Chapter 11 - Property, Plant, Equipment, and Intangible Assets PDF

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Summary

Utilization and Disposition of assets. Cost allocation, depreciation basis, and methods. ...

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The amount of use that the company expects to obtain from an asset before disposing of it is referred to as service life of the asset. The term used to describe the amount the company expects to receive for an asset at the end of its service life less any anticipated disposal costs is the residual value The total amount of cost to be allocated over an asset's service life is called its residual value. FALSE. Which of the following items should be considered when choosing an allocation method for a long-term asset? A pattern in which the services are obtained from its use, a systematic and rational allocation method The allocation of the cost of a tangible fixed asset is referred to as depreciation, whereas the allocation of the cost of an intangible asset is referred to as amortization. Under what circumstances is depreciation included in inventory? In a manufacturing environment. Service life, the estimated use that the company expects to receive from the asset Allocation method, the pattern in which the usefulness is expected to be consumed Allocation base, the cost of the asset that is expected to be consumed Depreciation, allocation of the cost of a tangible fixed asset Depletion, allocation of the cost of natural resources Amortization, allocation of the cost of an intangible asset Emil Company expects that its asset will be more usefull during early years of its life than during later years. In addition, the company estimates that repair costs will increase over time. Which methods may help equalize total expenses recognized over the service life of this asset? Declining balance, Sum-ofthe-years digits. Which statement is true about the straight-line method of depreciation? It allocates an equal amount of depreciation to each year the asset is used. The formula for straight-line depreciation is (Cost-residual value)/useful life The portion of a tangible asset's cost that is recognized as an expense in the current year is called depreciation expense Under what circumstances are accelerated depreciation methods most appropriate? For an asset that will be used extensively in earlier years of its life. For an asset that has high repair and maintenance costs later in life The sum-of-the-year's-digits (SYD) method of depreciation is an accelerated method in which depreciation expense decreases each year by decreasing the numerator each year in the depreciation rate. On January 1, year 1, Glasser Corp. Purchased equipment for $120,000. The equipment has a useful life of 3 years, and a residual value of $20,000. Using the sum-of-years'-digits method, what is the

depreciation expense for year 1? ($120,000 – 20,000) x (3/6) = $50,000. The denominator in SYD is 1+2+3=6 The formula for calculating declining balance depreciation is the depreciation rate per year times the book value at the beginning of the year. When a company uses accelerated depreciation, it is common practice to change to which depreciation method approximately halfway through the asset's life? Straight-line If a company bases depreciation expense on the life of a machine in hours and depreciates the machine for the number of hours used during the year, it is using the units-of-production method of depreciation. On January 1, year 1, Clem Corp. Purchased equipment for $160,000. The equipment has a residual value of $10,000 and has a life of 100,000 hours, Clem uses the units of production method of depreciation. In year 1, Clem used the machine 2,000 hours, and in a year 2, Clem used the machine 3,000 hours. What is the depreciation expense for year 2? The units-of-production rate per unit is ($160,000 - $10,000)/100,000 hours = $1.50 per machine hour. Year 2 depreciation is 3,000 hours * $1.50 = $4,500 Theoretically, which depreciation method provides the best estimate of expense to correspond with the usage of the asset? Units-of-production depreciation Companies use accelerated depreciation for tax purposes because it reduces taxable income in the early years of the asset's life. Companies must use the same depreciation method for all assets. FALSE Which of the following describes IFRS rules regarding depreciation? Each component of an item of property, plant, and equipment must be depreciated separately if its cost is significant. Which of the following are depreciation methods used for IFRS? Diminishing balance, units of production, straight-line. When selling a fixed asset, the seller recognized a gain or loss for the difference between the consideration received and the book value of the asset sold. Which of the following is true regarding property, plant, and equipment or intangibles held for sale? The assets held for sale are not depreciated or amortized. If the fair value less costs to sell is below book value, an impairment loss is recognized. A retirement or abandonment of an asset is different from a sale of an asset because, no consideration is received, and a loss must be recognized for the remaining book value. Group and composite depreciation commonly is used to reduce costs of record-keeping The group depreciation method defines the collection of depreciable assets as those that share similar service lives and attributes Group depreciation is calculated by multiplying the group depreciation rate by the total cost of assets in the group for that period.

When group depreciation is used, and asset is sold, which of the following occurs? No gain or loss is recorded, the asset's cost is removed from the books. Under U.S. GAAP, property, plant, and equipment is reported at book value; under IFRS property, plant, and equipment is reported at book or fair value. Kensington Corp. Prepares its financial statements in accordance with IFRS and elects the revaluation option for equipment. The equipment cost $100,000 and has accumulated depreciation of $20,000 at the end of its first year in business. The fair value of the equipment is $90,000 at the end of year 1. The journal entry to record the revaluation of equipment will include a credit to revaluation surplus in OCI of $10,000 Which of the following are accelerated methods of depreciation? Double-declining-balance method. Declining balance method, sum-of the years digits method. Under what circumstances are accelerated depreciation methods most appropriate? For an asset that has high repair and maintenance costs later in life. For an asset that will be used extensively in earlier years of its life. Declining balance depreciation methods multiply cost less accumulated depreciation by an annual rate that is a multiple of straight-line rate When a company uses accelerated depreciation, it is common practice to change to which depreciation method approximately halfway through the asset's life? Straight-line On January 1, year 1, Roark Crop. Purchased equipment for $120,000. The equipment has a residual value of $20,000, and has a life of 1,000,000 hours. Roark uses the units of production method of depreciation. In year 1, Roark used the machine 30,000 hours and in year 2, Roark used the machine 50,000 hours. What is depreciation expense for year 2? The units of production rate per unit $120,000 $20,000) 1,000,000 hours = $0.10 per machine hour. Year 2 depreciation is 50,000 hours x $0.10 = $5,000 At the beginning of year 1, Looby Corp. Purchases equipment for $100,000. The equipment has a residual value of $20,000 and an expected useful life of 10 years. What is accumulated depreciation at the end of year 2 using straight-line depreciation? ($100,000 – 20,000)/ 10 years = $8,000 per year x 2 years The journal entry to record depreciation expense includes credit to accumulated depreciation, debit to depreciation expense. For assets using the group or composite method of depreciation, the assets will be depreciated over the average service life of assets in the group. Which of the following occur when the revaluation option is used for IFRS reporting? A revaluation surplus is included in other comprehensive income, a revaluation resulting in a write-down is included as expense on the income statement. Although activity-based depreciation methods are theoretically superior to time-based methods, activity-based methods are difficult to apply in practice, too costly to use.

Under U.S. GAAP, when property, plant, and equipment are held for sale, the assets are reported at the lower of its book value or fair value less costs to sell....