 1 |
| Patent 2 |
| ||||||||
Purchase price | $ | 500,000 |
|
| $ | 200,000 |
|
| ||||
Legal and filing fees |
| 25,000 |
|
|
| 20,000 |
|
| ||||
In addition, near the end of 2021, the legality of both patents was challenged. The company paid $50,000 to defend Patent 1, and the defense was successful. The company paid $40,000 to defend Patent 2, but the defense was not successful and the patent was determined to have no value. Ignoring any amortization in 2021, the amount of expenditures to capitalize at the end of the year is:
A) $795,000.
B) $575,000.
C) $745,000.
D) $615,000.
Difficulty: 2 Medium
Topic: Subsequent expenditures—Intangible rights
Learning Objective: 11-09 Discuss the accounting treatment of repairs and maintenance, additions, improvements, and rearrangements to property, plant, and equipment and intangible assets.
Bloom's: Apply
AACSB: Knowledge Application
AICPA/Accessibility: Keyboard Navigation
167) Calloway Shoes purchased a delivery truck on September 30, 2021, for $32,000. The estimated useful life of the truck is 10 years with no residual value. After five years, the refrigeration unit will need to be replaced. The $8,000 cost of the unit is included in the cost of the truck. Calloway uses the straight-line depreciation method. Depreciation for 2021 under U.S. GAAP and International Financial Reporting Standards (IFRS), respectively, is:
| U.S.GAAP | IFRS | |||||
a. | $ | 3,200 |
| $ | 3,200 |
| |
b. | $ | 800 |
| $ | 800 |
| |
c. | $ | 800 |
| $ | 1,000 |
| |
d. | $ | 3,200 |
| $ | 4,000 |
| |
A) option A.
B) option B.
C) option C.
D) option D.
U.S. GAAP: $32,000 ÷ 10 × 3/12 = $800 |
|
|
| |
IFRS: $32,000 – $8,000 = $24,000 ÷ 10 × 3/12 = | $ | 600 |
| |
| + $8,000 ÷ 5 = $1,600 × 3/12 = |
| 400 |
|
Total | $ | 1,000 |
| |
Difficulty: 3 Hard
Topic: IFRS—Depreciation
Learning Objective: 11-02 Determine periodic depreciation using both time-based and activity-based methods and account for dispositions.; 11-10 Discuss the primary differences between U.S. GAAP and IFRS with respect to the utilization and impairment of property, plant, and equipment and intangible assets.
Bloom's: Apply
AACSB: Diversity; Knowledge Application
AICPA/Accessibility: BB Global; FN Measurement / Keyboard Navigation
168) Robertson Inc. prepares its financial statements according to International Financial Reporting Standards (IFRS). At the end of its 2021 fiscal year, the company chooses to revalue its equipment. The equipment cost $540,000, had accumulated depreciation of $240,000 at the end of the year after recording annual depreciation, and had a fair value of $330,000. After the revaluation, the accumulated depreciation account will have a balance of:
A) $240,000.
B) $264,000.
C) $270,000.
D) None of these answer choices are correct.
Difficulty: 3 Hard
Topic: IFRS valuation—PPE and intangibles
Learning Objective: 11-10 Discuss the primary differences between U.S. GAAP and IFRS with respect to the utilization and impairment of property, plant, and equipment and intangible assets.
Bloom's: Apply
AACSB: Diversity; Knowledge Application
AICPA/Accessibility: BB Global; FN Measurement / Keyboard Navigation
169) Rice Industries owns a manufacturing plant in a foreign country. Political unrest in the country indicates that Rice should investigate for possible impairment. Below is information related to the plant's assets ($ in millions):
Book value | $ | 190 |
|
Undiscounted sum of future estimated cash flows |
| 210 |
|
Present value of future cash flows |
| 175 |
|
Fair value less cost to sell (determined by appraisal) |
| 180 |
|
The amount of impairment loss that Rice should recognize according to U.S. GAAP and IFRS, respectively, is:
U.S.GAAP IFRS
a. $ 10 million $ 10 million
b. $ 15 million $ 15 million
c. $ 0 $ 10 million
d. There is no impairment under both U.S. GAAP and IFRS.
A) option A.
B) option B.
C) option C.
D) option D.
Difficulty: 3 Hard
Topic: IFRS Impairment—PPE-Intangibles-Goodwill
Learning Objective: 11-10 Discuss the primary differences between U.S. GAAP and IFRS with respect to the utilization and impairment of property, plant, and equipment and intangible assets.
Bloom's: Apply
AACSB: Diversity; Knowledge Application
AICPA/Accessibility: BB Global; FN Measurement / Keyboard Navigation
170) Kingston Corporation has $95 million of goodwill on its books from the 2019 acquisition of Reliant Motors. At the end of its 2021 fiscal year, management has provided the following information for its required goodwill impairment test ($ in millions):
Fair value of Reliant (approximates fair value less costs to sell) | $ | 655 |
|
Fair value of Reliant's net assets (excluding goodwill) |
| 600 |
|
Book value of Reliant's net assets (including goodwill) |
| 700 |
|
Present value of estimated future cash flows |
| 670 |
|
Assuming that Reliant is considered a reporting unit for U.S. GAAP and a cash-generating unit for IFRS, the amount of goodwill impairment loss that Kingston should recognize according to U.S. GAAP and IFRS, respectively, is:
| U.S.GAAP |
| IFRS | ||||
a. | $ | 45 | million |
| $ | 45 | million |
b. | $ | 55 | million |
| $ | 45 | million |
c. | $ | 0 |
|
| $ | 30 | million |
d. | $ | 40 | million |
| $ | 30 | million |
A) option A.
B) option B.
C) option C.
D) option D.
Difficulty: 3 Hard
Topic: IFRS Impairment—PPE-Intangibles-Goodwill
Learning Objective: 11-10 Discuss the primary differences between U.S. GAAP and IFRS with respect to the utilization and impairment of property, plant, and equipment and intangible assets.
Bloom's: Apply
AACSB: Diversity; Knowledge Application
AICPA/Accessibility: BB Global; FN Measurement / Keyboard Navigation
171) According to International Financial Reporting Standards (IFRS), the revaluation of equipment when fair value exceeds book value results in:
A) An increase in net income.
B) A decrease in net income.
C) An increase in other comprehensive income.
D) A decrease in other comprehensive income.
Difficulty: 2 Medium
Topic: IFRS valuation—PPE and intangibles
Learning Objective: 11-10 Discuss the primary differences between U.S. GAAP and IFRS with respect to the utilization and impairment of property, plant, and equipment and intangible assets.
Bloom's: Understand
AACSB: Reflective Thinking; Diversity
AICPA/Accessibility: BB Global; FN Measurement / Keyboard Navigation
172) According to International Financial Reporting Standards (IFRS), biological assets are valued at:
A) Cost less accumulated depreciation.
B) Fair value less estimated costs to sell.
C) Cost less accumulated depletion.
D) None of these answer choices are correct.
Difficulty: 1 Easy
Topic: IFRS valuation—PPE and intangibles
Learning Objective: 11-10 Discuss the primary differences between U.S. GAAP and IFRS with respect to the utilization and impairment of property, plant, and equipment and intangible assets.
Bloom's: Understand
AACSB: Reflective Thinking; Diversity
AICPA/Accessibility: BB Global; FN Measurement / Keyboard Navigation
173) According to International Financial Reporting Standards (IFRS), the impairment loss for property, plant, and equipment is the difference between book value and:
A) The undiscounted sum of estimated future cash flows.
B) The present value of future cash flows.
C) Fair value less costs to sell.
D) The higher of the present value of estimated future cash flows and the fair value less costs to sell.
Difficulty: 2 Medium
Topic: IFRS Impairment—PPE-Intangibles-Goodwill
Learning Objective: 11-10 Discuss the primary differences between U.S. GAAP and IFRS with respect to the utilization and impairment of property, plant, and equipment and intangible assets.
Bloom's: Understand
AACSB: Reflective Thinking; Diversity
AICPA/Accessibility: BB Global; FN Measurement / Keyboard Navigation
174) According to International Financial Reporting Standards (IFRS), the level of testing for goodwill impairment is the:
A) Reporting unit.
B) Subsidiary companies.
C) Cash-generating unit.
D) None of these answer choices are correct.
Difficulty: 1 Easy
Topic: IFRS Impairment—PPE-Intangibles-Goodwill
Learning Objective: 11-10 Discuss the primary differences between U.S. GAAP and IFRS with respect to the utilization and impairment of property, plant, and equipment and intangible assets.
Bloom's: Understand
AACSB: Reflective Thinking; Diversity
AICPA/Accessibility: BB Global; FN Measurement / Keyboard Navigation
175) The normal treatment of litigation costs to successfully defend an intangible right under U.S. GAAP and International Financial Reporting Standards (IFRS), respectively, is:
U.S. GAAP IFRS
a. Capitalize Expense
b. Capitalize Capitalize
c. Expense Capitalize
d. Expense Expense
A) option A.
B) option B.
C) option C.
D) option D.
Difficulty: 1 Easy
Topic: IFRS—Cost of defending intangible rights
Learning Objective: 11-10 Discuss the primary differences between U.S. GAAP and IFRS with respect to the utilization and impairment of property, plant, and equipment and intangible assets.
Bloom's: Understand
AACSB: Reflective Thinking; Diversity
AICPA/Accessibility: BB Global; FN Measurement / Keyboard Navigation
176) Canliss Mining uses the retirement method to determine depreciation on its office equipment. During 2019, its first year of operations, office equipment was purchased at a cost of $14,000. Useful life of the equipment averages four years and no salvage value is anticipated. In 2021, equipment costing $5,000 was sold for $600 and replaced with new equipment costing $6,000. Canliss would record 2021 depreciation of:
A) $3,500.
B) $4,400.
C) $5,400.
D) None of these answer choices are correct.
Difficulty: 3 Hard
Topic: Retirement and replacement—Chap App B
Learning Objective: Appendix 11B Retirement and Replacement Methods of Depreciation.
Bloom's: Apply
AACSB: Knowledge Application
AICPA/Accessibility: FN Measurement / Keyboard Navigation
177) Canliss Mining uses the replacement method to determine depreciation on its office equipment. During 2019, its first year of operations, office equipment was purchased at a cost of $14,000. Useful life of the equipment averages four years and no salvage value is anticipated. In 2021, equipment costing $5,000 was sold for $600 and replaced with new equipment costing $6,000. Canliss would record 2021 depreciation of:
A) $3,500.
B) $4,400.
C) $5,400.
D) None of these answer choices are correct.
Difficulty: 3 Hard
Topic: Retirement and replacement—Chap App B
Learning Objective: Appendix 11B Retirement and Replacement Methods of Depreciation.
Bloom's: Apply
AACSB: Knowledge Application
AICPA/Accessibility: FN Measurement / Keyboard Navigation
178) Listed below are five terms followed by a list of phrases that describe or characterize each of the terms. Match each phrase with the number for the correct term.
TERM | PHRASE | NUMBER |
1. Write-down of asset | Occurs with a significant decline in value. | ____ |
2. Straight-line method | Estimates service life in units of output. | ____ |
3. Composite method | Does not subtract residual value from cost when calculating depreciation. | ____ |
4. Double-declining-balance | Aggregates assets that are physically dissimilar when calculating depreciation. | ____ |
5. Activity-based method | Produces a level amount of annual depreciation. | ____ |
TERM | PHRASE | NUMBER |
1. Write-down of asset | Occurs with a significant decline in value. | 1 |
2. Straight-line method | Estimates service life in units of output. | 5 |
3. Composite method | Does not subtract residual value from cost when calculating depreciation. | 4 |
4. Double-declining-balance | Aggregates assets that are physically dissimilar when calculating depreciation. | 3 |
5. Activity-based method | Produces a level amount of annual depreciation. | 2 |
Difficulty: 1 Easy
Topic: Depreciation—Basics and compare methods; Impairment—PPE and finite-life intangibles
Learning Objective: 11-02 Determine periodic depreciation using both time-based and activity-based methods and account for dispositions.; 11-08 Identify situations that involve a significant impairment of the value of property, plant, and equipment and intangible assets and describe the required accounting procedures.
Bloom's: Understand
AACSB: Reflective Thinking
AICPA/Accessibility: BB Critical Thinking; FN Measurement
179) Listed below are five terms followed by a list of phrases that describe or characterize five of the terms. Match each phrase with the number for the correct term.
TERM | PHRASE | NUMBER |
1. Book value | Only used for tax purposes. | ____ |
2. Date placed in service | Cost less accumulated depreciation. | ____ |
3.Percentage depletion | Three methods are employed to record these costs. | ____ |
4. Rearrangements | Expenditures made to restructure an asset without addition, replacement, or improvement. | ____ |
5. Improvements | Triggers commencement of depreciation. | ____ |
TERM | PHRASE | NUMBER |
1. Book value | Only used for tax purposes. | 3 |
2. Date placed in service | Cost less accumulated depreciation. | 1 |
3. Percentage depletion | Three methods are employed to record these costs. | 5 |
4. Rearrangements | Expenditures made to restructure an asset without addition, replacement, or improvement. | 4 |
5. Improvements | Triggers commencement of depreciation. | 2 |
Difficulty: 1 Easy
Topic: Measuring cost allocation; Depletion of natural resources; Subsequent expenditures—PPE
Learning Objective: 11-01 Explain the concept of cost allocation as it pertains to property, plant, and equipment and intangible assets.; 11-03 Calculate the periodic depletion of a natural resource.; 11-09 Discuss the accounting treatment of repairs and maintenance, additions, improvements, and rearrangements to property, plant, and equipment and intangible assets.
Bloom's: Understand
AACSB: Reflective Thinking
AICPA/Accessibility: BB Critical Thinking; FN Measurement
180) Listed below are five terms followed by a list of phrases that describe or characterize each of the terms. Match each phrase with the number for the correct term.
TERM | PHRASE | NUMBER |
1. Depletion | Cost allocation for a natural resource. | ____ |
2. Change in depreciation method | Amount of use expected from plant and equipment asset. | ____ |
3. Service life | Cost less residual value. | ____ |
4. Allocation base | Treated prospectively like a change in estimate. | ____ |
5. Amortization | Cost allocation for an intangible asset. | ____ |
TERM | PHRASE | NUMBER |
1. Depletion | Cost allocation for a natural resource. | 1 |
2. Change in depreciation method | Amount of use expected from plant and equipment asset. | 3 |
3. Service life | Cost less residual value. | 4 |
4. Allocation base | Treated prospectively like a change in estimate. | 2 |
5. Amortization | Cost allocation for an intangible asset. | 5 |
Difficulty: 1 Easy
Topic: Measuring cost allocation; Depletion of natural resources; Change in depreciation method
Learning Objective: 11-01 Explain the concept of cost allocation as it pertains to property, plant, and equipment and intangible assets.; 11-03 Calculate the periodic depletion of a natural resource.; 11-06 Explain the appropriate accounting treatment required when a change in depreciation, amortization, or depletion method is made.
Bloom's: Understand
AACSB: Reflective Thinking
AICPA/Accessibility: BB Critical Thinking; FN Measurement
181) Listed below are five terms followed by a list of phrases that describe or characterize each of the terms. Match each phrase with the number for the correct term.
TERM | PHRASE | NUMBER |
1. Depreciation | Generate declining amounts of depreciation over time. | ____ |
2. Prior period adjustment | Allocation of cost for plant and equipment. | ____ |
3. Accelerated methods | Expenditures made to maintain a given level of benefits from an asset. | ____ |
4. Change in useful life | Results from subsequent year correction of a material error. | ____ |
5. Repairs and maintenance | Is a change in accounting estimate. | ____ |
TERM | PHRASE | NUMBER |
1. Depreciation | Generate declining amounts of depreciation over time. | 3 |
2. Prior period adjustment | Allocation of cost for plant and equipment. | 1 |
3. Accelerated methods | Expenditures made to maintain a given level of benefits from an asset. | 5 |
4. Change in useful life | Results from subsequent year correction of a material error. | 2 |
5. Repairs and maintenance | Is a change in accounting estimate. | 4 |
Difficulty: 1 Easy
Topic: Measuring cost allocation; Depreciation—Basics and compare methods; Changes in estimates; Error correction; Subsequent expenditures—PPE
Learning Objective: 11-01 Explain the concept of cost allocation as it pertains to property, plant, and equipment and intangible assets.; 11-02 Determine periodic depreciation using both time-based and activity-based methods and account for dispositions.; 11-05 Explain the appropriate accounting treatment required when a change is made in the service life or residual value of property, plant, and equipment and intangible assets.; 11-07 Explain the appropriate treatment required when an error in accounting for property, plant, and equipment and intangible assets is discovered.; 11-09 Discuss the accounting treatment of repairs and maintenance, additions, improvements, and rearrangements to property, plant, and equipment and intangible assets.
Bloom's: Understand
AACSB: Reflective Thinking
AICPA/Accessibility: BB Critical Thinking; FN Measurement
182) Listed below are five terms followed by a list of phrases that describe or characterize each of the terms. Match each phrase with the number for the correct term.
TERM | PHRASE | NUMBER |
1. Indefinite life | The reason for not amortizing goodwill. | ____ |
2. Group method | Cost allocation for plant and equipment. | ____ |
3. Depreciation | Aggregates assets that are similar. | ____ |
4. Time-based method | Estimates service life in years. | ____ |
5. Sum-of-the-years'-digits method | Results in depreciation declining by the same amount in subsequent years. | ____ |
TERM | PHRASE | NUMBER |
1. Indefinite life | The reason for not amortizing goodwill. | 1 |
2. Group method | Cost allocation for plant and equipment. | 3 |
3. Depreciation | Aggregates assets that are similar. | 2 |
4. Time-based method | Estimates service life in years. | 4 |
5. Sum-of-the-years'-digits method | Results in depreciation declining by the same amount in subsequent years. | 5 |
Difficulty: 1 Easy
Topic: Measuring cost allocation; Depreciation—Basics and compare methods; Intangible assets not subject to amortization
Learning Objective: 11-01 Explain the concept of cost allocation as it pertains to property, plant, and equipment and intangible assets.; 11-02 Determine periodic depreciation using both time-based and activity-based methods and account for dispositions.; 11-04 Calculate the periodic amortization of an intangible asset.
Bloom's: Understand
AACSB: Reflective Thinking
AICPA/Accessibility: BB Critical Thinking; FN Measurement
183) Listed below are five terms followed by a list of phrases that describe or characterize each of the terms. Match each phrase with the number for the correct term.
TERM | PHRASE | NUMBER |
1. Rearrangements | Estimate of recoverable cost at end of an asset's life. | ____ |
2. Additions | Should be capitalized since they provide future benefits. | ____ |
3. Impairment | Capitalize unless unsuccessful. | ____ |
4. Residual value | Considered if indicated that book value may not be recoverable. | ____ |
5. Cost of defending intangible rights | Should be expensed unless they are material and provide a future benefit. | ____ |
TERM | PHRASE | NUMBER |
1. Rearrangements | Estimate of recoverable cost at end of an asset's life. | 4 |
2. Additions | Should be capitalized since they provide future benefits. | 2 |
3. Impairment | Capitalize unless unsuccessful. | 5 |
4. Residual value | Considered if indicated that book value may not be recoverable. | 3 |
5. Cost of defending intangible rights | Should be expensed unless they are material and provide a future benefit. | 1 |
Difficulty: 1 Easy
Topic: Measuring cost allocation; Depreciation—Basics and compare methods; Impairment—PPE and finite-life intangibles; Subsequent expenditures—PPE; Subsequent expenditures—Intangible rights
Learning Objective: 11-01 Explain the concept of cost allocation as it pertains to property, plant, and equipment and intangible assets.; 11-02 Determine periodic depreciation using both time-based and activity-based methods and account for dispositions.; 11-08 Identify situations that involve a significant impairment of the value of property, plant, and equipment and intangible assets and describe the required accounting procedures.; 11-09 Discuss the accounting treatment of repairs and maintenance, additions, improvements, and rearrangements to property, plant, and equipment and intangible assets.
Bloom's: Understand
AACSB: Reflective Thinking
AICPA/Accessibility: BB Critical Thinking; FN Measurement
184) Listed below are 10 terms followed by a list of phrases that describe or characterize the terms. Match each phrase with the number for the correct term.
TERM | PHRASE | NUMBER |
1. Improvements | Can be expressed in units of time or in units of activity. | ____ |
2. Service life | The amount the company expects to receive for the asset at the end of its life. | ____ |
3. Amortization | Cost allocation for an intangible asset. | ____ |
4. Straight-line method | The replacement of a major component of plant and equipment asset. | ____ |
5. Double-declining-balance | Allocates an equal amount of depreciable base to each period. | ____ |
6. Activity-based method | Adding a new major component to existing plant and equipment. | ____ |
7. Residual value | The difference between cost and residual value. | ____ |
8. Depletion | Multiplies book value by twice the straight-line rate. | ____ |
9. Additions | Cost allocation for natural resources. | ____ |
10. Allocation base | Estimates service life in terms of a measure of activity. | ____ |
TERM | PHRASE | NUMBER |
1. Improvements | Can be expressed in units of time or in units of activity. | 2 |
2. Service life | The amount the company expects to receive for the asset at the end of its life. | 7 |
3. Amortization | Cost allocation for an intangible asset. | 3 |
4. Straight-line method | The replacement of a major component of plant and equipment asset. | 1 |
5. Double-declining-balance | Allocates an equal amount of depreciable base to each period. | 4 |
6. Activity-based method | Adding a new major component to existing plant and equipment. | 9 |
7. Residual value | The difference between cost and residual value. | 10 |
8. Depletion | Multiplies book value by twice the straight-line rate. | 5 |
9. Additions | Cost allocation for natural resources. | 8 |
10. Allocation base | Estimates service life in terms of a measure of activity. | 6 |
Difficulty: 1 Easy
Topic: Measuring cost allocation; Depreciation—Basics and compare methods; Depletion of natural resources; Subsequent expenditures—PPE
Learning Objective: 11-01 Explain the concept of cost allocation as it pertains to property, plant, and equipment and intangible assets.; 11-02 Determine periodic depreciation using both time-based and activity-based methods and account for dispositions.; 11-03 Calculate the periodic depletion of a natural resource.; 11-09 Discuss the accounting treatment of repairs and maintenance, additions, improvements, and rearrangements to property, plant, and equipment and intangible assets.
Bloom's: Understand
AACSB: Reflective Thinking
AICPA/Accessibility: FN Measurement
185) Ellen's Antiques reported the following in its December 31, 2021, balance sheet:
Equipment $4,000,000
Accumulated depreciation—equipment $3,150,000
In a disclosure note, Ellen's indicates that it uses straight-line depreciation over eight years and estimates salvage value at 10% of cost.
Required: Compute the average age of Ellen's equipment at 12/31/2020.
Difficulty: 2 Medium
Topic: Depreciation—Straight-line method
Learning Objective: 11-02 Determine periodic depreciation using both time-based and activity-based methods and account for dispositions.
Bloom's: Apply
AACSB: Knowledge Application
AICPA/Accessibility: FN Measurement
186) Comet Cleaning Co. reported the following on its December 31, 2021, balance sheet:
Equipment (at cost) $3,000,000
In a disclosure note, Comet indicates that it uses straight-line depreciation over six years and estimates salvage value as 10% of cost. Comet's equipment averages 4.5 years at December 31, 2021.
Required:
What is the book value of Comet's equipment at December 31, 2021?
Difficulty: 3 Hard
Topic: Depreciation—Straight-line method
Learning Objective: 11-02 Determine periodic depreciation using both time-based and activity-based methods and account for dispositions.
Bloom's: Apply
AACSB: Knowledge Application
AICPA/Accessibility: FN Measurement
Use the following to answer the question(s) below:
On January 1, 2021, Hobart Mfg. Co. purchased a drill press at a cost of $36,000. The drill press is expected to last 10 years and has a residual value of $6,000. During its 10-year life, the equipment is expected to produce 500,000 units of product. In 2021 and 2022, 25,000 and 84,000 units, respectively, were produced.
187) Required:
Compute depreciation for 2021 and 2022 and the book value of the drill press at December 31, 2021 and December 31, 2022, assuming the straight-line method is used.
Cost | $36,000 |
Less: Residual value | 6,000 |
Depreciable base | $30,000 |
Estimated life (years) | ÷ 10 |
Annual depreciation | $ 3,000 |
Year | Cost | Deprec. | Accum. Deprec. | Dec. 31 Book Value |
2021 | $36,000 | $3,000 | $3,000 | $33,000 |
2022 | 36,000 | 3,000 | 6,000 | 30,000 |
Difficulty: 2 Medium
Topic: Depreciation—Straight-line method
Learning Objective: 11-02 Determine periodic depreciation using both time-based and activity-based methods and account for dispositions.
Bloom's: Apply
AACSB: Knowledge Application
AICPA/Accessibility: FN Measurement
188) Required:
Compute depreciation for 2021 and 2022 and the book value of the drill press at December 31, 2021 and December 31, 2022, assuming the double-declining-balance method is used.
Cost, January 1, 2021 | $36,000 |
2021 depreciation (20%) | 7,200 |
Book value, December 31, 2021 | 28,800 |
2022 depreciation (20%) | 5,760 |
Book value, December 31, 2022 | $23,040 |
Difficulty: 2 Medium
Topic: Depreciation—Declining-balance method
Learning Objective: 11-02 Determine periodic depreciation using both time-based and activity-based methods and account for dispositions.
Bloom's: Apply
AACSB: Knowledge Application
AICPA/Accessibility: FN Measurement
189) Required:
Compute depreciation for 2021 and 2022 and the book value of the drill press at December 31, 2021 and December 31, 2022, assuming the sum-of-the-years'-digits method is used.
Year | Cost | Deprec. | Accum. Deprec. | Dec. 31 Book Value |
2021 | $36,000 | $5,455 | $5,455 | $30,545 |
2022 | 36,000 | 4,909 | 10,364 | 25,636 |
Difficulty: 2 Medium
Topic: Depreciation—Sum-of-the-years'-digits method
Learning Objective: 11-02 Determine periodic depreciation using both time-based and activity-based methods and account for dispositions.
Bloom's: Apply
AACSB: Knowledge Application
AICPA/Accessibility: FN Measurement
190) Required:
Compute depreciation for 2021 and 2022 and the book value of the drill press at December 31, 2021 and December 31, 2022, assuming the units-of-production method is used.
Depreciable base = $36,000 – $6,000 = | $30,000 |
Estimated production (units) | ÷ 500,000 |
Depreciation per unit | $.06 |
Year | Cost | Deprec. | Accum. Deprec. | Dec. 31 Book Value |
2021 | $36,000 | $1,500 | $1,500 | $34,500 |
2022 | 36,000 | 5,040 | 6,540 | 29,460 |
Difficulty: 2 Medium
Topic: Depreciation—Units-of-production method
Learning Objective: 11-02 Determine periodic depreciation using both time-based and activity-based methods and account for dispositions.
Bloom's: Apply
AACSB: Knowledge Application
AICPA/Accessibility: FN Measurement
Use the following to answer the question(s) below:
On January 1, 2021, Morrow Inc. purchased a spooler at a cost of $40,000. The equipment is expected to last eight years and have a residual value of $4,000. During its eight-year life, the equipment is expected to produce 250,000 units of product. In 2021 and 2022, 42,000 and 76,000 units, respectively, were produced.
191) Required:
Compute depreciation for 2021 and 2022 and the book value of the spooler at December 31, 2021 and December 31, 2022, assuming the straight-line method is used.
Cost | $40,000 |
Residual value | 4,000 |
Depreciable base | $36,000 |
Estimated life (years) | ÷ 8 |
Annual depreciation | $ 4,500 |
Year | Cost | Deprec. | Accum. Deprec. | Dec. 31 Book Value |
2021 | $40,000 | $4,500 | $4,500 | $35,500 |
2022 | 40,000 | 4,500 | 9,000 | 31,000 |
Difficulty: 2 Medium
Topic: Depreciation—Straight-line method
Learning Objective: 11-02 Determine periodic depreciation using both time-based and activity-based methods and account for dispositions.
Bloom's: Apply
AACSB: Knowledge Application
AICPA/Accessibility: FN Measurement
192) Required:
Compute depreciation for 2021 and 2022 and the book value of the spooler at December 31, 2021 and December 31, 2022, assuming the double-declining-balance method is used.
Cost, January 1, 2021 | $40,000 |
2021 depreciation (25%) | 10,000 |
Book value, December 31, 2021 | 30,000 |
2022 depreciation (25%) | 7,500 |
Book value, December 31, 2022 | $22,500 |
Difficulty: 2 Medium
Topic: Depreciation—Declining-balance method
Learning Objective: 11-02 Determine periodic depreciation using both time-based and activity-based methods and account for dispositions.
Bloom's: Apply
AACSB: Knowledge Application
AICPA/Accessibility: FN Measurement
193) Required:
Compute depreciation for 2021 and 2022 and the book value of the spooler at December 31, 2021 and December 31, 2022, assuming the sum-of-the-years'-digits method is used.
Year | Cost | Deprec. | Accum. Deprec. | Dec. 31 Book Value |
2021 | $40,000 | $8,000 | $ 8,000 | $32,000 |
2022 | 40,000 | 7,000 | 15,000 | 25,000 |
Difficulty: 2 Medium
Topic: Depreciation—Sum-of-the-years'-digits method
Learning Objective: 11-02 Determine periodic depreciation using both time-based and activity-based methods and account for dispositions.
Bloom's: Apply
AACSB: Knowledge Application
AICPA/Accessibility: FN Measurement
194) Required:
Compute depreciation for 2021 and 2022 and the book value of the spooler at December 31, 2021 and December 31, 2022, assuming the units-of-production method is used.
Depreciable base = $40,000 – $4,000 = | $ 36,000 |
Estimated production (units) | ÷ 250,000 |
Depreciation per unit | $.144 |
Year | Cost | Deprec. | Accum. Deprec. | Dec. 31 Book Value |
2021 | $40,000 | $6,048 | $ 6,048 | $33,952 |
2022 | 40,000 | 10,944 | 16,992 | 23,008 |
Difficulty: 2 Medium
Topic: Depreciation—Sum-of-the-years'-digits method
Learning Objective: 11-02 Determine periodic depreciation using both time-based and activity-based methods and account for dispositions.
Bloom's: Apply
AACSB: Knowledge Application
AICPA/Accessibility: FN Measurement
195) Nature Power Company uses the composite method and straight-line depreciation for its power plant equipment. Its Apple River plant, which began generating electricity January 1, 2021, had the following equipment:
Equipment | Life (Years) | Estimated Cost | Residual Value |
Turbines | 25 | $4,500,000 | $500,000 |
Steam pipes | 15 | 3,000,000 | 300,000 |
Furnace | 20 | 6,000,000 | 0 |
Required:
1. Compute the composite depreciation rate.
2. Compute the average service life.
3. Compute 2021 depreciation.
Equipment | Cost | Residual Value | Depreciable Base | Life (yrs) | Straight-Line Deprec. |
Turbines | $4,500,000 | $500,000 | $4,000,000 | 25 | $160,000 |
Steam pipes | 3,000,000 | 300,000 | 2,700,000 | 15 | 180,000 |
Furnace | 6,000,000 | 0 | 6,000,000 | 20 | 300,000 |
$13,500,000 | $12,700,000 | $640,000 |
Difficulty: 3 Hard
Topic: Depreciation—Group and composite methods
Learning Objective: 11-02 Determine periodic depreciation using both time-based and activity-based methods and account for dispositions.
Bloom's: Apply
AACSB: Knowledge Application
AICPA/Accessibility: FN Measurement
Use the following to answer the question(s) below:
On April 1, 2021, Parks Co. purchased machinery at a cost of $42,000. The machinery is expected to last 10 years and to have a residual value of $6,000.
196) Required:
Compute depreciation for 2021 and 2022 and the book value of the machinery at December 31, 2021 and December 31, 2022, assuming the sum-of-the-years'-digits method is used.
Year | Cost | Deprec. | Accum. Deprec. | Dec. 31 Book Value |
2021 | $42,000 | $4,909 | $4,909 | $37,091 |
2022 | 42,000 | 6,054 | 10,963 | 31,037 |
Difficulty: 3 Hard
Topic: Depreciation—Sum-of-the-years'-digits method
Learning Objective: 11-02 Determine periodic depreciation using both time-based and activity-based methods and account for dispositions.
Bloom's: Apply
AACSB: Knowledge Application
AICPA/Accessibility: FN Measurement
197) Compute depreciation for 2021 and 2022 and the book value of the machinery at December 31, 2021 and December 31, 2022, assuming double-declining-balance method is used.
Cost, April 1, 2021 | $42,000 |
2021 depreciation (20% × 9/12) | 6,300 |
Book value, December 31, 2021 | 35,700 |
2022 depreciation (20%) | 7,140 |
Book value, December 31, 2022 | $28,560 |
Difficulty: 3 Hard
Topic: Depreciation—Declining-balance method
Learning Objective: 11-02 Determine periodic depreciation using both time-based and activity-based methods and account for dispositions.
Bloom's: Apply
AACSB: Knowledge Application
AICPA/Accessibility: FN Measurement
198) On September 30, 2021, Sternberg Company sold office equipment for $12,000. The equipment was purchased on March 31, 2018, for $24,000. The asset was being depreciated over a five-year life using the straight-line method, with depreciation based on months in service. No residual value was anticipated.
Required:
Prepare the journal entries to record 2021 depreciation and the sale of the equipment.
Cost | $24,000 | |
Service life (years) | ÷ 5 | |
Depreciation per year | $4,800 | |
Years in service (Mar. 31, 2018—Sep. 30, 2021) | × 3.5 | |
Accumulated depreciation | $16,800 |
(2021 depreciation expense) | |||||
Depreciation expense ($4,800 × 0.75 years) | $3,600 | ||||
Accumulated depreciation | $3,600 | ||||
Cash | $12,000 | ||||
Accumulated depreciation | $16,800 | ||||
Equipment | $24,000 | ||||
Gain on sale of equipment | $4,800 | ||||
Difficulty: 3 Hard
Topic: Depreciation—Straight-line method; Disposition of PPE and intangible assets
Learning Objective: 11-02 Determine periodic depreciation using both time-based and activity-based methods and account for dispositions.
Bloom's: Apply
AACSB: Knowledge Application
AICPA/Accessibility: FN Measurement
199) The table below contains data on depreciation for equipment.
Required: Fill in the missing data in the table.
Acquisition date | 1/1/2019 | 1/1/2019 | 1/1/2019 | 1/1/2020 | 1/1/2020 |
Cost | $100,000 | $100,000 | $330,000 | ||
Accumulated depreciation, 2/31/2021 | $90,000 | ||||
Depreciation, 2020 | $10,000 | $27,000 | $200,000 | ||
Depreciation, 2021 | $10,000 | $18,000 | $80,000 | ||
Book value, 12/31/2020 | $140,000 | $37,000 | $300,000 | ||
Book value, 12/31/2021 | $70,000 | ||||
Estimated service life | 6 | 4 | 5 | 5 | |
Estimated salvage value | 0 | $10,000 | 0 | ||
Depreciation method | Straight- Line | Sum-of- Years'-Digits | Double- Declining- Balance |
Acquisition date | 1/1/2019 | 1/1/2019 | 1/1/2019 | 1/1/2019 | 1/1/2019 |
Cost | $100,000 | $200,000 | $100,000 | $330,000 | $500,000 |
Accumulated depreciation, 12/31/2021 | $30,000 | $90,000 | $81,000 | $180,000 | $320,000 |
Depreciation, 2020 | $10,000 | $30,000 | $27,000 | $100,000 | $200,000 |
Depreciation, 2021 | $10,000 | $30,000 | $18,000 | $80,000 | $120,000 |
Book value, 12/31/2020 | $80,000 | $140,000 | $37,000 | $230,000 | $300,000 |
Book value, 12/31/2021 | $70,000 | $110,000 | $19,000 | $150,000 | $180,000 |
Estimated service life | 10 | 6 | 4 | 5 | 5 |
Estimated salvage value | 0 | $20,000 | $10,000 | $30,000 | 0 |
Depreciation method | Straight- Line | Straight- Line | Sum-of- Years'- Digits | Sum-of- Years'- Digits | Double- Declining-Balance |
Difficulty: 3 Hard
Topic: Depreciation—Basics and compare methods
Learning Objective: 11-02 Determine periodic depreciation using both time-based and activity-based methods and account for dispositions.
Bloom's: Analyze
AACSB: Analytical Thinking
AICPA/Accessibility: FN Measurement
200) Cheney Company sold a 20-ton mechanical draw press (equipment) for $60,000. The old draw press cost $77,000 and had a book value of $55,000.
Required:
Prepare the journal entry to record the disposition.
Cash | $60,000 | |
Accumulated depreciation | $22,000 | |
Equipment | $77,000 | |
Gain on sale of equipment | $5,000 |
Difficulty: 2 Medium
Topic: Disposition of PPE and intangible assets
Learning Objective: 11-02 Determine periodic depreciation using both time-based and activity-based methods and account for dispositions.
Bloom's: Apply
AACSB: Knowledge Application
AICPA/Accessibility: FN Measurement
201) McLean Mfg. Company sold a three-speed lathe (equipment) for $24,000 cash. The lathe cost $66,200 and had a book value of $23,200.
Required:
Prepare the journal entry to record the sale.
Cash | $24,000 | |
Accumulated depreciation | $43,000 | |
Equipment | $66,200 | |
Gain on sale of equipment | $800 |
Difficulty: 2 Medium
Topic: Disposition of PPE and intangible assets
Learning Objective: 11-02 Determine periodic depreciation using both time-based and activity-based methods and account for dispositions.
Bloom's: Apply
AACSB: Knowledge Application
AICPA/Accessibility: FN Measurement
Use the following to answer the question(s) below:
In its 2021 annual report to shareholders, Buffalo Burgers Company, Inc., included the following in a disclosure note:
E. Property, Plant, and Equipment
Property, plant, and equipment for the years ended December 28, 2021, and December 29, 2020, consisted of the following ($ in thousands):
2021 | 2020 | |
Machinery and plant equipment | $259,664 | $183,828 |
Kegs | 60,350 | 46,899 |
Land | 23,260 | 24,515 |
Building and building improvements | 44,234 | 36,667 |
Office equipment and furniture | 14,581 | 12,580 |
Leasehold improvements | 7,600 | 6,193 |
409,689 | 310,682 | |
Less: accumulated depreciation | 143,131 | 120,734 |
$266,558 | $189,948 |
The Company recorded depreciation related to these assets of $23,565 in the 2021 fiscal year.
Also, Buffalo Burgers reported the following information in the annual report ($ in thousands):
Years ended | ||||
12/28/2021 | 12/29/2020 | |||
Cash flows for investing | ||||
activities: |
| |||
Purchases of property, | ||||
plant, and equipment | $(100,655) | $(66,010) | ||
Proceeds on disposal of |
|
| ||
property, plant, and equipment | $18 | $41 |
202) Use a T-account to show the balances and changes during 2021 in Buffalo Burgers' Property, Plant, and Equipment account and its Accumulated Depreciation—Property, Plant, and Equipment account.
Beg. Balance 310,682 Purchases 100,655 | Disposals 1,648 |
End. Balance 409,689 |
Acc. Depreciation 1,168 on disposals | 120,734 Beg. Balance 23,565 Depreciation Exp. |
143,131 End. Balance |
Difficulty: 3 Hard
Topic: Depreciation—Basics and compare methods; Disposition of PPE and intangible assets
Learning Objective: 11-02 Determine periodic depreciation using both time-based and activity-based methods and account for dispositions.
Bloom's: Analyze
AACSB: Analytical Thinking
AICPA/Accessibility: FN Measurement
203) Prepare the journal entry to record Buffalo Burgers' sale of property, plant, and equipment during 2021.
Cash | $18 | |
Accumulated depreciation | $1,168 | |
Loss on sale of property, plant, and equipment | $462 | |
Property, plant, and equipment | $1,648 |
Difficulty: 3 Hard
Topic: Disposition of PPE and intangible assets
Learning Objective: 11-02 Determine periodic depreciation using both time-based and activity-based methods and account for dispositions.
Bloom's: Apply
AACSB: Knowledge Application
AICPA/Accessibility: FN Measurement
Use the following to answer the question(s) below:
In its 2021 annual report to shareholders, Plank Breweries included the following note:
Property, Plant, and Equipment
Property, plant, and equipment consist of the following ($ in thousands):
December 31, | ||||
2021 | 2020 | |||
Brewery and retail | $ 14,465 | $ 14,246 | ||
Equipment |
| |||
Furniture and fixtures | 918 | 772 | ||
Leasehold improvements | 13,808 | 13,563 | ||
Construction in progress | 584 | 165 | ||
Assets held for sale | ________ | 4 | ||
| 29,775 | 28,750 | ||
Less accumulated depreciation | (9,555) | (7,625) | ||
| $ 20,220 | $ 21,125 |
| |
Total depreciation expense was approximately $2.121 million and $2.179 million for the years ended December 31, 2021 and December 31, 2020, respectively.
Also, Plank Breweries reported the following information in its annual report (in $ thousands):
Years Ended December 31, | ||
2021 | 2020 | |
Acquisition of property, plant, and equipment | 1,279 | 808 |
|
| |
Proceeds from sale of property, plant, and equipment | 15 | 157 |
204) Required:
Use a T-account to show the balances and changes during 2021 in Plank Breweries:
Property, Plant, and Equipment account and Accumulated Depreciation—Property, Plant, and Equipment (PPE) account ($ in thousands).
Beg. Balance 28,750 Purchases 1,279 | Disposals 54 |
End. Balance 29,775 |
Acc. Depreciation on disposals 191 | 7,625 Beg. Balance 2,121 Depreciation Exp. |
9,555 End. Balance |
Difficulty: 3 Hard
Topic: Depreciation—Basics and compare methods; Disposition of PPE and intangible assets
Learning Objective: 11-02 Determine periodic depreciation using both time-based and activity-based methods and account for dispositions.
Bloom's: Analyze
AACSB: Analytical Thinking
AICPA/Accessibility: BB Critical Thinking; FN Measurement
205) Prepare the journal entry to record Plank's disposal of the property, plant, and equipment during 2021.
Cash | $15 | |
Accumulated depreciation | $191 | |
Loss on sale of property, plant, and equipment | $48 | |
Property, plant, and equipment | $254 |
Difficulty: 3 Hard
Topic: Disposition of PPE and intangible assets
Learning Objective: 11-02 Determine periodic depreciation using both time-based and activity-based methods and account for dispositions.
Bloom's: Apply
AACSB: Knowledge Application
AICPA/Accessibility: FN Measurement
206) In its 2021 annual report to shareholders, Custard Cup Inc. included the following note:
Note 4 Property, Plant, and Equipment
Property, plant, and equipment (PPE) at December 31, 2021, and December 31, 2020, consisted of the following:
2021 | 2020 | |
(In millions) | ||
Machinery and equipment | $244 | $237 |
Buildings and improvements | 90 | 89 |
Office furniture and fixtures | _ _6 | ___6 |
| 340 | 332 |
Less: Accumulated depreciation |
| |
and Amortization | 183 | 165 |
157 | 167 | |
Land | 15 | 15 |
Construction in progress | 24 | 6 |
$196 | $188 |
Depreciation expense for property, plant and equipment was $26 million in 2021.
Required: Compute the accumulated depreciation on PPE disposed of by Custard Cup during 2021.
Acc. Depreciation on disposals 8 | 165 Beg. Balance 26 Depreciation Exp. |
183 End. Balance |
Difficulty: 2 Medium
Topic: Depreciation—Basics and compare methods; Disposition of PPE and intangible assets
Learning Objective: 11-02 Determine periodic depreciation using both time-based and activity-based methods and account for dispositions.
Bloom's: Apply
AACSB: Knowledge Application
AICPA/Accessibility: FN Measurement
207) The table below contains data on depreciation for machinery.
Required: Fill in the missing data in the table.
Acquisition date | 1/1/2019 | 1/1/2019 | 6/30/2019 |
Cost | $250,000 | $320,000 | |
Accumulated depreciation, 12/31/2021 | $120,000 | ||
Depreciation, 2020 | $40,000 | $90,000 | |
Depreciation, 2021 | $32,000 | $70,000 | |
Book value, 12/31/2020 | $160,000 | $240,000 | $180,000 |
Book value, 12/31/2021 | |||
Estimated service life | 5 | ||
Estimated salvage value | 0 | 0 | $20,000 |
Depreciation method | Straight-line |
Acquisition date | 1/1/2019 | 1/1/2019 | 6/30/2019 |
Cost | $250,000 | $320,000 | $320,000 |
Accumulated depreciation, 12/31/2021 | $122,000 | $120,000 | $210,000 |
Depreciation, 2020 | $40,000 | $40,000 | $90,000 |
Depreciation, 2021 | $32,000 | $40,000 | $70,000 |
Book value, 12/31/2020 | $160,000 | $240,000 | $180,000 |
Book value, 12/31/2021 | $128,000 | $200,000 | $110,000 |
Estimated service life | 10 | 8 | 5 |
Estimated salvage value | 0 | 0 | $20,000 |
Depreciation method | Double-declining-balance | Straight-line | Sum-of-years'-digits |
Difficulty: 3 Hard
Topic: Depreciation—Basics and compare methods
Learning Objective: 11-02 Determine periodic depreciation using both time-based and activity-based methods and account for dispositions.
Bloom's: Analyze
AACSB: Analytical Thinking
AICPA/Accessibility: FN Measurement
208) In 2021, the internal auditors of KJI Manufacturing discovered the following material errors made in prior years:
1. Equipment was purchased on June 30, 2019, for $100,000. The purchase was incorrectly recorded as a debit to repair and maintenance expense. The equipment has a useful life of five years and no residual value.
2. On March 31, 2020, $50,000 was paid to a contractor to landscape the area around a manufacturing plant, including the installation of a sprinkler system. The expenditure was debited to the Land account. The landscaping is expected to have a 20-year useful life and no residual value.
KJI uses the straight-line method of depreciation for all depreciable assets.
Required:
1. Prepare the journal entries at December 31, 2021, to correct the errors (ignore income taxes).
2. Prepare the journal entries to record 2021 depreciation for any assets recorded in requirement.
Difficulty: 3 Hard
Topic: Error correction
Learning Objective: 11-07 Explain the appropriate treatment required when an error in accounting for property, plant, and equipment and intangible assets is discovered.
Bloom's: Apply
AACSB: Knowledge Application
AICPA/Accessibility: FN Measurement
209) Zvinakis Mining Company paid $200,000 for the rights to mine lead in southeast Missouri. The cost to drill and erect a mine shaft was $2,400,000, and equipment to process the lead ore before shipment to the smelter was $1,800,000. The mine is expected to yield 2,000,000 tons of ore during the five years it is expected to be operating. The equipment has an estimated residual value of $150,000 when mining is concluded. The mine started operations on April 30, 2021. In 2021, 300,000 tons of ore were extracted, and in 2022, 700,000 tons were mined.
Required:
1. Compute the depletion rate and the units-of-production depreciation rate.
2. Compute depletion and depreciation for 2021 and 2022.
1. | Mineral rights | $ 200,000 | ||||
Mine shaft | 2,400,000 | |||||
Depletion base | 2,600,000 | |||||
Recoverable ore (tons) | ÷ 2,000,000 | |||||
Depletion rate per ton | $1.30 | |||||
Mining equipment | $1,800,000 | |||||
Less: residual value | 150,000 | |||||
Depreciable base | 1,650,000 | |||||
Recoverable ore (tons) | ÷ 2,000,000 | |||||
Depreciation rate per ton | $0.825 | |||||
2. | Depletion: | |||||
2021: 300,000 × $1.30 | $390,000 | |||||
2022: 700,000 × $1.30 | $910,000 | |||||
Depreciation: | ||||||
2021: 300,000 × $0.825 | $247,500 | |||||
2022: 700,000 × $0.825 | $577,500 | |||||
Difficulty: 3 Hard
Topic: Depreciation—Units-of-production method; Depletion of natural resources
Learning Objective: 11-02 Determine periodic depreciation using both time-based and activity-based methods and account for dispositions.; 11-03 Calculate the periodic depletion of a natural resource.
Bloom's: Apply
AACSB: Knowledge Application
AICPA/Accessibility: FN Measurement
210) On February 20, 2021, Genoa Mining Company incurred costs of $3,600,000 to acquire and prepare to extract an estimated 4,000,000 tons of mineral deposits. In 2021, 450,000 tons of ore were mined. At the beginning of 2022, Genoa geologists estimated that 3,900,000 tons of ore still remained. In 2022, 700,000 tons of ore were mined.
Required:
Compute depletion for 2021 and 2022.
2021: | ||
Cost | $3,600,000 | |
Recoverable ore (tons) | ÷ 4,000,000 | |
Depletion rate | $0.90 | |
Ore mined in 2021 | 450,000 | |
Depletion: 2021 | $405,000 | |
2022: | ||
Cost | $3,600,000 | |
Less: 2021 depletion | 405,000 | |
Book value, Jan. 1, 2022 | 3,195,000 | |
Estimated tons recoverable | ÷ 3,900,000 | |
Revised depletion rate | $0.81923 | |
Mined in 2022 (tons) | 700,000 | |
Depletion: 2022 | $573,461 |
Difficulty: 3 Hard
Topic: Depletion of natural resources
Learning Objective: 11-03 Calculate the periodic depletion of a natural resource.
Bloom's: Apply
AACSB: Knowledge Application
AICPA/Accessibility: FN Measurement
211) On August 1, 2021, Reliable Software began developing a software program to allow individuals to customize their investment portfolios. Technological feasibility was established on January 31, 2022, and the program was available for release on March 31, 2022. Development costs were incurred as follows:
August 1 through December 31, 2021 $6,300,000
January 1 through January 31, 2022 1,200,000
February 1 through March 31, 2022 1,600,000
Reliable expects a useful life of five years for the software and total revenues of $8,000,000 during that time. During 2022, revenue of $2,000,000 was recognized.
Required:
1. Prepare the journal entries to record the development costs in 2021 and 2022.
2. Calculate the required amortization for 2022.
Difficulty: 3 Hard
Topic: Intangible assets subject to amortization
Learning Objective: 11-04 Calculate the periodic amortization of an intangible asset.
Bloom's: Apply
AACSB: Knowledge Application
AICPA/Accessibility: FN Measurement
212) On September 30, 2021, Morgan, Inc., acquired all of the outstanding common stock of Pathways, Inc., for $100 million. In addition to tangible assets, Morgan recorded the following assets as a result of the acquisition:
Patent $6 million
Developed technology 3 million
In-process research & development 2 million
Goodwill 7 million
Morgan's policy is to amortize intangible assets using the straight-line method, no residual value, and a six-year useful life.
Required:
What is the total amount of expenses that would appear in Morgan's income statement for the year ended December 31, 2021, related to these items?
Difficulty: 3 Hard
Topic: Intangible assets subject to amortization; Intangible assets not subject to amortization
Learning Objective: 11-04 Calculate the periodic amortization of an intangible asset.
Bloom's: Apply
AACSB: Knowledge Application
AICPA/Accessibility: FN Measurement
213) Meca Concrete purchased a mixer on January 1, 2019, at a cost of $45,000. Straight-line depreciation for 2019 and 2020 was based on an estimated eight-year life and $3,000 estimated residual value. In 2021, Meca revised its estimate and now believes the mixer will have a total service life of only six years, and that the residual value will be only $2,000.
Required:
Compute depreciation for 2021 and 2022.
Cost | $45,000 | |
Less: Residual value | 3,000 | |
Depreciable base | 42,000 | |
Estimated life (years) | ÷ 8 | |
Annual depreciation (2019 and 2020) | $ 5,250 | |
Cost | $45,000 | |
Depreciation: 2019 | $5,250 | |
2020 | 5,250 | 10,500 |
Book value, Dec. 31, 2020 | 34,500 | |
Less: Revised residual value | 2,000 | |
Remaining depreciable base | 32,500 | |
Remaining life (years) | ÷ 4 | |
Annual depreciation 2021 and 2022 | $8,125 |
Difficulty: 3 Hard
Topic: Changes in estimates
Learning Objective: 11-05 Explain the appropriate accounting treatment required when a change is made in the service life or residual value of property, plant, and equipment and intangible assets.
Bloom's: Apply
AACSB: Knowledge Application
AICPA/Accessibility: FN Measurement
214) Eckland Manufacturing Co. purchased equipment on January 1, 2019, at a cost of $90,000. Straight-line depreciation for 2019 and 2020 was based on an estimated eight-year life and $2,000 estimated residual value. In 2021, Eckland revised its estimate and now believes the equipment will have a total service life of only six years, while the residual value remains the same.
Required:
Compute depreciation for 2021 and 2022.
Cost | $90,000 | |
Less: Residual value | 2,000 | |
Depreciable base | 88,000 | |
Estimated life (years) | ÷ 8 | |
Annual depreciation charge (2019 and 2020) | $11,000 | |
Cost | $90,000 | |
Depreciation: 2019 | $11,000 | |
2020 | 11,000 | 22,000 |
Book value, Dec. 31, 2020 | 68,000 | |
Less: Residual value | 2,000 | |
Remaining depreciable base | 66,000 | |
Remaining life (years) | ÷ 4 | |
Annual depreciation 2021 and 2022 | $16,500 |
Difficulty: 3 Hard
Topic: Changes in estimates
Learning Objective: 11-05 Explain the appropriate accounting treatment required when a change is made in the service life or residual value of property, plant, and equipment and intangible assets.
Bloom's: Apply
AACSB: Knowledge Application
AICPA/Accessibility: FN Measurement
215) Weaver Textiles Inc. has used the straight-line method to depreciate its equipment since it started business in 2017. At the beginning of 2021, the company decided to change to the double-declining-balance (DDB) method. Depreciation as reported and as it would have been reported if the company had always used DDB is listed below:
Year | Straight-Line | DDB |
2017 | $22,500 | $45,000 |
2018 | 25,000 | 40,000 |
2019 | 28,000 | 38,000 |
2020 | 28,000 | 32,000 |
Required:
What journal entry, if any, should Weaver make to record the effect of the accounting change (ignore income taxes)? Explain.
Difficulty: 2 Medium
Topic: Changes in depreciation method
Learning Objective: 11-06 Explain the appropriate accounting treatment required when a change in depreciation, amortization, or depletion method is made.
Bloom's: Analyze
AACSB: Analytical Thinking; Communication
AICPA/Accessibility: BB Critical Thinking; FN Measurement
216) Gonzaga Company has used the double-declining-balance method for depreciation since it started business in 2017. At the beginning of 2021, the company decided to change to the straight-line method. Depreciation as reported and how it would have been reported if the company had always used straight-line is listed below:
Straight- | ||
Year | Line | DDB |
2017 | $32,000 | $64,000 |
2018 | 35,000 | 50,000 |
2019 | 39,000 | 58,000 |
2020 | 39,000 | 48,000 |
Required:
What journal entry, if any, should Gonzaga make to record the effect of the accounting change (ignore income taxes)? Explain.
Difficulty: 2 Medium
Topic: Changes in depreciation method
Learning Objective: 11-06 Explain the appropriate accounting treatment required when a change in depreciation, amortization, or depletion method is made.
Bloom's: Analyze
AACSB: Analytical Thinking; Communication
AICPA/Accessibility: BB Critical Thinking; FN Measurement
217) In December of 2021, XL Computer's internal auditors discovered that office equipment costing $800,000 was charged to expense in 2019. The asset had an expected life of 10 years with no residual value. XL would have recorded a half year of depreciation in 2019.
Required:
Prepare the necessary correcting entry that would be made in 2021 (ignore income taxes), and the entry to record depreciation for 2021.
Office equipment | $800,000 | |
Accumulated depreciation | 120,000 | |
Retained earnings | 680,000 |
Depreciation expense | $80,000 | |
Accumulated depreciation | 80,000 |
Difficulty: 3 Hard
Topic: Error correction
Learning Objective: 11-07 Explain the appropriate treatment required when an error in accounting for property, plant, and equipment and intangible assets is discovered.
Bloom's: Apply
AACSB: Knowledge Application
AICPA/Accessibility: FN Measurement
Use the following to answer the question(s) below:
El Dorado Foods Inc. owns a chain of specialty stores in the Pacific Northwest. Recently, four of the stores have experienced declining profits due to market saturation in the area. As a result, management gathered data about possible impairment of the assets of the stores. The information gathered was as follows:
Book value: $17.5 million
Fair value: $14.9 million
Undiscounted sum of future cash flows: $16.5 million
218) Required:
Determine the amount, if any, of the impairment loss that El Dorado must recognize on these assets.
Difficulty: 2 Medium
Topic: Impairment—PPE and finite-life intangibles
Learning Objective: 11-08 Identify situations that involve a significant impairment of the value of property, plant, and equipment and intangible assets and describe the required accounting procedures.
Bloom's: Apply
AACSB: Knowledge Application
AICPA/Accessibility: FN Measurement
219) Required:
Assume that the undiscounted sum of future cash flows is $18.2 million, instead of $16.5 million. Determine the amount, if any, of the impairment loss that El Dorado must recognize on these assets.
Difficulty: 2 Medium
Topic: Impairment—PPE and finite-life intangibles
Learning Objective: 11-08 Identify situations that involve a significant impairment of the value of property, plant, and equipment and intangible assets and describe the required accounting procedures.
Bloom's: Apply
AACSB: Knowledge Application
AICPA/Accessibility: BB Critical Thinking; FN Measurement
Use the following to answer the question(s) below:
In 2020, Dooling Corporation acquired Oxford Inc. for $250 million, of which $50 million was attributed to goodwill. At the end of 2021, Dooling's accountants derive the following information for a required goodwill impairment test:
Book value of Oxford (including goodwill): | $234.5 million |
Fair value of Oxford's tangible and intangible assets (excluding goodwill): | $204.9 million |
Fair value of Oxford (the reporting unit): | $260.0 million |
220) Required: Determine the amount, if any, of the goodwill impairment loss that Dooling must recognize on these assets.
Difficulty: 2 Medium
Topic: Impairment—Indefinite-life intangible assets
Learning Objective: 11-08 Identify situations that involve a significant impairment of the value of property, plant, and equipment and intangible assets and describe the required accounting procedures.
Bloom's: Apply
AACSB: Knowledge Application
AICPA/Accessibility: BB Critical Thinking; FN Measurement
221) Assume the same facts as above, except that the fair value of Oxford (the reporting unit) is $225 million.
Required:
1. Determine the amount, if any, of the goodwill impairment loss that Dooling must recognize on these assets.
2. Determine the proper balance of goodwill in Dooling's records at the end of 2021.
Fair value of Oxford (reporting unit) | $225.0 million |
Book value of Oxford (with goodwill) | 234.5 million |
Impairment loss | $(9.5) million |
Original goodwill | $50.0 million |
Impairment loss | (9.5) million |
Balance of goodwill | $40.5 million |
Difficulty: 3 Hard
Topic: Impairment—Indefinite-life intangible assets
Learning Objective: 11-08 Identify situations that involve a significant impairment of the value of property, plant, and equipment and intangible assets and describe the required accounting procedures.
Bloom's: Apply
AACSB: Knowledge Application
AICPA/Accessibility: FN Measurement
222) Wicker Corporation operates a manufacturing plant in California. Due to a change in business climate, an impairment test is deemed appropriate. Management has acquired the following information for the assets at the plant:
Cost $58,500,000
Accumulated depreciation 26,400,000
Wicker's estimate of the total cash flows to be generated
by selling the products manufactured at its California plant,
not discounted to present value 30,000,000
The fair value of the California plant is estimated to be $24,000,000.
Required:
1. Determine the amount of impairment loss, if any.
2. If a loss is indicated, where would it appear in Wicker's multiple-step income statement?
3. If a loss is indicated, prepare the entry to record the loss.
4. Repeat requirement 1, assuming that the estimated undiscounted sum of future cash flows is $27,000,000 instead of $30,000,000.
5. Repeat requirement 1, assuming that the estimated undiscounted sum of future cash flows is $34,000,000 instead of $30,000,000.
Difficulty: 3 Hard
Topic: Impairment—PPE and finite-life intangibles
Learning Objective: 11-08 Identify situations that involve a significant impairment of the value of property, plant, and equipment and intangible assets and describe the required accounting procedures.
Bloom's: Apply
AACSB: Knowledge Application
AICPA/Accessibility: FN Measurement
223) (Note: The following problem requires students to determine the amount of goodwill in a business acquisition, a Chapter 10 topic.)
In 2019, Quasar Ltd. acquired all of the common stock of Penlight Laser for $124 million. The fair value of Penlight's identifiable tangible and intangible assets totaled $205 million, and the fair value of liabilities assumed by Quasar was $95 million. Quasar performed a required goodwill impairment test at the end of its fiscal year ended December 31, 2021. Management has provided the following information:
Fair value of Penlight (reporting unit) $115 million
Fair value of Penlight's net assets (excluding goodwill) 107 million
Book value of Penlight's net assets (including goodwill) 125 million
Required:
1. Determine the amount of goodwill that resulted from the Penlight acquisition.
2. Determine the amount of goodwill impairment loss that Quasar should recognize at the end of 2021, if any.
3. If an impairment loss is required, prepare the journal entry to record the loss.
Fair value of Penlight (reporting unit) | $115 million |
Book value of Penlight (with goodwill) | 125 million |
Impairment loss | $(10) million |
Difficulty: 3 Hard
Topic: Impairment—Indefinite-life intangible assets
Learning Objective: 11-08 Identify situations that involve a significant impairment of the value of property, plant, and equipment and intangible assets and describe the required accounting procedures.
Bloom's: Apply
AACSB: Knowledge Application
AICPA/Accessibility: FN Measurement
224) Atlas Trucking incurred the following costs during 2021:
1. Spent $15,000 on a major overhaul for a tractor trailer rig. The overhaul is expected to increase the service life of the rig by three years.
2. Repaired the air-conditioning system for $3,000.
3. Rearranged and reconfigured the maintenance, loading, and unloading facilities at a cost of $75,000. The rearrangement is expected to result in substantial cost savings and increased efficiency over the next several years.
Required:
Prepare journal entries to record the above costs.
1. | Accumulated depreciation | $15,000 | |
Cash | $15,000 | ||
2. | Repairs and maintenance expense | $3,000 | |
Cash | $3,000 | ||
3. | Buildings | $75,000 | |
Cash | $75,000 |
Difficulty: 3 Hard
Topic: Subsequent expenditures—PPE
Learning Objective: 11-09 Discuss the accounting treatment of repairs and maintenance, additions, improvements, and rearrangements to property, plant, and equipment and intangible assets.
Bloom's: Apply
AACSB: Knowledge Application
AICPA/Accessibility: FN Measurement
225) A company made the following expenditures related to its restaurant:
1. Replaced the heating and air-conditioning equipment at a cost of $15,000.
2. Remodeled the restaurant building. The total cost of the project was $150,000.
3. Performed annual building maintenance at a cost of $47,000.
4. Paid annual insurance premium on the property for the coming year, $7,700.
5. Purchased a new delivery truck, $22,500.
6. Landscaped the property and added outdoor lights, $9,000.
Required:
Assume the company credits cash for each of these expenditures. Indicate the account to be debited for each of these expenditures.
1. | Equipment (or Building) |
2. | Building |
3. | Maintenance Expense |
4. | Prepaid Insurance |
5. | Equipment |
6. | Land Improvements |
Difficulty: 2 Medium
Topic: Subsequent expenditures—PPE
Learning Objective: 11-09 Discuss the accounting treatment of repairs and maintenance, additions, improvements, and rearrangements to property, plant, and equipment and intangible assets.
Bloom's: Apply
AACSB: Knowledge Application
AICPA/Accessibility: FN Measurement
226) A company had the following expenditures related to developing its trademark.
General advertising costs | $300,000 |
Advertising specifically focused on trademark development | 120,000 |
Legal fees to register trademark | 52,000 |
Registration fees for the trademark | 38,000 |
Legal fees for successful defense of the new trademark | 33,000 |
Total | $543,000 |
During your year-end review of the accounts related to intangibles, you discover that the company has capitalized all the above as costs of the trademark. Management contends that all of the costs increase the value of the trademark; therefore, all the costs should be capitalized.
Required:
1. Which of the above costs should the company capitalize to the Trademark account in the balance sheet?
2. Which of the above costs should the company report as expense in the income statement?
1. Trademark account in the balance sheet: | |
Legal fees to register trademark | $52,000 |
Registration fees for the trademark | 38,000 |
Legal fees for successful defense of the new trademark | 33,000 |
Total costs capitalized | $123,000 |
2. Expense in the income statement: | |
General advertising costs | $300,000 |
Advertising specifically focused on trademark development | 120,000 |
Total costs expensed | $420,000 |
Difficulty: 2 Medium
Topic: Subsequent expenditures—Intangible rights
Learning Objective: 11-09 Discuss the accounting treatment of repairs and maintenance, additions, improvements, and rearrangements to property, plant, and equipment and intangible assets.
Bloom's: Apply
AACSB: Knowledge Application
AICPA/Accessibility: FN Measurement
227) On March 30, 2021, Calvin Exploration purchased a drilling machine for $840,000. The estimated useful life of the machine is 10 years and no residual value is anticipated. An important component of the machine is the drill housing component that will need to be replaced in five years. The $200,000 cost of the drill housing component is included in the $840,000 cost of the machine. Calvin uses the straight-line depreciation method for all machinery. The company's fiscal year ends on December 31.
Required:
1. Calculate depreciation on the drilling machine for 2021 and 2022, applying the typical U.S. GAAP treatment.
2. Repeat requirement 1, applying IFRS.
Difficulty: 3 Hard
Topic: Depreciation—Straight-line method; IFRS—Depreciation
Learning Objective: 11-02 Determine periodic depreciation using both time-based and activity-based methods and account for dispositions.; 11-10 Discuss the primary differences between U.S. GAAP and IFRS with respect to the utilization and impairment of property, plant, and equipment and intangible assets.
Bloom's: Apply
AACSB: Knowledge Application; Diversity
AICPA/Accessibility: BB Global; FN Measurement
228) Synthetic Fuels Corporation prepares its financial statements according to IFRS. On June 30, 2021, the company purchased equipment for $350,000. The equipment is expected to have a seven-year useful life with no residual value. Synthetic uses the straight-line depreciation method for all depreciable assets. On December 31, 2021, the end of the company's fiscal year, Synthetic chooses to revalue the machinery to its fair value of $299,000.
Required:
1. Calculate depreciation for 2021.
2. Prepare the journal entry at the end of 2021 to record the revaluation of the equipment.
3. Calculate depreciation for 2022.
4. Repeat requirement 2, assuming that the fair value of the equipment at the end of 2021 is $338,000.
Difficulty: 3 Hard
Topic: IFRS—Depreciation; IFRS Valuation—PPE and intangibles
Learning Objective: 11-10 Discuss the primary differences between U.S. GAAP and IFRS with respect to the utilization and impairment of property, plant, and equipment and intangible assets.
Bloom's: Apply
AACSB: Knowledge Application; Diversity
AICPA/Accessibility: BB Global; FN Measurement
229) Smithson Ltd. prepares its financial statements according to IFRS. On March 30, 2021, the company purchased a franchise for $3,000,000. The franchise has a 10-year contractual life with no residual value. Smithson uses the straight-line amortization method for all intangible assets. On December 31, 2021, the end of the company's fiscal year, Smithson chooses to revalue the franchise. There is an active market for this particular franchise, and its fair value on December 31 is $2,860,000.
Required:
1. Calculate amortization for 2021.
2. Prepare the journal entry to record the revaluation of the patent.
3. Calculate amortization for 2022.
Difficulty: 3 Hard
Topic: IFRS Valuation—PPE and intangibles
Learning Objective: 11-10 Discuss the primary differences between U.S. GAAP and IFRS with respect to the utilization and impairment of property, plant, and equipment and intangible assets.
Bloom's: Apply
AACSB: Knowledge Application; Diversity
AICPA/Accessibility: BB Global; FN Measurement
230) Sanders Corporation operates a factory in Arizona. Due to a change in business climate, an impairment test is deemed appropriate. Management has acquired the following information for the assets at the plant:
Cost $243,000,000
Accumulated depreciation 122,000,000
Estimate of the total cash flows to be generated by selling the products
manufactured at the Arizona factory, not discounted to present value 110,000,000
Present value of estimated future cash flows 94,000,000
Estimated fair value of the Arizona factory determined by appraisal 90,000,000
Required:
1. Determine the amount of impairment loss, if any.
2. If a loss is indicated, prepare the entry to record the loss.
3. Repeat requirement 1, assuming that Sanders prepares its financial statements according to International Financial Reporting Standards (IFRS). Also assume that the estimated fair value of the factory approximates fair value less costs to sell.
Difficulty: 3 Hard
Topic: Impairment—PPE and finite-life intangibles; IFRS Impairment—PPE-Intangibles-Goodwill
Learning Objective: 11-08 Identify situations that involve a significant impairment of the value of property, plant, and equipment and intangible assets and describe the required accounting procedures.; 11-10 Discuss the primary differences between U.S. GAAP and IFRS with respect to the utilization and impairment of property, plant, and equipment and intangible assets.
Bloom's: Apply
AACSB: Knowledge Application; Diversity
AICPA/Accessibility: BB Global; FN Measurement
231) Kentfield Corporation has $260 million of goodwill on its book from the 2018 acquisition of Seaford Shipping. At the end of its 2021 fiscal year, management has provided the following information for a required goodwill impairment test ($ in millions):
Fair value of Seaford (approximates fair value less costs to sell) $ 810
Fair value of Seaford's net assets (excluding goodwill) 650
Book value of Seaford's net assets (including goodwill) 850
Present value of estimated future cash flows 825
Required:
Assuming that Seaford is considered a reporting unit for U.S. GAAP and a cash-generating unit for IFRS, determine the amount of goodwill impairment loss that Kentfield should recognize according to U.S. GAAP and International Financial Reporting Standards (IFRS).
Difficulty: 3 Hard
Topic: Impairment—Indefinite-life intangible assets; IFRS Impairment—PPE-Intangibles-Goodwill
Learning Objective: 11-10 Discuss the primary differences between U.S. GAAP and IFRS with respect to the utilization and impairment of property, plant, and equipment and intangible assets.
Bloom's: Apply
AACSB: Knowledge Application; Diversity
AICPA/Accessibility: BB Global; FN Measurement
232) On June 30, 2019, Mobley Corporation acquired a patent for $4 million. The patent was estimated to have an eight-year life and no residual value. Mobley uses the straight-line method of amortization for intangible assets. At the beginning of January 2021, Mobley successfully defended its patent against infringement. Litigation costs totaled $650,000.
Required:
1. Calculate patent amortization for 2019 and 2020.
2. Prepare the journal entry to record the 2021 litigation costs.
3. Calculate amortization for 2021.
4. Repeat requirements 2 and 3, assuming that Mobley prepares its financial statements according to International Financial Reporting Standards (IFRS).
Difficulty: 3 Hard
Topic: Intangible assets subject to amortization; Subsequent expenditures—Intangible rights; IFRS—Cost of defending intangible rights
Learning Objective: 11-04 Calculate the periodic amortization of an intangible asset.; 11-09 Discuss the accounting treatment of repairs and maintenance, additions, improvements, and rearrangements to property, plant, and equipment and intangible assets.; 11-10 Discuss the primary differences between U.S. GAAP and IFRS with respect to the utilization and impairment of property, plant, and equipment and intangible assets.
Bloom's: Apply
AACSB: Knowledge Application; Diversity
AICPA/Accessibility: BB Global; FN Measurement
233) Notsofast Inc. acquired land for $500,000 on July 1, 2020. It erroneously recorded the full amount as an expense. Explain what Notsofast must do when it discovers the error in 2021.
Difficulty: 2 Medium
Topic: Error correction
Learning Objective: 11-07 Explain the appropriate treatment required when an error in accounting for property, plant, and equipment and intangible assets is discovered.
Bloom's: Analyze
AACSB: Analytical Thinking; Communication
AICPA/Accessibility: BB Critical Thinking; FN Measurement
234) Briefly explain the following statement. Depreciation is a process of cost allocation, not valuation.
Difficulty: 2 Medium
Topic: Measuring cost allocation
Learning Objective: 11-01 Explain the concept of cost allocation as it pertains to property, plant, and equipment and intangible assets.
Bloom's: Understand
AACSB: Reflective Thinking
AICPA/Accessibility: BB Critical Thinking; FN Measurement
235) Briefly discuss the factors that determine the service life of a depreciable asset.
Difficulty: 2 Medium
Topic: Measuring cost allocation
Learning Objective: 11-01 Explain the concept of cost allocation as it pertains to property, plant, and equipment and intangible assets.
Bloom's: Understand
AACSB: Reflective Thinking
AICPA/Accessibility: BB Critical Thinking; FN Measurement
236) Briefly explain the differences between the terms depreciation, depletion, and amortization.
Difficulty: 2 Medium
Topic: Measuring cost allocation
Learning Objective: 11-01 Explain the concept of cost allocation as it pertains to property, plant, and equipment and intangible assets.
Bloom's: Understand
AACSB: Reflective Thinking
AICPA/Accessibility: BB Critical Thinking; FN Measurement
237) Briefly explain the disclosures that are required relative to depreciable assets.
Difficulty: 2 Medium
Topic: Measuring cost allocation
Learning Objective: 11-01 Explain the concept of cost allocation as it pertains to property, plant, and equipment and intangible assets.
Bloom's: Remember
AACSB: Reflective Thinking
AICPA/Accessibility: BB Critical Thinking; FN Measurement
238) Briefly differentiate between activity-based and time-based allocation methods.
Difficulty: 2 Medium
Topic: Depreciation—Basics and compare methods
Learning Objective: 11-02 Determine periodic depreciation using both time-based and activity-based methods and account for dispositions.
Bloom's: Understand
AACSB: Reflective Thinking
AICPA/Accessibility: BB Critical Thinking; FN Measurement
239) Briefly discuss why straight-line is the most common depreciation method used in practice.
Difficulty: 2 Medium
Topic: Depreciation—Basics and compare methods
Learning Objective: 11-02 Determine periodic depreciation using both time-based and activity-based methods and account for dispositions.
Bloom's: Understand
AACSB: Reflective Thinking
AICPA/Accessibility: FN Decision Making; FN Measurement
240) Which depreciation method is most common for financial reporting? Which depreciation method is most common for tax reporting? Why do companies choose these methods?
Difficulty: 2 Medium
Topic: Depreciation—Basics and compare methods
Learning Objective: 11-02 Determine periodic depreciation using both time-based and activity-based methods and account for dispositions.
Bloom's: Understand
AACSB: Communication
AICPA/Accessibility: FN Decision Making; FN Measurement
241) Why is land not depreciated? What are land improvements? Why do we record land and land improvements separately?
Difficulty: 2 Medium
Topic: Depreciation—Basics and compare methods
Learning Objective: 11-02 Determine periodic depreciation using both time-based and activity-based methods and account for dispositions.
Bloom's: Understand
AACSB: Communication
AICPA/Accessibility: BB Critical Thinking; FN Measurement
242) Kelly Company and its subsidiaries are engaged in the manufacture and marketing of ready-to-eat cereal and convenience foods. In its annual report to shareholders, Kelly disclosed the following:
DISPOSITIONS
Last year, the Company sold certain assets and liabilities of the Leader's Bagels business to Aura Foods Inc. for $275 million in cash. As a result of this transaction, the Company recorded a pretax charge of $178.9 million ($119.3 million after tax or $.29 per share). This charge included approximately $57 million for disposal of other assets associated with the Leader's business, which were not purchased by Aura. Disposal of these other assets was completed during the current year. The original reserve of $57 million exceeded actual losses from asset sales and related disposal costs by approximately $9 million. This amount was recorded as a credit to other income (expense) net during the current year.
Required:
Explain how the Kelly transactions described could be interpreted as an example of earnings management.
Difficulty: 3 Hard
Topic: Disposition of PPE and intangible assets
Learning Objective: 11-02 Determine periodic depreciation using both time-based and activity-based methods and account for dispositions.
Bloom's: Analyze
AACSB: Analytical Thinking
AICPA/Accessibility: BB Critical Thinking; FN Measurement
243) Briefly explain how to account for a change in depreciation method.
Difficulty: 2 Medium
Topic: Changes in depreciation method
Learning Objective: 11-06 Explain the appropriate accounting treatment required when a change in depreciation, amortization, or depletion method is made.
Bloom's: Remember
AACSB: Reflective Thinking
AICPA/Accessibility: BB Critical Thinking; FN Measurement
244) Qualcomm Inc. engages in the development, design, manufacture, and marketing of digital wireless telecommunications products and services. In a recent income statement the company reported a $114 million goodwill impairment loss. The loss related to the goodwill of its Firethorn reporting unit.
Required:
1. Why did Qualcomm conduct an impairment test of the goodwill of this reporting unit?
2. Describe how Qualcomm would measure the impairment loss.
3. Where would the impairment loss be shown in the company's income statement?
Difficulty: 3 Hard
Topic: Impairment—Indefinite-life intangible assets
Learning Objective: 11-08 Identify situations that involve a significant impairment of the value of property, plant, and equipment and intangible assets and describe the required accounting procedures.
Bloom's: Analyze
AACSB: Analytical Thinking; Communication
AICPA/Accessibility: BB Critical Thinking; FN Measurement
Document Information
Connected Book
Answer Key + Test Bank | Intermediate Accounting 10e
By J. David Spiceland, Mark W. Nelson, Wayne Thomas