Deck 11: Operational Assets: Utilization and Impairment

Question 1

Once selected for existing assets, a company must consistently use the same method of depreciation for all subsequent fixed asset acquisitions.

Answer 1

False

Question 2

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 2

B

Question 3

Activity-based methods of depreciation are appropriate for assets whose service life is a function of use rather than time.

Answer 3

True

Question 4

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.

Question 5

Statutory depletion is the maximum amount of depletion that may be reported in financial statements prepared according to GAAP.

Question 6

The physical life of a depreciable asset sets the lower limit of its service life.

Question 7

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.

Question 8

Changes in the estimates involved in depreciation, depletion, and amortization require retroactive restatement of financial statements.

Question 9

Total depreciation is the same over the life of an asset regardless of the method of depreciation used.

Question 10

The three factors in cost allocation of a depreciable asset are service life, allocation base, and allocation method.

Question 11

MACRS (Modified accelerated cost recovery system) depreciation is equivalent to sum-of-the-years' digits depreciation.

Question 12

One of the advantages of group and composite methods is that gains and losses on the disposal of individual assets need not be computed.

Question 13

By the replacement depreciation method, depreciation is recorded when assets are replaced.

Question 14

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.

Question 15

A change in the estimated recoverable units used to compute depletion requires retroactive adjustments to the financial statements.

Question 16

Tangible operational assets must be tested for impairment at least once a year.

Question 17

Depreciation, depletion, and amortization:

A)All refer to the process of allocating the cost of operational assets over future periods.
B)All generally utilize the same methods of cost allocation.
C)Are all handled the same in arriving at taxable income.
D)All of these are correct.

Question 18

Any method of depreciation should be both systematic and rational.

Question 19

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.

Question 20

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.

Question 21

Using the straight-line method, depreciation for 2010 and the equipment's book value at December 31, 2010 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.Depreciation, 2010 = ($72,000 6,000) 5 = $13,200 Book value, 12/31/10 = $72,000 (2 13,200) = $45,600

Question 22

Prego would report depreciation in 2010 of:

A)$135,230.
B)$126,000.
C)$108,000.
D)$105,000.Depreciation in 2010 = [($450,000 36,000) (70,000 + 160,000)] = $1.80 per unit 70,000 = $126,000

Question 23

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.

Question 24

Using the sum-of-the-years'-digits method, depreciation for 2010 and book value at December 31, 2010 would be:

A)$19,200 and $22,800.
B)$17,600 and $26,400.
C)$19,200 and $28,800.
D)$17,600 and $32,400.Depreciation, 2010 = ($72,000 6,000) 4/15 = $17,600 Book value, 12/31/10 = $72,000 22,000 17,600 = $32,400

Question 25

Using the straight-line method, depreciation for 2009 and book value at December 31, 2009, would be:

A)$10,000 and $30,000.
B)$11,250 and $28,750.
C)$10,000 and $35,000.
D)$11,250 and $33,750.Depreciation in 2009 = ($45,000 5,000) 4 = $10,000 Book value, 12/31/09 = $45,000 10,000 = $35,000

Question 26

Using the double-declining balance method, the book value at December 31, 2010 would be:

A)$14,400.
B)$24,960.
C)$27,360.
D)$25,920.Book value, 12/31/10 = $72,000 28,800 17,280 = $25,920

Question 27

Using the straight-line method, depreciation for 2009 would be:

A)$13,200.
B)$14,400.
C)$72,000.
D)None of these is correct.($72,000 6,000) 5 = $13,200

Question 28

Depreciation for 2009, using double-declining balance, would be:

A)$40,000.
B)$10,000.
C)$36,000.
D)$ 9,000.$200,000 20% 3/12 = $10,000

Question 29

Using the double-declining balance method, depreciation for 2010 and book value at December 31, 2010, would be:

A)$10,000 and $5,000.
B)$10,000 and $10,000.
C)$11,250 and $6,250.
D)$11,250 and $11,250.Depreciation in 2010 = [($45,000 (45,000 50%)] 50% = $11,250 Book value, 12/31/10 = $45,000 22,500 11,250 = $11,250

Question 30

Prego would report depreciation in 2009 of:

A)$36,000.
B)$43,900.
C)$18,000.
D)$21,950.Depreciation in 2009 = ($450,000 300,000) = $1.50 per unit 24,000 = $36,000

Question 31

Using the sum-of-the-years'-digits method, depreciation for 2009 and book value at December 31, 2009 would be:

A)$18,000 and $27,000.
B)$16,000 and $29,000.
C)$16,000 and $24,000.
D)$18,000 and $22,000.Depreciation in 2009 = ($45,000 5,000) 4/10 = $16,000 Book value, 12/31/09 = $45,000 16,000 = $29,000

Question 32

Using the sum-of-the years'-digits method, depreciation for 2010 and book value at December 31, 2010, would be

A)$13,500 and $13,500.
B)$13,500 and $8,500.
C)$12,000 and $17,000.
D)$12,000 and $12,000.Depreciation in 2010 = ($45,000 5,000) 3/10 = $12,000 Book value, 12/31/10 = $45,000 16,000 12,000 = $17,000

Question 33

Using the straight-line method, the book value at December 31, 2009 would be:

A)$57,600.
B)$51,600.
C)$58,800.
D)$52,800.$72,000 13,200 = $58,800

Question 34

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.

Question 35

Using the double-declining balance method, depreciation for 2010 would be:

A)$28,800.
B)$18,240.
C)$17,280.
D)None of these is correct.Depreciation, 2010 = [$72,000 ($72,000 40%)] 40% = $17,280

Question 36

Using the double-declining balance method, depreciation for 2009 and book value at December 31, 2009, would be:

A)$22,500 and $22,500.
B)$22,500 and $17,500.
C)$20,000 and $25,000.
D)$20,000 and $20,000.Depreciation in 2009 = $45,000 50% = $22,500 Book value, 12/31/09 = $45,000 22,500 = $22,500

Question 37

Depreciation for 2009, using the straight-line method is:

A)$13,500.
B)$15,000.
C)$ 4,500.
D)$ 5,000.($200,000 20,000) 10 3/12 = $4,500

Question 38

Using the double-declining balance method, depreciation for 2009 and the book value at December 31, 2009 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.Depreciation, 2009 = $72,000 40% = $28,800 Book value, 12/31/09 = $72,000 28,800 = $43,200

Question 39

Using the sum-of-the-years'-digits method, depreciation for 2009 and book value at December 31, 2009 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.Depreciation, 2009 = ($72,000 6,000) 5/15 = $22,000 Book value, 12/31/2009 = $72,000 22,000 = $50,000

Question 40

Using the straight-line method, depreciation for 2010 and book value at December 31, 2010, would be:

A)$10,000 and $20,000.
B)$10,000 and $25,000.
C)$11,250 and $17,500.
D)$11,250 and $22,500.Depreciation in 2010 = ($45,000 5,000) 4 = $10,000 Book value, 12/31/10 = $45,000 (2 $10,000) = $25,000

Question 41

The legal life of a patent is:

A)Forty years.
B)Twenty years.
C)Life of the inventor plus fifty years.
D)Indefinite.

Question 42

Granite Enterprises acquired a patent from Southern Research Corporation on 1/1/09 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 2009, assuming the straight-line method is used.

A)$380,000
B)$400,000
C)$760,000
D)$800,000 The $200,000 purchase commitment is treated as the residual value of the patent.Amortization is as follows:
($4,000,000 200,000) 5 years = $760,000

Question 43

Depreciation (to the nearest dollar) for 2010, using sum-of-the-years' digits, would be:

A)$31,909.
B)$29,455.
C)$35,456.
D)$18,000.($200,000 20,000) 10/55 9/12 + ($200,000 20,000) 9/55 3/12 = $31,909

Question 44

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 is correct.$16.5 million [(10 + 9 + 8 + 7 + 6)/55] = $12 million

Question 45

Gulf Consulting Co. reported the following on its December 31, 2009, 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, 2009. What is the book value of Gulf's equipment at December 31, 2009?

A)$490,000
B)$441,000
C)$259,000
D)$210,000 Annual depreciation is ($700,000 70,000) 5 = $126,000
Depreciation for 3.5 years is $126,000 3.5 = $441,000
Book value = $700,000 441,000 = $259,000

Question 46

Belotti would record depletion in 2009 of:

A)$41,000.
B)$32,800.
C)$30,750.
D)$24,600.Depletion in 2009 = ($164,000 20,000) = $8.20 per ton 4,000 = $32,800

Question 47

Broadway Ltd. purchased equipment on 1/1/07 for $800,000, estimating a five-year useful life and no residual value. In 2007 and 2008, Broadway depreciated the asset using the straight-line method. In 2009, Broadway changed to sum-of-years'-digits depreciation for this equipment. What depreciation would Broadway record for the year 2009 on this equipment?

A)$120,000.
B)$160,000.
C)$200,000.
D)$240,000.The depreciation for 2007 and 2008 was: $800,000 5 = $160,000 per year.This leaves a book value of $480,000 ($800,000 320,000) and three years remain in the asset's life.Under SYD, the remaining depreciable base would be multiplied by 3 (1 + 2 + 3) for 2010, or 3/6 $480,000 = $240,000 in depreciation.

Question 48

An operational 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.

Question 49

Belotti would record depletion in 2010 of:

A)$54,667.
B)$65,600.
C)$52,480.
D)$55,760.Depletion in 2010 = [($164,000 32,800) (8,000 + 12,000)] = $6.56 per ton 8,000 = $52,480

Question 50

Murgatroyd Co. purchased equipment on 1/1/07 for $500,000, estimating a four-year useful life and no residual value. In 2007 and 2008, Murgatroyd depreciated the asset using the sum-of-years'-digits method. In 2009, Murgatroyd changed to straight-line depreciation for this equipment. What depreciation would Murgatroyd record for the year 2009 on this equipment?

A)$ 75,000.
B)$125,000.
C)$150,000.
D)None of these is correct.The depreciation for 2007 was: $500,000 4/10 = $200,000.The depreciation for 2008 was: $500,000 3/10 = $150,000.This leaves a book value of $150,000 ($500,000 350,000), so that the new depreciation would be $75,000 ($150,000 2).

Question 51

Nanki Corporation purchased equipment on 1/1/07 for $650,000. In 2007 and 2008, Nanki depreciated the asset on a straight-line basis with an estimated useful life of 8 years and a $10,000 residual value. In 2009, 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 2009 on this equipment?

A)$108,333.
B)$106,667.
C)$122,500.
D)None of these is correct.The depreciation for 2007 and 2008 was 2 [($650,000 10,000) 8] = $160,000.This leaves a book value of $490,000 .

Question 52

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 vs.old estimates.
D)None of these is correct.

Question 53

Short Corporation purchased 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.Goodwill is not amortized.

Question 54

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.

Question 55

Depreciation for 2010, using double-declining balance, would be:

A)$32,000.
B)$34,000.
C)$38,000.
D)$40,000.Depreciation for 2010 = [$200,000 ($200,000 20% 3/12] 20% = $38,000

Question 56

Depreciation (to the nearest dollar) for 2009, using sum-of-the-years' digits, would be:

A)$ 9,091.
B)$24,545.
C)$27,273.
D)$ 8,182.($200,000 20,000) 10/55 3/12 = $8,182

Question 57

A change from the straight-line method to the sum-of-years'-digits 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 vs.old useful life estimate.
C)A prospective change from the current year through the remainder of its useful life.
D)None of these is correct.

Question 58

Jennings Advertising Inc. reported the following in its December 31, 2009, balance sheet: 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

Question 59

In January of 2009, 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 2012, Vega spent $40,000 in legal fees for an unsuccessful defense of the patent. The amount charged to income (expense and loss) in 2012 related to the patent should be:

A)$ 40,000.
B)$ 65,000.
C)$215,000.
D)$ 25,000.

Question 60

Fellingham Corporation purchased equipment on January 1, 2007, 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 2009, 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 2009?

A)$24,000
B)$27,333
C)$36,000
D)$41,000 This is a change in estimate, so the remaining deprecation will be spread over the remaining useful life.Accumulated depreciation at 12/31/08 = 2 [($200,000 20,000) 10] = $36,000
Book value at 12/31/08 = $200,000 36,000 = $164,000
Annual depreciation after change in estimate = $164,000 4 = $41,000

Question 61

Canliss Mining uses the replacement method to determine depreciation on its office equipment. During 2007, its first year of operations, office equipment was purchased at a cost of $14,000. Useful life of the equipment averages 4 years and no salvage value is anticipated. In 2009, equipment costing $5,000 was sold for $600 and replaced with new equipment costing $6,000. Canliss would record 2009 depreciation of:

A)$3,500.
B)$4,400.
C)$5,400.
D)None of these.Cost of replacement equipment of $6,000 less proceeds of $600 = $5,400.

Question 62

Required:
Compute depreciation for 2009 and 2010 and the book value of the drill press at December 31, 2009 and 2010, assuming the straight-line method is used.

Question 63

Canliss Mining uses the retirement method to determine depreciation on its office equipment. During 2007, its first year of operations, office equipment was purchased at a cost of $14,000. Useful life of the equipment averages 4 years and no salvage value is anticipated. In 2009, equipment costing $5,000 was sold for $600 and replaced with new equipment costing $6,000. Canliss would record 2009 depreciation of:

A)$3,500.
B)$4,400.
C)$5,400.
D)None of these.Cost of equipment sold of $5,000 less proceeds of $600 = $4,400.

Question 64

In testing for recoverability of an operational asset, 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)None of these.

Question 65

Compute depreciation for 2009 and 2010 and the book value of the machinery at December 31, 2009 and 2010, assuming double-declining balance method is used.

Question 66

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.
B)Equipment.
C)Maintenance.
D)Gain from repairs.

Question 67

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.

Question 68

In 2008, 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 2009 year-end book value of $580 million. Antle assessed the fair value of Demski 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 2009 is:

A)$150 million
B)$ 95 million
C)$ 0
D)None of these is correct An impairment loss must be recognized if book value of the reporting unit acquired exceeds it fair value.In this case, it does not, so no impairment loss is recognized.

Question 69

Accounting for impairment losses:

A)Involves a two-step process for recoverability and measurement.
B)Applies only to depreciable, operational assets.
C)Applies only to assets with finite lives.
D)All of these are correct.

Question 70

Recognition of impairment for tangible operational assets is required if book value exceeds:

A)Fair value.
B)Present value of expected cash flows.
C)Undiscounted expected cash flows.
D)Accumulated depreciation.

Question 71

Required:
Compute depreciation for 2009 and 2010 and the book value of the drill press at December 31, 2009 and 2010, assuming the units-of-production method is used.

Question 72

Jung Inc. owns a patent for which it paid $66 million. At the end of 2009, 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 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, Lester:

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.The patent fails the recoverability test, and the impairment is measured by the difference between its fair value of $35 million and its book value of $50 million ($66 million 16 million).

Question 73

Wilson Inc. owns equipment for which it paid $70 million. At the end of 2009, 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 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 is correct.The undiscounted cash flows ($60 million) exceed the book value ($58 million), so no impairment is required.

Question 74

Required:
Compute depreciation for 2009 and 2010 and the book value of the drill press at December 31, 2009 and 2010, assuming the double-declining-balance method is used.

Question 75

Fryer Inc. owns equipment for which it paid $90 million. At the end of 2009, 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 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 is correct.The book value exceeds the undiscounted cash flows, so an impairment is required.The fair value ($40 million) is $23 million less than the book value ($63 million).

Question 76

Which of the following types of subsequent expenditures is normally capitalized:

A)Additions.
B)Improvements.
C)Rearrangements.
D)All of these are normally capitalized.

Question 77

On September 30, 2009, Sternberg Company sold office equipment for $12,000. The equipment was purchased on March 31, 2006, 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 2009 depreciation and the sale of the equipment.

Question 78

Required:
Compute depreciation for 2009 and 2010 and the book value of the spooler at December 31, 2009 and 2010, assuming the double-declining-balance method is used.

Question 79

At the end of its 2009 fiscal year, a triggering event caused Janero Corporation to perform an impairment test for one of its manufacturing facilities. The following information is available: The manufacturing facility is:

A)Impaired because its book value exceeds expected 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.

Question 80

The amount of impairment loss is the excess of book value over:

A)Carrying value.
B)Undiscounted future cash flows.
C)Fair value.
D)Future revenues.