Test Bank, Intermediate Accounting , 14th ed.
CHAPTER 13
235
Investments in Noncurrent Operating Assets—Utiliation and !etirement MULTIPLE CHOICE QUESTIONS Theory/Definition! Q"e#tion#
1 $ ' 4 ) / 0 13 11 1$ 1' 14 1) 11 1/ 10 $3 $1 $$ $' $4 $) $$
"urpose o# depreciation %epreciation as s&stematic and rational al allocation In#ormation necessar& to compute depletion per unit (omposite depreciation method %etermine #raction #o #or #o #ourth &e &ear un under #i#ive*&ear + +% %epreciation using +% method Assumptions o# straight* line depreciation %%B ignores salvage value !eporting and disclosure reuirements o# assets2depreciation %epreciation o# natural resources (onsiderations in determining use#ul li#e o# intangile asset +traight*line am amortiation recommended #or intangile assets %epreciation method that applies a uni#orm depreciation rate 5ort&*&e *&ear amortiati ation #or intangile assets i# inde#inite ene#it Theoretical support #or accelerated depreciation 6##ect o# changing the estimate o# an asset7s use#ul lili#e "roductive output depreciation same as depletion 8hen sale o# depreciale asset results in loss The e9change o# similar assets that involves a gain %epreciation e9pense #or the doule*declining*a *alance method (apitaliation o# legal #ees to de#end patents (omposite and group depreciation oth use straight*line %epreciation un under pr productive ou output, + +%, and %%B*(omparison The e9change o# similar assets that involves a loss (arr&ing amount o# group assets upon retirement o# one :ournal entr& #or trade o# assets ;A(!+ and optional straight*line ta9 depreciation
Co$%"ttion! Q"e#tion#
$/ $0
(omputation o# %%B depreciation e9pense (omputation o# %%B depreciation e9pense
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'3 '1 '$ '' '4 ') '' '/ '0 43 41 4$ 4' 44 4) 44 4/ 40 )3 )1 )$ )' )4 )) )) )/ )0 -3 -1 -$ -' -4 -) -- -/ -0 3 1 $ '
(hapter 1'
Investments
in Noncurrent Operating Assets—Utiliation Assets—Utiliation and !etirement
Amortiation o# organiational costs (omputation o# %%B depreciation e9pense (omputation o# cost o# ne< product
i#e o# o# assets un under st straight*line co composite me method (omputation o# o# straight* line de depreciation e9 e9pense +traight*line ac accumulated depreciation +% depreciation e9pense %%B depreciation e9pense Units*o#*production depreciation e9pense +% depreciation an and the e9change o# assets +% depreciation an and the e9change o# assets (omputation o# patent amortiation e9pense (omputation o# ne< asset7s value
23&
'3 '1 '$ '' '4 ') '' '/ '0 43 41 4$ 4' 44 4) 44 4/ 40 )3 )1 )$ )' )4 )) )) )/ )0 -3 -1 -$ -' -4 -) -- -/ -0 3 1 $ '
(hapter 1'
Investments
in Noncurrent Operating Assets—Utiliation Assets—Utiliation and !etirement
Amortiation o# organiational costs (omputation o# %%B depreciation e9pense (omputation o# cost o# ne< product i#e o# o# assets un under st straight*line co composite me method (omputation o# o# straight* line de depreciation e9 e9pense +traight*line ac accumulated depreciation +% depreciation e9pense %%B depreciation e9pense Units*o#*production depreciation e9pense +% depreciation an and the e9change o# assets +% depreciation an and the e9change o# assets (omputation o# patent amortiation e9pense (omputation o# ne< asset7s value
Test Bank, Intermediate Accounting , 14th ed.
4
23'
(omputation o# gain on e9change
PRO(LEMS 1 $ ' 4 ) / 0 13 11 1$ 1' 14 1)
(omputation o# o# e9 e9pense un under %% %%B, + +%, st straight*li *line, se service ho hours (omputation o# o# e9 e9pense un under %% %%B, +%, st straight* line (omputation o# composite li#e an and depreciation rate (omputation o# annual rate and charge under straight* line, service hours, productive*output (omputation o# amortiation #or #our &ears (omputation o# depletion charge "repare intangile assets section o# alance sheet :ournalie e9change on oth parties ooks :ournalie e9change on similar, dissimilar assets :ournalie e9 e9change on similar, dissimilar as assets !ecording an impairment loss !ecording an impairment loss
MULTIPLE CHOICE QUESTIONS >O1
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a
1. %epr %eprec ecia iati tion on o# nonc noncur urre rent nt oper operat atin ing g asse assetts is an acco accoun unti ting ng proc proces ess s #or the purpose o# a. reporti reporting ng declining declining asset asset values values on the the alance alance sheet. sheet. . allocating allocating asset costs over over the periods ene#itt ene#itted ed & use o# the assets. c. account accounting ing #or costs costs to re#lect re#lect the the change in general general price price levels. levels. d. settin setting g aside aside #unds to replace replace assets assets
'. In#o In#orm rmat atio ion n nee neede ded d to to com compu pute te a dep deple leti tion on cha charg rge e per per unit unit incl includ udes es the the
23)
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(hapter 1'
a. . c. d.
Investments
in Noncurrent Operating Assets—Utiliation Assets—Utiliation and !etirement
estimated to total am amount o# o# re resources av availale #o #or re removal. amount amount o# o# resource resources s removed removed during during the the period. period. cumula cumulativ tive e amount amount o# o# resourc resources es remove removed. d. amount amount o# o# resource resources s sold during during the the period. period.
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4. The composite depreciation method a. is applied to a group o# homogeneous assets. . is an accele accelerate rated d method method o# o# depreci depreciati ation. on. c. does not not recognie recognie gain gain or loss on the retirem retirement ent o# speci# speci#ic ic assets assets in the group. d. e9cludes e9cludes salvage salvage value #rom #rom the ase ase o# the the depreciation depreciation calculation. calculation.
d >O1 >O1
). The The sum* sum*o# o#*t *the he*& *&ea ears rs7* 7*di digi gits ts met metho hod d o# depr deprec ecia iati tion on is is ein eing g used used #or #or a mach machin ine e
d
-. In ord order to cal calcula culatte the thi third &ear &ear77s depr depre eciat iation on an ass asset usin sing the sum*o#* the*& he*&e ears ars*d *diigit gits met method,
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. 8hich 8hich o# o# the the #ol #ollo lo
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/. A meth method od tha thatt ign ignor ores es sal salva vage ge val value ue in in calc calcul ulat atin ing g peri period odic ic dep depre reci ciat atio ion n e9pense is the a. produ product ctive ive*ou *outp tput ut meth method. od. . group group com compo posi site te meth method. od. c. sum*o# sum*o#*the *the*&e *&ears7 ars7*digi *digits ts method. method. d. doule*de doule*decli clining* ning*alan alance ce method method..
Test Bank, Intermediate Accounting , 14th ed.
>O1
23*
0. 8hich o# the #ollo
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13. 8hich o# the #ollo
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11. 8hich o# the #olloegal, regulator&, or contractual provisions . "rovisions #or rene
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1$. In accordance
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1'. 8hich o# the #ollo
2+,
(hapter 1'
Investments
in Noncurrent Operating Assets—Utiliation and !etirement
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14. 8hat is the proper time or time period over
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1). 8hich o# the #ollo
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1-. 8hen the estimate o# an asset7s use#ul li#e is changed, a. depreciation e9pense #or all past periods must e recalculated. . there is no change in the amount o# depreciation e9pense recorded #or #uture &ears. c. onl& the depreciation e9pense in the remaining &ears is changed. d. None o# the aove are true.
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1. 8hich o# the #ollo
Test Bank, Intermediate Accounting , 14th ed.
c >Oan&
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10. 8hen an e9change o# similar assets involves a gain, a. the recorded amount o# the ne< asset is the cost o# the old asset plus cash paid. . the recorded amount o# the ne< asset is its #air market value less an& cash paid. c. the recorded amount o# the ne< asset is the net ook value o# the old asset plus an& cash paid. d. None o# the aove are true. $3. On :anuar& 1 +tockton (ompan& acuired a machine oooo
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$1. >egal #ees incurred in success#ull& de#ending a patent suit should e capitalied
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$$. 8hich o# the #ollo
2+2
(hapter 1'
Investments
in Noncurrent Operating Assets—Utiliation and !etirement
>O1
$'. A depreciale asset has an estimated 1) percent salvage value. At the end o# its estimated use#ul li#e, the accumulated depreciation
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$4. 8hen similar assets are e9changed at a loss, the asis o# the ne< asset is usuall& a. the list price o# the ne< asset. . the ook value o# the old asset plus an& cash paid on the trade*in. c. the #air market value o# the ne< asset. d. 6ither or c.
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$). A compan& using the group depreciation method #or its deliver& trucks retired one o# the trucks a#ter the average service li#e o# the group
$. 8hich o# the #olloO/ a. Use o# the ;A(!+ tales reuires that salvage value e deducted in computing depreciation deductions. . Use o# the optional straight*line method reuires that salvage value not e
Test Bank, Intermediate Accounting , 14th ed.
2+3
considered in computing depreciation deductions. c. The use o# oth the ;A(!+ tales and the optional straight*line method reuires that salvage value e deducted in computing depreciation deductions. d. None o# the aove are true. >O1
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$/. %e
'1. >uther +oaps purchased a machine on :anuar& 1, $333, #or 1/,333 cash.
2++
(hapter 1'
Investments
in Noncurrent Operating Assets—Utiliation and !etirement
>O1
The machine has an estimated use#ul li#e o# #our &ears and a salvage value o# 4,33. >uther uses the doule*declining*alance method o# depreciation #or all its assets. 8hat
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'$. ;alone (ompan& traded in an old machine
d
''. Overerg (ompan& purchased a machine on :anuar& $, $331, #or 1,333,333. The machine has an estimated use#ul li#e o# #ive &ears and a salvage value o# 133,333. %epreciation
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'4. Ku#elt (ompan& ought a trademark #rom Basin (orporation on :anuar& 1, $33$, #or 1-/,333. An independent consultant retained & Ku#elt estimated that the remaining use#ul li#e is )3 &ears. Its unamortied cost on Basin7s accounting records
a
'). :ordan (ompan& e9changed a used autograph*signing machine
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Test Bank, Intermediate Accounting , 14th ed.
2+5
2+&
(hapter 1'
Investments
in Noncurrent Operating Assets—Utiliation and !etirement
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'-. LK (orporation ought a machine on :anuar& 1, $33$. In purchasing the machine, the compan& paid )3,333 cash and signed an interest*earing note #or 133,333. The estimated use#ul li#e o# the machine is #ive &ears, a#ter
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'. On :anuar& 1, $33$, (arson (ompan& purchased euipment at a cost o# 4$3,333. The euipment
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'/. On +eptemer '3, $33$, Ira "art& +upplies purchased catering euipment #or 4,-/3. The euipment is estimated to have a use#ul li#e o# eight &ears and no salvage value. I# Ira selected the sum*o#*the*&ears7*digits method,
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'0. On :une '3, $33$, a #ire in Oak (ompan&7s plant caused the total loss o# a production machine. The machine
Test Bank, Intermediate Accounting , 14th ed.
a >O1
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43. On :anuar& 1, $333, Malos (o. purchased a ne< machine #or $,)33,333. The ne< machine has an estimated use#ul li#e o# #ive &ears and the salvage value
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4$. On %ecemer $, $331, "art (ompan&,
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4'. On :anuar& 1, $33$, (arson (ompan& purchased euipment at a cost o# 4$3,333. The euipment
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44. In :anuar&, Hunter (orporation entered into a contract to acuire a ne< machine #or its #actor&. The machine,
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4). ;elvin ;otor +ales e9changed a car #rom its inventor& #or a computer to e used as a noncurrent operating asset. The #olloisted selling price o# the car................................................ 4),333 5air value o# the computer.................................................... 4',333 (ash di##erence paid & ;elvin............................................. ),333 On :ul& '1, $33$, ho< much pro#it should ;elvin recognie on this e9change a. 3 . /,333 c. 13,333 d. 1',333
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4-. The Bucol (ompan& purchased a tooling machine in 100$ #or 1$3,333. The machine
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40. At the start o# its usiness, +nell (orp. decided to use the composite method o# depreciation and prepared the #olloi#e (ost +alvage @alue in ears ;achine A $),333 $),333 $3 ;achine B 133,333 13,333 1) ;achine ( $3,333 ** ) +nell computes depreciation on the straight*line method. Based on the in#ormation presented, the composite li#e o# these assets Fin &earsG should e a. 1'.'. . 1-.3. c. 1/.3. d. 10./.
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)3. A truck that cost /,333
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)$. Andre
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)4. Andre
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)). On :anuar& 1, $331, Herschel >ocks (orporation purchased drilling euipment #or 11,)33. The euipment has an estimated use#ul li#e o# #our &ears and a salvage value o# $33. ?iven this in#ormation, i# Herschel uses the sum*o#* the*&ears7*digits method o# depreciation and then trades the euipment #or ne<, dissimilar euipment ocks (orporation purchased drilling euipment #or 11,)33. The euipment has an estimated use#ul li#e o# #our &ears and a salvage value o# $33. Assuming that Herschel uses the straight*line method o# depreciation, i# it trades the euipment #or ne< similar euipment
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). "astel (o. purchased a patent on :anuar& 1, 1000, #or 14,333. The patent
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)/. Hart
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)0. ;onier (arpet traded cleaning euipment
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-3. %uring 100, @olvo ;achine (ompan& spent ')$,333 on research and development costs #or an invention. This invention
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-1. On :anuar& 1, 100/, Barr& (ompan& purchased #or -33,333, a trademark
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-$. :oseph (ompan& acuired a tract o# land containing an e9tractale natural resource. :oseph is reuired & the purchase contract to restore the land to a condition suitale #or recreational use a#ter it has e9tracted the natural resource. ?eological surve&s estimate that the recoverale reserves and....................................................................................... 0,333,333 6stimated restoration costs................................................... 1,)33,333 8hat should e the depletion charge per ton o# e9tracted material a. 4.33 . './3 c. '.-3 d. '.$3
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-'. Bunker (onstruction (ompan& recentl& e9changed an old truck,
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-4. In :anuar& $33$, @ance ;ining (orporation purchased a mineral mine #or ,$33,333
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-). In $331, Ne
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--. In :anuar& $33$, Bevis (ompan& e9changed an old machine,
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-. 6llis (onstruction (ompan& recentl& e9changed an old truck,
-/. "ost (ompan&7s depreciation polic& on machiner& and euipment is as #ollo
>O • • • •
A #ull &ear7s depreciation is taken in the &ear o# an asset7s acuisition. No depreciation is taken in the &ear o# an asset7s disposition. The estimated use#ul li#e is #ive &ears. The straight*line method is used.
On :une '3, $33$, "ost sold #or $'3,333 a machine acuired in 1000 #or 4$3,333. The accumulated depreciation #or this machine O-
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-0. On :ul& 1, "hoeni9 (orporation, a calendar*&ear compan&, received a condemnation a
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1. In :anuar& $33$, But (ompan& e9changed an old machine,
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'. 6agle (ompan& o
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4. A compan& oand Fneand FoldG......................................................... 13,333 (ash................................................................. ),333 . >and Fneoss on 69change................................................. $,333 >and................................................................. 13,333 (ash................................................................. ),333 c. >and Fneand FoldG......................................................... 13,333 (ash................................................................. ),333 ?ain on 69change........................................... ',333 d. >and Fneand FoldG......................................................... 13,333 (ash................................................................. ),333
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). In Octoer $33$, %ar&l (ompan& e9changed a used packaging machine having a ook value o# $43,333 #or a dissimilar ne< machine and paid a cash di##erence o# '3,333. The market value o# the used packaging machine
PRO(LEMS Problem 1
Burton 69cavating purchased a ulldoer on :une 1, $33$. in#ormation regarding this asset and its acuisition is availaleJ
The #ollo
(ost .......................................................................................... '/3,333 !esidual value.......................................................................... '3,333 6stimated use#ul li#e................................................................. / &ears 6stimated service hours........................................................... -3,333 The ulldoer
%oule*declining*alance +um*o#*the*&ears7*digits +traight*line +ervice hours Fround rate to the nearest centG
Solution 1
>O F1G %oule*declining*alance F$33=G $33$J $33'J
$)= 9 '/3,333 9 $)= F'/3,333 * 4,)33G
4,)33 /',1$)
F$G +um*o#*the*&ears7*digitsJ P/F/Q1G2$R '$33$J $33'J
F/2'- 9 ')3,333 9 12$G F/2'- 9 ')3,333 9 12$G F2'- 9 ')3,333 9 12$G
'/,//0 '/,//0 '4,3$/ $,01
F'G +traight*line $33$J $33'J
F')3,3332/G 9 ')3,3332/
$1,/) 4',)3
F4G +ervice hours F')3,333G %epreciation e9pense per hour F')3,3332-3,333G )./' FroundedG $33$J $33'J
-,133 9 )./' /,$33 9 )./'
'),)-' 4,/3-
Problem 2
On ;a& 1, $33$, !eginald Inc. purchased euipment at a cost o# $/3,333. The euipment has an estimated salvage value o# 1$,333 and is eing depreciated over an estimated li#e o# si9 &ears. The compan&7s polic& is to recognie depreciation to the nearest
>O F1G %oule*declining*alance $33$J $33'J
$/3,333 9 '' 12'= 9 /21$ -$,$$$ F$/3,333 * -$,$$$G 9 '' 12'= $,)0'
F$G +um*o#*the*&ears7*digitsJ P-FG2$R $1 $33$J $33'J
$-/,333 9 -2$1 9 /21$ $-/,333 9 -2$1 9 421$ $-/,333 9 )2$1 9 /21$
)1,34/ $),)$4 4$,)43 -/,3-4
F'G +traight*line $33$J $33'J
$-/,3332- 9 /21$ $-/,3332-
$0,/ 44,--
Problem 3
The #olloi#e in (ost @alue ears ;achine A -33,333 113,333 $3 ;achine B '1),333 '3,333 13 ;achine ( /4,333 3 1) ;achine % 13,333 ,333 ) 1,13-,333 ;artin computes depreciation on the straight*line asis. Based on the in#ormation presented, compute theJ F1G (omposite li#e o# these assets Fin &earsG. F$G (omposite depreciation rate. Solution 3
>O1 Asset A B ( %
(ost -33,333 '1),333 /4,333 13,333 1,13-,333
+alvage @alue 113,333 '3,333 3 ,333 14,333
F1G 0)0,3332/,-33 1$.$3 &ears F$G /,-3321,13-,333 .11= Problem 4
%epreciale (ost 403,333 $/),333 /4,333 133,333 0)0,333
6stimated Annual >i#e %epreciation $3 $4,)33 13 $/,)33 1) ),-33 ) $3,333 /,-33
Hearsa ;anu#acturing Inc. purchased a ne< machine on :anuar& $, $33$, that
''3,333 '3,333 ) $)3,333 '33,333
Using each o# the #ollo
>O1 F1G +traight*lineJ $33$J F''3,333 * '3,333G2) $33'J
-3,333 -3,333
F$G +ervice hoursJ F''3,333 * '3,333G2$)3,333 1.$3 per hour depreciation rate $33$J 1.$3 9 '$,333 '/,433 $33'J 1.$3 9 '-,333 4',$33 F'G "roductive*outputJ F''3,333 * '3,333G2'33,333 1.33 per unit depreciation rate $33$J 1.33 9 '1,333 '1,333 $33'J 1.33 9 ',333 ',333 Problem 5
The 5itsimmons (ompan& applied #or and received numerous patents at a total cost o# $/-,)33 at the eginning o# 1000. It is assumed the patents
(alculate the amortiation e9pense #or the &ears 1000, $333, $331, and $33$. !ound to the nearest dollar. Solution 5
>O$ 1000J
$/-,)3321
1-,/)'
$333J
$/-,)3321
1-,/)'
$331J
Acuisition cost >essJ amortiation to date (arr&ing value +uccess#ul de#ense Ne< carr&ing value !emaining li#e 1) &ears '31,'0421)
$/-,)33 '',3$)$,04 4/,-33 '31,'04
(arr&ing value, :an. 1, $331 Amortiation #or $331 (arr&ing value, :an. 1, $33$
'31,'04 $3,30' $/1,'31
$33$J
!emaining li#e ) &ears $/1,'312)
$3,30'
)-,$-3
Problem 6
In $331, +ilverspur ;ining Inc. purchased land #or ),-33,333 that had a natural resource suppl& estimated at 4,333,333 tons. 8hen the natural resources are removed, the land has an estimated value o# -43,333. The reuired restoration cost #or the propert& is estimated to e /33,333. %evelopment and road construction costs on the land
Solution 6
>O' Acuisition costs.................................................................... ),-33,333 !estoration costs................................................................... /33,333 !esidual value**land............................................................. F-43,333G %evelopment costs................................................................ )-3,333 Building................................................................................. //,333 +alvage value**uilding......................................................... F/,333G -,433,333 -,433,33324,333,333 tons 1.-3 per ton $331J $33$J
33,333 tons 9 1.-3 Original cost Additional costs**$33$ 6stimated depletion**$331 Balance suCect to depletion
1,1$3,333 -,433,333 $$,333 -,-$,333 F1,1$3,333G ),))$,333
),))$,3332','33,333 tons 1.-/ per ton FroundedG 033,333 tons 9 1.-/ 1,)1$,333 Problem 7
In#ormation concerning Thomas (orporation7s intangile assets is as #olloegal #ees and other costs associated
Solution 7
>O$ Thomas (orporation Balance +heet FpartialG %ecemer '1, $33$ "atent, net o# accumulated amortiation o# /,$33..................... Trademark, net o# accumulated amortiation o# $0,1-............ SS
),433 S 13,/$4 $$/,$$4
S "atent (apitalied cost o# patent at :anuar& $, $33$......................... Amortiation F-),-332/ &earsG...................................................... BalanceJ %ecemer '1, $33$................................................. SS Trademark (ost o# Trademark...................................... Amortiation F:ul& 1, 1000 * %ec. '1, $331G F1-3,3332$3 9 $ 12$G................................ Amortiation F:an. 1, 1000 * :une '3, $33$G F/,333 9 12$G.......................................... (ost o# success#ul de#ense........................
(ost 1-3,333
-),-33 F/,$33G ),433 Accumulated Amortiation $3,333 4,333
43,333 $33,333
$4,333
Amortiation
F:ul& 1, $33$ * %ec. '1, $33$G PF$33,333 * $4,333G21R 9 ......................
),1-
$33,333 $0,1%educt accumulated amortiation.............. $0,1Trademark alance.................................... 13,/$4 Problem 8
!ile& (ompan& o
Solution 8
>OF1G !ile& (ompan&7s ooks ;achiner&................................................................... Accumulated %epreciation......................................... ;achiner&........................................................... (ash................................................................... ?ain on 69change o# Asset................................
-43,333 '$3,333 )-3,333 1-3,333 $43,333 S
S Because cash euals $)= or more o# the #air value o# the e9change.
F$G 5ier (ompan&7s ooks (ash............................................................................ ;achiner&................................................................... Accumulated %epreciation......................................... ;achiner&........................................................... ?ain on 69change o# Asset................................
1-3,333 4/3,333 433,333 $3,333 '$3,333 S
S (ost.......................................................................... $3,333 Accumulated depreciation........................................ 433,333 Book value................................................................ '$3,333 5air value.................................................................. -43,333 ?ain.......................................................................... '$3,333 Problem 9
The (hase (ompan& e9changed euipment costing $43,333
Solution 9
>OF1G (haseJ
:onesJ
F$G (haseJ
:onesJ
6uipment.................................................. Accumulated %epreciation......................... 6uipment.............................................
1)3,333 03,333
6uipment.................................................. Accumulated %epreciation......................... 6uipment.............................................
$13,333 1$3,333
6uipment.................................................. Accumulated %epreciation......................... 6uipment............................................. ?ain on 69change o# 6uipment..........
'33,333 03,333
6uipment.................................................. Accumulated %epreciation......................... 6uipment............................................. ?ain on 69change o# 6uipment..........
'33,333 1$3,333
$43,333
''3,333
$43,333 1)3,333
''3,333 03,333
Problem 10
+eaver Inc. e9changed a machine costing 433,333
>O?oodinJ ;achiner&........................................................... Accumulated %epreciation................................. ;achiner&................................................... (ash...........................................................
1)$,/33 -/,333 $33,333 $3,/33
+eaverJ ;achiner&........................................................... Accumulated %epreciation................................. (ash................................................................... ;achiner&................................................... ?ain on 69change o# ;achiner&................
13-,10) $/3,333 $3,/33 433,333 -,00) S
S P$3,/332F$3,/33 Q 1-3,333GR 9 F1/3,/33 * 1$3,333G -,00)
Problem 11
:ohnson (ompan& purchased euipment / &ears ago #or 1,333,333. The euipment has een depreciated using the straight*line method
>O) F1G Annual depreciation #or the euipment has een 4),333 F1,333,333 * 133,333G2$3 &ears. (urrent ook value o# the euipment isJ Original cost....................................................... 1,333,333 Accumulated depreciation F4),333 9 / &earsG. '-3,333 Book value.......................................................... -43,333 The ook value o# -43,333 is compared to the undiscounted sum o# the #uture cash #lo
Accumulated %epreciation**6uipment ...........................'-3,333 >oss on Impairment o# 6uipment.....................433,333 6uipment F1,333,333 * $43,333G..........
-3,333
F'G The ans
:ohnson (ompan& purchased euipment / &ears ago #or 1,333,333. The euipment has een depreciated using the straight*line method
>O) F1G Annual depreciation #or the euipment has een 4),333 F1,333,333 * 133,333G2$3 &ears. (urrent ook value o# the euipment isJ Original cost....................................................... 1,333,333 Accumulated depreciation F4),333 9 / &earsG. '-3,333 Book value.......................................................... -43,333 In addition to the ook value o# the euipment, the remaining ook value o# the good
F$G The impairment loss is eual to the 44/,333 F-//,333 * $43,333G di##erence etoss on Impairment o# 6uipment..................... 44/,333 6uipment F1,333,333 * $43,333G.......... ?ood
-3,333 4/,333
Problem 13
:ohnson (ompan& is located in Hong Mong and uses international accounting standards. :ohnson (ompan& purchased euipment / &ears ago #or 1,333,333. The euipment has een depreciated using the straight*line method
2',
(hapter 1'
Investments
in Noncurrent Operating Assets—Utiliation and !etirement
Solution 13
>O) F1G Annual depreciation #or the euipment has een 4),333 F1,333,333 * 133,333G2$3 &ears. (urrent ook value o# the euipment isJ Original cost....................................................... 1,333,333 Accumulated depreciation F4),333 9 / &earsG. '-3,333 Book value.......................................................... -43,333 According to IA+ '-, the e9istence o# impairment is determined & comparing ook value o# -43,333 to the #air value o# $43,333. The #air value is looss on Impairment o# 6uipment..................... 433,333 6uipment F1,333,333 * $43,333G..........
-3,333
F'G +ince the #air value o# 0/3,333 is greater than the ook value o# -43,333, :ohnson (ompan&
'43,333 $3,333
Problem 14
The ;c(loud (ompan& purchased a ne< piece o# #actor& euipment on ;a& $3, $33$, #or 43,333. 5or income ta9 purposes, the euipment is classi#ied as a *&ear asset. +ince the ta9 li#e is similar to the estimated economic li#e o# the asset, ;c(loud decides to use ta9 depreciation #or #inancial reporting purposes. The euipment is not e9pected to have an& residual value at the end o# the &ears. "repare a depreciation schedule #or the li#e o# the asset using the ;A(!+ method o# cost recover&.
Test Bank, Intermediate Accounting , 14th ed
2'1
Solution 14
>O/ %epreciation +chedule (ost (omputation !ecover& Amount
Asset ear Book @alue 43,333 $33$ 43,333 9 .$/) 9 ),14 '4,$/$33' '4,$/- 9 .$/) 0,0$4,403 $334 $4,$03 9 .$/) -,00 1,40' $33) 1,40' 9 .$/) 4,00/ 1$,40) $331$,40) 9 .$/) ',)-0 /,0$S $33 /,0$- ÷ $.) ',)3 ),')$33/ ),')- ÷ 1.) ',)3 1,/$330 1,/*3* +
A recentl& issued 5A+B standard reuires that an impairment loss e recognied i# the sum o# the e9pected #uture net cash in#lo
>O) The #ollo
A signi#icant decrease in the market value o# an asset.
.
A signi#icant change in the e9tent or manner in
used. c. A signi#icant adverse change in legal #actors or in the usiness climate that a##ects the value o# an asset.
2'2
(hapter 1'
Investments
in Noncurrent Operating Assets—Utiliation and !etirement
d. An accumulation o# costs signi#icantl& in e9cess o# the amount originall& e9pected to acuire or construct an asset. e. associated
A proCection or #orecast that demonstrates continuing losses
The use o# the sum o# the e9pected #uture net cash #lo
Test Bank, Intermediate Accounting , 14th ed
2'3
CHAPTER 13 -- QUI. A Name +ection T 5
1. The cost o# propert& less the e9pected residual value, i# an&, is called the depreciale ase.
T 5
$. %epreciation is the s&stematic and rational allocation o# asset cost over the periods ene#itted & the use o# the asset.
T 5
'. The residual FsalvageG value o# an asset is de#ined as the estimated amount that can e realied upon retirement o# the asset.
T 5
4. The ph&sical #actors limiting the lives o# noncurrent operating assets are inadeuac& and osolescence.
T 5
). The 5A+B reuires disclosure o# oth cost and accumulated depreciation #or propert& on the alance sheet or notes to the #inancial statements.
T 5
-. The modi#ied accelerated cost recover& s&stem F;A(!+G is an e9ample o# a group rate depreciation method.
T 5
. (omposite depreciation is not an allo
T 5
/. The sum*o#*the*&ears7*digits method is an e9ample o# a decreasing*charge depreciation method.
T 5
0. In the sum*o#*the*&ears7*digits method, residual value is not used in the computations o# depreciation e9pense.
T 5 13. +traight*line depreciation assumes eual use#ulness in each time period, and the periodic charge is not a##ected & asset productivit& or e##icienc& variations.
CHAPTER 13 -- QUI. ( Name +ection T 5
1. Under A(!+ and ;A(!+, no depreciation is recognied on acuisitions during the &ear, ut depreciation #or a #ull &ear is recognied on retirements.
T 5
$. ;ost companies use the straight*line depreciation method #or #inancial reporting purposes.
T 5
'. %ecreasing*charge methods o# depreciation are reasonale approaches to cost allocation
T 5
4. 8hen group depreciation is used and an asset is retired #rom the group, no gain or loss is recognied.
T 5
). 8hen appl&ing the composite depreciation method, a ne< rate is usuall& calculated each period ased on the assets currentl& included in the group.
T 5
-. According to A"B Opinion No. 1, the straight*line method o# amortiation should e applied unless a compan& demonstrates that another s&stematic method is more appropriate.
T 5
. 8hen similar assets are e9changed, at least part o# an& gain can al
T 5
/. 8hen uildings and improvements are constructed in connection
T 5
0. The acuisition cost o#
T 5 13. AdCustments #or the change in estimated use#ul lives o# oth propert&, plant, and euipment and intangile assets are reported as a cumulative e##ect o# a change in accounting principle.
$4
CHAPTER 13 -- QUI. C Name +ection A. B. (. %. 6. 5. ?. H. I. :.
(omposite depreciation +traight*line depreciation Time #actor +um*o#*the*&ears7*digits depreciation (ost recover& period Amortiation Indicated loss "h&sical #actor %epreciation +imilar assets
M. >. ;. N. O. ". V. !. +.
Involuntar& conversion Unit depreciation %eclining*alance depreciation (urrent cost !esidual value Natural resources Use #actor Impairment ?roup depreciation
+elect the term that est #its each o# the #ollo
$)
1). 8asting assets such as oil, gas, timer, and ore deposits are all e9amples.
CHAPTER 13 -- QUI. SOLUTIONS Vui A 1. $. '. 4. ). -. . /. 0. 13.
T T T 5 T 5 5 T 5 T
Vui B 1. $. '. 4. ). -. . /. 0. 13.
Vui (
5 T 5 T 5 T 5 T T 5
1. $. '. 4. ). -. . /. 0. 13. 11. 1$. 1'. 14. 1).
$-
; 5 + B M ( O H V A 6 ? I ! "
