CH11 TB 8e final - practice questions PDF

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Chapter 11 Property, Plant, and Equipment and Intangible Assets: Utilization and Impairment True/False Questions 1. The three factors in cost allocation of a depreciable asset are service life, allocation base, and allocation method. Answer: True Level of Learning: 1 Easy Learning Objective: 11-01 Topic Area: Measuring cost allocation Blooms: Remember AACSB: Reflective thinking AICPA: BB Critical thinking AICPA: FN Measurement 2. The physical life of a depreciable asset is bounded by its service life. Answer: False Level of Learning: 1 Easy Learning Objective: 11-01 Topic Area: Measuring cost allocation Blooms: Remember AACSB: Reflective thinking AICPA: BB Critical thinking AICPA: FN Measurement 3. Any method of depreciation should be both systematic and rational. Answer: True Level of Learning: 1 Easy Learning Objective: 11-01 Topic Area: Measuring cost allocation Blooms: Remember AACSB: Reflective thinking AICPA: BB Critical thinking AICPA: FN Measurement

4. Total depreciation is the same over the life of an asset regardless of the method of depreciation used. Answer: True Level of Learning: 1 Easy Learning Objective: 11-01 Topic Area: Measuring cost allocation Blooms: Understand AACSB: Reflective thinking AICPA: BB Critical thinking AICPA: FN Measurement

Intermediate Accounting, Eighth Edition, Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 11-1

Chapter 11 Property, Plant, and Equipment and Intangible Assets: Utilization and Impairment 5. 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. Answer: True Level of Learning: 1 Easy Learning Objective: 11-02 Topic Area: Depreciation Blooms: Understand AACSB: Reflective thinking AICPA: BB Critical thinking AICPA: FN Measurement 6. Activity-based methods of depreciation are appropriate for assets whose service life is a function of use rather than time. Answer: True Level of Learning: 1 Easy Learning Objective: 11-02 Topic Area: Depreciation Blooms: Remember AACSB: Reflective thinking AICPA: BB Critical thinking AICPA: FN Measurement 7. Once selected for existing assets, a company must consistently use the same method of depreciation for all subsequent fixed asset acquisitions. Answer: False Level of Learning: 1 Easy Learning Objective: 11-02 Topic Area: Depreciation Blooms: Remember AACSB: Reflective thinking AICPA: BB Critical thinking AICPA: FN Measurement 8. Under group and composite depreciation methods, gains and losses on the disposal of individual assets need not be computed. Answer: True Level of Learning: 1 Easy Learning Objective: 11-02 Topic Area: Depreciation – Group and composite methods Blooms: Remember AACSB: Reflective thinking AICPA: BB Critical thinking AICPA: FN Measurement

Intermediate Accounting, Eighth Edition, Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 11-2

Chapter 11 Property, Plant, and Equipment and Intangible Assets: Utilization and Impairment 9. Statutory depletion is the maximum amount of depletion that may be reported in financial statements prepared according to GAAP. Answer: False Level of Learning: 1 Easy Learning Objective: 11-03 Topic Area: Depletion of natural resources Blooms: Remember AACSB: Reflective thinking AICPA: BB Critical thinking AICPA: FN Measurement

10. A change in the estimated recoverable units used to compute depletion requires retroactive adjustments to the financial statements. Answer: False Level of Learning: 1 Easy Learning Objective: 11-05 Topic Area: Changes in estimates Blooms: Remember AACSB: Reflective thinking AICPA: BB Critical thinking AICPA: FN Measurement

11. Changes in the estimates involved in depreciation, depletion, and amortization require retroactive restatement of financial statements. Answer: False Level of Learning: 1 Easy Learning Objective: 11-05 Topic Area: Changes in estimates Blooms: Remember AACSB: Reflective thinking AICPA: BB Critical thinking AICPA: FN Measurement

12. Property, plant, and equipment and finite-life intangible assets must be tested for impairment at least once a year. Answer: False Level of Learning: 1 Easy Learning Objective: 11-08 Topic Area: Impairment of value Blooms: Remember AACSB: Reflective thinking AICPA: BB Critical thinking AICPA: FN Measurement Intermediate Accounting, Eighth Edition, Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 11-3

Chapter 11 Property, Plant, and Equipment and Intangible Assets: Utilization and Impairment 13. International Financial Reporting Standards (IFRS) require goodwill to be tested for impairment at least annually. Answer: True Level of Learning: 1 Easy Learning Objective: 11-10 Topic Area: IFRS – Impairment of value – Goodwill Blooms: Remember AACSB: Reflective thinking AACSB: Diversity AICPA: BB Global AICPA: FN Measurement

14. According to International Financial Reporting Standards (IFRS), property, plant, and equipment must be valued at cost less accumulated depreciation. Answer: False Level of Learning: 1 Easy Learning Objective: 11-10 Topic Area: IFRS – Valuation of PP&E Blooms: Understand AACSB: Reflective thinking AACSB: Diversity AICPA: BB Global AICPA: FN Measurement 15. Component depreciation, required under International Financial Reporting Standards (IFRS), is allowed but rarely used by U.S. companies. Answer: True Level of Learning: 1 Easy Learning Objective: 11-10 Topic Area: IFRS – Depreciation Blooms: Understand AACSB: Reflective thinking AICPA: BB Global AICPA: FN Measurement 16. Biological assets are valued at fair value less estimated costs to sell under International Financial Reporting Standards (IFRS). Answer: True Level of Learning: 1 Easy Learning Objective: 11-10 Topic Area: IFRS – Biological assets Blooms: Understand AACSB: Reflective thinking AACSB: Diversity AICPA: BB Global Intermediate Accounting, Eighth Edition, Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 11-4

Chapter 11 Property, Plant, and Equipment and Intangible Assets: Utilization and Impairment AICPA: FN Measurement 17. 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. Answer: False Level of Learning: 1 Easy Learning Objective: 11-10 Topic Area: IFRS – Impairment of value – PP&E Blooms: Understand AACSB: Reflective thinking AACSB: Diversity AICPA: BB Global AICPA: FN Measurement 18. 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. Answer: True Level of Learning: 1 Easy Learning Objective: 11-10 Topic Area: IFRS – Impairment of value – Intangibles other than goodwill Blooms: Remember AACSB: Reflective thinking AACSB: Diversity AICPA: BB Global AICPA: FN Measurement 19. According to International Financial Reporting Standards (IFRS), the costs to successfully defend an intangible right normally are capitalized and amortized. Answer: False Level of Learning: 1 Easy Learning Objective: 11-10 Topic Area: IFRS – Cost of defending intangible rights Blooms: Understand AACSB: Reflective thinking AACSB: Diversity AICPA: BB Global AICPA: FN Measurement 20. MACRS (modified accelerated cost recovery system) depreciation is equivalent to sum-of-theyears’ digits depreciation. Answer: False Level of Learning: 1 Easy Learning Objective: Appendix 11A Topic Area: Comparison with MACRS (tax depreciation) Blooms: Remember AACSB: Reflective thinking Intermediate Accounting, Eighth Edition, Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 11-5

Chapter 11 Property, Plant, and Equipment and Intangible Assets: Utilization and Impairment AICPA: BB Critical thinking AICPA: FN Measurement 21. By the replacement depreciation method, depreciation is recorded when assets are replaced. Answer: True Level of Learning: 1 Easy Learning Objective: Appendix 11B Topic Area: Retirement and replacement methods of depreciation Blooms: Remember AACSB: Reflective thinking AICPA: BB Critical thinking AICPA: FN Measurement Multiple Choice Questions 22. 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. Answer: d Level of Learning: 1 Easy Learning Objective: 11-01 Topic Area: Measuring cost allocation Blooms: Remember AACSB: Reflective thinking AICPA: BB Critical thinking AICPA: FN Measurement 23. The depreciable 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 Answer: b Level of Learning: 1 Easy Learning Objective: 11-01 Topic Area: Measuring cost allocation Blooms: Remember AACSB: Reflective thinking AICPA: BB Critical thinking AICPA: FN Measurement 24. 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. Intermediate Accounting, Eighth Edition, Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 11-6

Chapter 11 Property, Plant, and Equipment and Intangible Assets: Utilization and Impairment c. d.

Are all handled the same in arriving at taxable income. All of these answer choices are correct.

Answer: a Level of Learning: 1 Easy Learning Objective: 11-01 Topic Area: Measuring cost allocation Blooms: Remember AACSB: Reflective thinking AICPA: BB Critical thinking AICPA: FN Measurement 25. Gains on the cash sales of fixed assets: 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. Answer: d Level of Learning: 1 Easy Learning Objective: 11-01 Topic Area: Measuring cost allocation Blooms: Remember AACSB: Reflective thinking AICPA: BB Critical thinking AICPA: FN Measurement 26. 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. Answer: b Level of Learning: 1 Easy Learning Objective: 11-01 Topic Area: Measuring cost allocation Blooms: Remember AACSB: Reflective thinking AICPA: BB Critical thinking AICPA: FN Measurement

Intermediate Accounting, Eighth Edition, Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 11-7

Chapter 11 Property, Plant, and Equipment and Intangible Assets: Utilization and Impairment

27. 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. Answer: b Level of Learning: 2 Medium Learning Objective: 11-01 Topic Area: Measuring cost allocation Blooms: Remember AACSB: Reflective thinking AICPA: BB Critical thinking AICPA: FN Measurement 28. 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-year's digits. Answer: c Level of Learning: 2 Medium Learning Objective: 11-02 Topic Area: Depreciation – Comparing methods Blooms: Understand AACSB: Reflective thinking AICPA: BB Critical thinking AICPA: FN Measurement 29. 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. Composite or group. Answer: a Level of Learning: 2 Medium Learning Objective: 11-02 Topic Area: Depreciation – Comparing methods Blooms: Understand AACSB: Reflective thinking AICPA: BB Critical thinking AICPA: FN Measurement

Intermediate Accounting, Eighth Edition, Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 11-8

Chapter 11 Property, Plant, and Equipment and Intangible Assets: Utilization and Impairment

30. An asset acquired January 1, 2016, 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, 2017, for $6,000. The entry to record the sale would be: a.

b. c.

d.

Cash Loss on sale of equipment Equipment Cash Equipment Cash Accumulated depreciation Loss on sale of equipment Equipment Cash Accumulated depreciation Equipment

6,000 9,000 15,000 6,000 6,000 6,000 3,750 5,250 15,000 6,000 9,000 15,000

Answer: d Level of Learning: 3 Hard Learning Objective: 11-02 Topic Area: Depreciation – Group and composite methods Blooms: Analyze AACSB: Analytical thinking AICPA: FN Measurement Feedback: Under the group depreciation method, it is assumed that the book value of a disposed item exactly equals any proceeds received, and no gain or loss is recorded.

Use the following to answer questions 31–38: Cutter Enterprises purchased equipment for $72,000 on January 1, 2016. The equipment is expected to have a five-year life and a residual value of $6,000. 31. Using the straight-line method, depreciation for 2016 would be: a. $13,200. b. $14,400. c. $72,000. d. None of these answer choices are correct. Answer: a Level of Learning: 1 Easy Learning Objective: 11-02 Topic Area: Depreciation – Straight-line method Blooms: Apply AACSB: Knowledge application AICPA: FN Measurement Feedback: ($72,000 – 6,000)  5 = $13,200 Intermediate Accounting, Eighth Edition, Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 11-9

Chapter 11 Property, Plant, and Equipment and Intangible Assets: Utilization and Impairment

32. Using the straight-line method, the book value at December 31, 2016, would be: a. $57,600. b. $51,600. c. $58,800. d. $52,800. Answer: c Level of Learning: 2 Medium Learning Objective: 11-02 Topic Area: Depreciation – Straight-line method Blooms: Apply AACSB: Knowledge application AICPA: FN Measurement Feedback: $72,000 – 13,200 = $58,800 33. Using the straight-line method, depreciation for 2017 and the equipment’s book value at December 31, 2017, would be: a. $14,400 and $43,200. b. $28,800 and $37,200. c. $13,200 and $39,600. d. $13,200 and $45,600. Answer: d Level of Learning: 3 Hard Learning Objective: 11-02 Topic Area: Depreciation – Straight-line method Blooms: Apply AACSB: Knowledge application AICPA: FN Measurement Feedback: Depreciation, 2017 = ($72,000 – 6,000)  5 = $13,200 Book value, 12/31/17 = $72,000 – (2 x 13,200) = $45,600 34. Using the double-declining balance method, depreciation for 2016 and the book value at December 31, 2016, would be: a. $26,400 and $45,600. b. $28,800 and $43,200. c. $28,800 and $37,200. d. $26,400 and $36,600. Answer: b Level of Learning: 2 Medium Learning Objective: 11-02 Topic Area: Depreciation – Declining balance method Blooms: Apply AACSB: Knowledge application AICPA: FN Measurement Feedback: Intermediate Accounting, Eighth Edition, Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 11-10

Chapter 11 Property, Plant, and Equipment and Intangible Assets: Utilization and Impairment Depreciation, 2016 = $72,000 x 40% = $28,800 Book value, 12/31/16 = $72,000 – 28,800 = $43,200 35. Using the double-declining balance method, depreciation for 2017 would be: a. $28,800. b. $18,240. c. $17,280. d. None of these answer choices are correct. Answer: c Level of Learning: 3 Hard Learning Objective: 11-02 Topic Area: Depreciation – Declining balance method Blooms: Apply AACSB: Knowledge application AICPA: FN Measurement Feedback: Depreciation, 2017 = [$72,000 – ($72,000 x 40%)] x 40% = $17,280

36. Using the double-declining balance method, the book value at December 31, 2017, would be: a. $14,400. b. $24,960. c. $27,360. d. $25,920. Answer: d Level of Learning: 3 Hard Learning Objective: 11-02 Topic Area: Depreciation – Declining balance method Blooms: Apply AACSB: Knowledge application AICPA: FN Measurement Feedback: Book value, 12/31/2017 = $72,000 – 28,800 –17,280 = $25,920 37. Using the sum-of-the-years'-digits method, depreciation for 2016 and book value at December 31, 2016, would be: a. $22,000 and $44,000. b. $22,000 and $50,000. c. $24,000 and $48,000. d. $24,000 and $42,000. Answer: b Level of Learning: 3 Hard Learning Objective: 11-02 Topic Area: Depreciation – Sum-of-the-years’-digits method Blooms: Apply AACSB: Knowledge application AICPA: FN Measurement Feedback: Depreciation, 2016 = ($72,000 – 6,000) x 5/15 = $22,000 Book value, 12/31/2016 = $72,000 – 22,000 = $50,000 Intermediate Accounting, Eighth Edition, Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 11-11

Chapter 11 Property, Plant, and Equipment and Intangible Assets: Utilization and Impairment

38. Using the sum-of-the-years'-digits method, depreciation for 2017 and book value at December 31, 2017, would be: a. $19,200 and $30,800. b. $17,600 and $26,400. c. $19,200 and $28,800. d. $17,600 and $32,400. Answer: d Level of Learning: 3 Hard Learning Objective: 11-02 Topic Area: Depreciation – Sum-of-the-years’-digits method Blooms: Apply AACSB: Knowledge application AICPA: FN Measurement Feedback: Depreciation, 2017 = ($72,000 – 6,000) x 4/15 = $17,600 Book value, 12/31/2017 = $72,000 – 22,000 - 17,600 = $32,400

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Chapter 11 Property, Plant, and Equipment and Intangible Assets: Utilization and Impairment Use the following to answer questions 39 and 40: On June 30, 2016, 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 2016, 24,000 units of product were produced. At the beginning of 2017, engineers estimated that the machine can realistically be used to produce only another 230,000 units. During 2017, 70,000 units were produced. 39. Prego would report depreciation in 2016 of: a. $36,000. b. $43,900. c. $18,000. d. $21,950. Answer: a Level of Learning: 2 Medium Learning Objective: 11-02 Topic Area: Depreciation – Activity-based method Blooms: Apply AACSB: Knowledge application AICPA: FN Measurement Feedback: Depreciation in 2016 = ($450,000300,000) = $1.50 per unit x 24,000 = $36,000 40. Prego would report depreciation in 2...