Accounting Ch. 11 Notes

What are the two types of PP&E assets?

PP&E and Intangibles

Cost allocation for plant and equipment is known as
a. Depletion
b. Depreciation
c. Amortization

Depreciation

Cost allocation for intangibles is known as
a. Depletion
b. Depreciation
c. Amortization

Amortization

Cost allocation for natural resources is known as
a. Depletion
b. Depreciation
c. Amortization

Depletion

Why do accountants allocate the depreciation costs of an asset over time instead of all at once?
a. To spread the asset’s cost evenly
b. To maintain a consistent asset value
c. To match revenues with expenses
d. To follow tax laws set by legislation

C

____ is the amount of use a company expects to obtain from an asset before its disposal
a. Service life
b. Salvage value
c. Market value
d. Replacement cost

A

T/F The service life of an asset can be less than its physical life

True

Physical life provides the _____ for service life
a. Starting point
b. Expected average life
c. Lower boundary
d. Upper boundary

D

T/F Estimating residual value is usually straightforward with little difficulty

False; it’s in the future so it’s difficult to estimate.

According to GAAP, the depreciation method chosen should allocate the cost of an asset in a ____ and ____ manner.

a. consistent; predictable
b. systematic; rational
c. uniform; equal
d. proportional; market-based

B

What is the big-picture difference between the various depreciation methods (straight-line, declining balance, units-of-production)?

a. The pattern in which depreciation is recognized over time
b. The total amount of depreciation recorded over the asset’s life
c. The salvage value assigned to the asset
d. Whether the asset appears on the balance sheet

A

Compared to accelerated depreciation methods, straight-line depreciation results in:

a. Higher depreciation in the earlier years of the asset’s life
b. Greater total depreciation over the asset’s useful life
c. Depreciation that varies with the asset’s level of use
d. Less depreciation in the earlier years of an asset’s life

D

Using the straight-line method results in ____ impact on net income in earlier years, and ____ impact in later years

a. negative; positive
b. minimal; positive
c. positive; negative
d. No impact

C

Which type of depreciation method recognizes a higher depreciation expense in the earlier years of an asset’s life?

a. Accelerated
b. Straight-line
c. Units-of-production
d. Activity-based

A

T/F There are no constraints in using different depreciation methods for financial reporting or tax reporting

True

Which of the following is a potential advantage of using an accelerated depreciation method?

a. Increased total depreciation recorded over the asset’s life
b. Taxation benefits through greater depreciation deduction
c. Increased salvage value of the asset at the end of its life
d. Faster expiration of the asset being depreciated

B

Which convention do many companies use for determining when assets are acquired?
a. Half-year
b. Full-year
c. End-of-year
d. Day-by-day

A

What is an increase in book value resulting from the sale of a depreciable asset called?

a. Economic gain
b. Accounting gain
c. Market gain
d. Capital adjustment

B

What is a decrease in book value resulting from the sale of a depreciable asset called?

a. Realized loss
b. Economic loss
c. Asset impairment
d. Accounting loss

D

Tex Corp is interested in selling an asset but management indicates the plan is likely to change. Should the asset be classified as “held for sale”?

No; plan must be unlikely to change

Tex Corp is interested in selling an asset. It’s available for immediate sale and there is an active plan to sell it. Should the asset be classified as “held for sale”?

Yes

An asset can be classified as “held for sale” if it is expected to be sold within ____ , among other requirements.
a. 5 years
b. 1 year
c. 6 months
d. 72 weeks

B

1. An asset has a current book value of $5,000 and a fair value (less any costs to sell) of $6,000. If it is held for sale, what is the value it should be reported as?
   a. $11,000
   b. $1,000
   c. $5,000
   d. $6,000
   

2. Why?

C; $5,000

It should be classified as the lower of the two.

What is the service life of Natural Resources based on?
a. The expected number of years the resource will remain valuable
b. The company’s estimated production capacity
c. The expected number of units it will produce
d. The estimated amount of resource to be collected

D

How is a change in accounting estimate (such as depreciation) accounted for?
a. Prospectively
b. Retrospectively
c. Through a prior period adjustment
d. By restating previously issued financial statements

A

What does it mean for something to be changed prospectively?
a. The change is applied only to future periods
b. The change is applied to both past and future periods
c. The change is applied only to the earliest reported period
d. The change is applied to all previously issued financial statements

A

How should movable extraction equipment that can be used on future projects be depreciated?

a. Over the life of the natural resource being extracted
b. Over the estimated useful life of the equipment
c. Over the estimated extraction period of the current project
d. Over the shorter of the equipment life or the resource life

B

How should extraction equipment that cannot be moved or used for future projects be depreciated?

a. Over the estimated useful life of the equipment only
b. Over the life of the natural resource being extracted
c. Over the shorter of the equipment’s useful life or the life of the natural resource
d. Over the longer of the equipment’s useful life or the life of the natural resource

C

Which depreciation method is commonly used for assets involved in extracting natural resources, such as a drilling rig or mining excavator?
a. Straightline
b. Units of production
c. Double Declining Balance
d. Sum of Years

B

T/F Classifying an intangible asset as indefinite is permanent.

False

If an intangible asset is indefinite, is it amortized (depreciated)?

No

Company X misrecorded its depreciation expense for a patent. 3 years later, the error is discovered. Which of the following is the correct adjustment?
a. Debit patent; credit Retained Earnings
b. Debit Amortization expense; credit patent
c. Debit R&D expene; credit cash
d. Debit depreciation expense; credit accumulated depreciation

A

In year 3, the amortization expense is already in R.E. You must therefore reverse the closing entry.

Which of the following is NOT the correct way to treat material errors in a previous year?
a. Restate financial statements
b. Disclosures
c. Retained Earnings adjustment
d. Account balance correction
e. All of the above are a correct way

E

Regarding impairments, the assumption in allocating the cost of an asset over its useful life is:
a. The asset will maintain its original purchase price
b. The anticipated total benefits of the asset wont change
c. The asset will generate identical cash flows each year
d. The asset will not require maintenance or upgrades

B

If book value is higher than the anticipated future cash flows of the asset, is it impaired?

Yes

Recognizing and measuring an impairment loss depends on whether the assets are:
a. Tangible or intangible
b. Long-term or short-term
c. In use or held for sale
d. Purchased or internally developed

C

What happens to depreciation when an asset is classified as held for sale?

a. Depreciation doubles
b. Depreciation continues until the asset is sold
c. Depreciation is recalculated using fair value
d. Depreciation stops

D

Describe the two step process to determining whether an impairment loss should be recorded.

1. Compare undiscounted estimated future cash flows to book value

2. If impaired: Loss = Fair Value - Book Value

An impairment loss occurs when the ____ sum of an asset’s estimated future cash flows is less than book value.
a. undiscounted
b. discounted
c. accumulated
d. realized

A

If an impairment loss is recognized, the written-down book value:
a. Is restored if the asset’s value later increases
b. Becomes the new base for future allocation
c. Is removed entirely from the balance sheet
d. Must be recalculated using the original useful life

B

Fair value is defined as:
a. The original price paid for the asset less accumulated depreciation
b. The value assigned by the company’s accounting policy
c. The current amount an asset can be bought or sold
d. The salvage value of an asset after depreciation

C

When measuring impairment loss, fair value is often estimated as the:
a. Total revenue generated by the asset
b. Original purchase price of the asset
c. Average market value of similar assets
d. Discounted present value of future cash flows

D

____ estimates of cash flows are used to determine whether an impairment has occurred.
a. Undiscounted
b. Discounted

A

____ estimates of cash flows are used to estimate fair value to determine the amount of loss.
a. Undiscounted
b. Discounted

B

T/F There is a recoverability test for the impairment of indefinite-life intangible assets

False; there is none

Are indefinite-life intangible assets tested for impairment? If so, how often?

Yes; once per year

Measuring the impairment of an indefinite long term asset is a ____-step process.
a. One
b. Two
c. Three
d. Four

One

Regarding indefinite-life intangibles, the one-step process for determining the amount of impairment is:
a. Difference between estimated future cash flow value to book value
b. Difference between book value to fair value
c. Difference between fair value to estimated future cash flow value
d. N/A; indefinite life assets are never impaired

B

When is an impairment loss recognized for assets held for sale?
a. When original cost exceeds accumulated depreciation
b. When the market value exceeds its book value
c. When book value exceeds fair value less costs to sell
d. When the asset has been fully depreciated but is still in use

C

Are assets held for sale reported separately on the balance sheet, or included in PP&E?

Separately

T/F Assets held for sale are not depreciated

True

Expenditures that produce benefits beyond the current fiscal year are ____
a. Expensed to a maintenance account
b. Capitalized to the asset account
c. Ignored and written off to retained earnings
d. Subtracted from the asset

B

Expenditures that maintain a given level of benefits are ____
a. Expensed to a maintenance account
b. Capitalized to the asset account
c. Ignored and written off to retained earnings
d. Subtracted from the asset

A

Should the following events be capitalized or expensed? Label them.

1. Repairs

2. Additions

3. Improvements

4. Maintenance

5. Rearrangements

1. Expensed

2. Capitalized

3. Capitalized

4. Expensed

5. Capitalized

This kind of subsequent expenditure serves to maintain the current benefits of an asset.
a. Additions
b. Rearrangements
c. Repairs & Maintenance
d. Improvements

C

Do repairs and maintenance increase the future benefits of an asset?

No

Expenditures for repairs and maintenance should be expensed
a. before the event occurs
b. in the following year
c. by the end of the year
d. in the period incurred

D

This form of subsequent expenditure involves adding a new major component to an existing asset that makes it better
a. Additions
b. Rearrangements
c. Repairs & Maintenance
d. Improvements

A

This form of subsequent expenditure involves the replacement of a major component of an asset
a. Additions
b. Rearrangements
c. Repairs & Maintenance
d. Improvements

D

Tearing down and removing the wall of an existing building is an example of
a. Additions
b. Rearrangements
c. Repairs & Maintenance
d. Improvements

A

Regarding improvements, a replacement can be new components with _______ capabilities compared to the old one
a. the same
b. better
c. the same or better
d. less

C

An asset can be improved by
a. replacing it
b. adding onto it
c. reducing depreciation
d. all of the above

D

If an intangible is successfully defended, the costs to defend it should be:
a. Recorded as a new asset
b. Capitalized but not amortized
c. Capitalized and amortized
d. Expensed

C

If an intangible is not successfully defended, the costs to defend it should be:
a. Recorded as a new asset
b. Capitalized but not amortized
c. Capitalized and amortized
d. Expensed

D

If an intangible is not successfully defended, what happens to the book value of the asset?
a. disposed of as it no longer has value
b. book value is reduced to fair value
c. book value is reduced to its realizable value
d. nothing

C; It’s realizable because realizable value is the revenue a company expects to receive from it. Fair value refers to how much a company could sell it for (unrelated)