Deck 9: Reporting and Analyzing Long-Lived Assets

Question 1

The Accumulated Depreciation account represents a cash fund available to replace property, plant, and equipment.

Answer 1

False

Question 2

Explain and calculate depreciation for plant and equipment.

Answer 2

Depreciation is the process of allocating the cost of a long-lived asset over the asset's useful (service) life in a systematic way. There are three commonly used depreciation methods: straight-line, diminishing-balance, and units-of-production. Other accounting issues related to depreciation include (1) identifying significant components of a long-lived asset for which different depreciation methods or rates may be appropriate; (2) capital cost allowance (CCA) used for income tax purposes; (3) testing long-lived assets for impairment; (4) accounting for property, plant, and equipment using the cost or revaluation model; and (5) circumstances under which a revision of depreciation is required.

Question 3

Account for the derecognition of property, plant, and equipment.

Answer 3

The procedure for accounting for the disposal of property, plant, and equipment through sale or retirement is: Step 1: Update unrecorded depreciation for any partial period. Step 2: Calculate the carrying amount. Step 3: Calculate any gain (proceeds less carrying amount). If the carrying amount is greater than proceeds then there is a loss on disposal. Step 4: Derecognize (remove) the asset and accumulated depreciation accounts related to the sold or retired asset. Record the proceeds received and the gain or loss (if any).

Question 4

Under a finance lease, both the leased asset and the related lease obligation are shown on the statement of financial position.

Question 5

Canada Revenue Agency requires a company to use the same depreciation method on its income tax return that is used in preparing financial statements.

Question 6

Under IFRS, companies must account for their property, plant, and equipment using the revaluation model, where depreciable assets are re-valued upward to their fair values.

Question 7

When purchasing a delivery truck, the cost of painting the company logo on the side should be debited to the Vehicles account.

Question 8

In calculating depreciation, cost, useful life, and residual value are all based on estimates.

Question 9

Under an operating lease, both the leased asset and the related lease obligation are shown on the statement of financial position.

Question 10

If land is purchased with a building on it that is to be demolished, proceeds from any salvaged materials are reported in the Other Revenues and Expenses section of the income statement.

Question 11

The depreciable amount of property, plant, and equipment is its original cost minus the depreciation for the current year.

Question 12

All property, plant, and equipment must be depreciated for accounting purposes.

Question 13

Determine the cost of property, plant, and equipment.

Question 14

Land improvements are generally debited to the Land account.

Question 15

Using the units-of-production method of depreciation for equipment will generally result in more depreciation expense being recorded over the life of the asset than if the straight-line method had been used.

Question 16

Recording depreciation on equipment affects both the statement of financial position and the income statement.

Question 17

Leasehold improvements are depreciated over the remaining life of the lease or the useful life of the improvements, whichever is longer.

Question 18

Using the diminishing-balance method results in higher expense in the early years, and therefore lower net income.

Question 19

Carrying amount is used in determining the amount that the diminishing-balance rate is applied to.

Question 20

When purchasing land, the costs for clearing, draining, filling, and grading should be charged to a Land Improvements account.

Question 21

Which of the following assets does not decline in service potential over the course of its useful life?

A) office equipment
B) furnishings
C) land
D) computers

Question 22

The Land account would include all of the following costs except

A) drainage costs.
B) the cost of building a parking lot.
C) title fees.
D) the cost of tearing down a building.

Question 23

Which of the following should not be classified as property, plant and equipment?

A) building used as a factory
B) land used in ordinary business operations
C) a truck held for resale by an automobile dealership
D) land improvements, such as parking lots and fences

Question 24

A company purchased land for $120,000 cash; $7,000 was spent to demolish an old building on the land before construction of a new building could start; and $1,500 was received for material salvaged from the old building. The cost of the land would be recorded at

A) $120,000.
B) $125,500.
C) $127,000.
D) $128,500.

Question 25

The expected costs to retire an asset are called

A) off-balance sheet financing.
B) expected retirement costs.
C) disposal costs.
D) asset retirement costs.

Question 26

Which one of the following items is not considered to be a part of the cost of a truck purchased for business use?

A) insurance during transit
B) motor vehicle licence
C) freight charges incurred when acquiring the truck
D) cost of lettering on the side of the truck

Question 27

Enmerick Corporation purchases a new delivery truck for $45,000. The company logo is painted on the side of the truck for $1,500. The motor vehicle licence is $175. Annual insurance is $1,500. At what amount does Enmerick record the cost of the new truck?

A) $45,000
B) $45,175
C) $46,500
D) $46,675

Question 28

The carrying amount of an asset is the original cost less anticipated residual value.

Question 29

Land improvements should be depreciated over the useful life of the

A) land.
B) buildings on the land.
C) land or land improvements, whichever is longer.
D) land improvements.

Question 30

Angus Corp. acquires land for $105,000 cash. Additional costs are as follows: Angus will record the cost of the land as

A) $105,000.
B) $109,400.
C) $109,900.
D) $126,200.

Question 31

Interest incurred on the construction of a building can be included in the cost of the building

A) during the construction period of a building.
B) for as long as the interest is payable.
C) if the building is financed by a mortgage.
D) under no circumstances.

Question 32

Harmon Medical Ltd. purchases land for $290,500 cash. The title and legal fees totalled $1,500. The clinic has the land graded for $25,000. What amount does Harmon Medical record as the cost for the land?

A) $290,500
B) $292,000
C) $315,500
D) $317,000

Question 33

Asset retirement costs are

A) added to the cost of a depreciable asset.
B) treated as a separate asset.
C) deducted from the cost of a depreciation asset.
D) have no effect on a depreciable asset.

Question 34

A characteristic of property, plant, and equipment is that it is

A) intangible.
B) used in the operations of a business.
C) held for sale in the ordinary course of the business.
D) not currently used in the business but held for future use.

Question 35

Which of the following is not true for an operating expenditure?

A) It is recorded with a debit to a statement of financial position account.
B) It benefits the current period only.
C) It is incurred to maintain an asset in its normal operating condition.
D) It often recurs.

Question 36

Which of the following would not be included in the Equipment account?

A) installation costs
B) freight costs
C) cost of trial runs
D) electricity used by the machine

Question 37

Aye Corp. purchases a remote-site building for computer operations. The building will be suitable for operations after some necessary expenditures. The wiring must be replaced to handle the computer specifications. The roof is leaking and must be replaced. All rooms must be repainted and re-carpeted and there will also be some updating of the plumbing needed. Which of the following statements is true?

A) The cost of the building will include the repainting and re-carpeting costs.
B) The cost of the building will include the cost of replacing the roof.
C) The cost of the building is the purchase price of the building, while the additional expenditures are all capitalized as Building Improvements.
D) The wiring replacement will be part of the computer costs, not the building cost.

Question 38

Which of the following is not an advantage of an operating lease?

A) reduced risk of obsolescence
B) 100 percent financing
C) income tax advantages
D) accelerated depreciation

Question 39

Mercy General Hospital installs a new parking lot. The paving cost $25,000 and the lights to illuminate the new parking lot cost $13,000. Which of the following statements is true with respect to these expenditures?

A) $25,000 should be debited to Land.
B) $13,000 should be debited to Lighting Expense.
C) $38,000 should be debited to Land.
D) $38,000 should be debited to Land Improvements.

Question 40

The cost of land does not include

A) closing costs.
B) annual property taxes.
C) removal costs of an old building.
D) title fees.

Question 41

Depreciation is a process of

A) determining the asset's fair value.
B) asset valuation.
C) cost allocation.
D) determining the asset's residual value.

Question 42

Equipment with a cost of $160,000, an estimated residual value of $10,000, and an estimated life of 4 years, was purchased on April 1, 2018. If the straight-line method is used, the depreciation expense for calendar 2018 is

A) $40,000.
B) $37,500.
C) $30,000.
D) $28,125.

Question 43

In calculating depreciation, residual value is

A) the fair value of the asset on the date of acquisition.
B) subtracted from accumulated depreciation to determine the asset's depreciable cost.
C) an estimate of the asset's value at the end of its useful life.
D) ignored in all the depreciation methods.

Question 44

Equipment was purchased for $20,000. It is estimated that the equipment will have a $3,000 residual value at the end of its 5-year useful life. Using the straight-line method, annual depreciation expense will be

A) $3,400.
B) $4,000.
C) $4,600.
D) $5,000.

Question 45

The cost of a depreciable long-lived asset is expensed

A) when it is paid for.
B) as the asset benefits the company.
C) in the period in which it is acquired.
D) in the period in which it is disposed of.

Question 46

Which statement is correct regarding the use of the cost model and the revaluation model?

A) The cost model is not allowed under IFRS.
B) The revaluation model is the only model allowed under IFRS.
C) The cost model is the only model allowed under ASPE.
D) Either the cost model or the revaluation model can be under ASPE.

Question 47

A truck was purchased for $40,000 and it was estimated to have a $4,000 residual value. Using the straight-line method, monthly depreciation expense of $600 was recorded. Therefore, the annual depreciation rate expressed as a percentage is

A) 2%.
B) 17%.
C) 18%.
D) 20%.

Question 48

The carrying amount of property, plant, and equipment

A) is always equal to its fair value.
B) is always greater than its fair value.
C) is always less than its fair value.
D) may be different than its fair value.

Question 49

The diminishing-balance method of depreciation produces a(n)

A) decreasing depreciation expense each period.
B) increasing depreciation expense each period.
C) diminishing percentage rate each period.
D) constant amount of depreciation expense each period.

Question 50

The difference between a depreciable asset's cost and its residual value is called

A) the annual depreciation.
B) accumulated depreciation.
C) the depreciable amount.
D) the revaluation amount.

Question 51

A company purchased factory equipment on May 1, 2018 for $30,000. It is estimated that the equipment will have a $4,200 residual value at the end of its 8-year useful life. Using straight-line depreciation, the depreciation expense for the years ended December 31, 2018 and 2019 is

A) $2,500 in 2018 and $3,750 in 2019.
B) $3,225 in 2018 and $3,225 in 2019.
C) $2,150 in 2018 and $3,225 in 2019.
D) none of the above

Question 52

Which of the following is not a consideration when calculating depreciation?

A) the method of payment for the asset
B) the cost of the asset
C) the useful life of the asset
D) the residual value of the asset

Question 53

Equipment was purchased for $25,000. Freight charges amounted to $700 and there was a cost of $3,000 for building a foundation and installing the equipment. It is estimated that the equipment will have a $1,600 residual value at the end of its 5-year useful life. Using the straight-line method, annual depreciation expense will be

A) $4,540.
B) $4,680.
C) $5,420.
D) $5,740.

Question 54

The carrying amount of an asset is equal to the

A) asset's fair value less its original cost.
B) asset's cost less residual value less accumulated depreciation.
C) asset's cost less residual value.
D) asset's cost less accumulated depreciation.

Question 55

Use the following information for questions.
On January 1, 2018, Anvil Corp. purchased equipment for $60,000. It was expected to last 5 years, after which it will be sold for $5,000. It is expected to be used for a total of 10,000 machine hours, and was used for 750 hours during the year ended December 31, 2018.
The depreciation expense for 2018 using the straight-line method will be

A) $4,125.
B) $11,000.
C) $12,000.
D) $12,250.

Question 56

Which of the following is included in the cost of constructing a building?

A) cost of paving a parking lot
B) cost of grading the land on which the building is to be constructed
C) interest incurred during construction
D) cost of removing the demolished building that existed on the land when it was purchased

Question 57

Which of the following is not an acceptable method of depreciation?

A) straight-line
B) increasing-balance
C) diminishing-balance
D) units-of-production

Question 58

Assuming there are no impairment losses, the balance in the Accumulated Depreciation account represents the

A) cash fund to be used to replace assets.
B) amount to be deducted from the cost of the asset to arrive at its fair value.
C) amount charged to depreciation expense in the current period.
D) amount charged to depreciation expense since the acquisition of the asset.

Question 59

When estimating the useful life of an asset, accountants do not consider

A) the cost to replace the asset at the end of its useful life.
B) vulnerability to obsolescence.
C) expected repairs and maintenance.
D) the intended use of the asset.

Question 60

Use the following information for questions.
On January 1, 2018, Anvil Corp. purchased equipment for $60,000. It was expected to last 5 years, after which it will be sold for $5,000. It is expected to be used for a total of 10,000 machine hours, and was used for 750 hours during the year ended December 31, 2018.
The depreciation expense for 2018 using the units-of-production method will be

A) $4,125.
B) $11,000.
C) $4,500.
D) $12,250.

Question 61

On April 1, 2018, Check Mate Ltd. places a new asset into service. The cost of the asset is $40,000 with an estimated 8-year life and $2,500 residual value. Assuming that Check Mate uses the double diminishing-balance method of depreciation, what is the carrying amount of the asset at December 31, 2018?

A) $32,500
B) $30,625
C) $38,125
D) $35,000

Question 62

Management should select the depreciation method that

A) is easiest to apply.
B) best measures the asset's fair value each period over its useful life.
C) best reflects the pattern in which the asset's future economic benefits are to be consumed.
D) is required by the government.

Question 63

On October 1, 2018, Ming Wo Ltd. places a new asset into service. The cost of the asset is $16,000 with an estimated 5-year life and $4,000 residual value. If Ming Wo uses straight-line depreciation, the depreciation expense for the year ended January 31, 2019 is

A) $ 600.
B) $ 800.
C) $1,067.
D) $2,400.

Question 64

With regard to depreciation and income taxes, which of the following statements is not true?

A) When calculating taxable income, the taxpayer must choose the method that best reflects the pattern in which the asset's future economic benefits are consumed.
B) When calculating taxable income, the taxpayer must use the rate set by Canada Revenue Agency.
C) When calculating taxable income, the taxpayer must use the diminishing-balance method for most assets.
D) When calculating taxable income, the amount of depreciation calculated for income tax purposes must be deducted, rather than the amount of depreciation calculated for financial reporting purposes.

Question 65

On July 1, 2018, a machine with a useful life of five years and a residual value of $4,000 was purchased for $20,000. Under straight-line depreciation, what is the depreciation expense for calendar 2019?

A) $4,000
B) $3,556
C) $3,200
D) $1,600

Question 66

Use the following information for questions.
On January 1, 2017, Flowers Unlimited purchased a new delivery van. The van cost $35,000 with an estimated life of 5 years and $5,000 residual value. Double diminishing-balance depreciation will be used.
What is the depreciation expense for calendar 2017?

A) $ 3,000
B) $ 6,000
C) $12,000
D) $14,000

Question 67

Jemima Ltd. purchased factory equipment for $200,000, and estimated that the equipment will have a $20,000 residual value at the end of its estimated 5-year useful life. If Jemima uses the double diminishing-balance method of depreciation, the depreciation expense for the second year after purchase would be

A) $43,200.
B) $48,000.
C) $72,000.
D) $80,000.

Question 68

The depreciation method that applies a constant percentage to the carrying amount at the beginning of the period in calculating depreciation is called

A) straight-line.
B) units-of-production.
C) diminishing-balance.
D) component depreciation.

Question 69

Equipment that cost of $180,000 has an estimated residual value of $15,000 and an estimated useful life of 4 years or 25,000 hours. Using the units-of-production method, the depreciation expense for the first year, during which the machine was used 3,300 hours, would be

A) $45,000.
B) $41,500.
C) $23,760.
D) $21,780.

Question 70

Equipment was purchased on January 1 for $39,000 with an estimated residual value of $3,000. The current year's Depreciation Expense is $4,000, calculated on the straight-line basis, and the balance of the Accumulated Depreciation account at the end of the year is $12,000. The remaining useful life of the equipment is

A) 3 years.
B) 5 years.
C) 6 years.
D) 9 years.

Question 71

Cordo Ltd. uses the units-of-production depreciation method. A new asset is purchased for $30,000 that will produce an estimated 90,000 units over its useful life. Estimated residual value is $3,000. What is the depreciable cost per unit?

A) $3.30
B) $3.00
C) $0.33
D) $0.30

Question 72

Units-of-production is an appropriate depreciation method to use when

A) it is impossible to determine the productivity of the asset.
B) the asset's use will be constant over its useful life.
C) the company is a manufacturing company.
D) the asset's use varies significantly from one period to another.

Question 73

On April 1, 2018, a machine was purchased for $33,600. It was estimated that it would have a $3,200 residual value at the end of its 5-year useful life. It was also estimated that the machine would be used for a total of 80,000 hours over the 5 years. If the actual number of machine hours used in 2018 was 12,000 hours and the company uses the units-of-production method of depreciation, the depreciation expense for 2018 would be

A) $5,040.
B) $4,560.
C) $3,780.
D) $3,420.

Question 74

A machine that cost $72,000 has an estimated residual value of $6,000 and an estimated useful life of 5 years or 30,000 hours. Using the units-of-production method, the depreciation expense for the second year, during which the machine was used 5,000 hours, would be

A) $14,400.
B) $13,200.
C) $12,000.
D) $11,000.

Question 75

Beynon Corp. purchased office equipment for $20,000, with an estimated residual value of $4,000 at the end of its 8-year useful life. Assuming the double diminishing-balance method is used, the constant percentage to be applied against the carrying amount each year is

A) 10%.
B) 12.5%.
C) 25%.
D) not determinable.

Question 76

The calculation of depreciation using the diminishing-balance method

A) ignores residual value in determining the amount to which a constant rate is applied.
B) multiplies a constant percentage times the previous year's depreciation expense.
C) yields an increasing depreciation expense each period.
D) multiplies a diminishing percentage times a constant carrying amount.

Question 77

Tran Inc. purchased equipment for $48,000, and estimated that the equipment will have a $4,000 residual value at the end of its 8-year useful life. Using the double diminishing-balance method, the depreciation expense for the third year would be

A) $9,000.
B) $6,750.
C) $6,188.
D) $5,500.

Question 78

Use the following information for questions.
On January 1, 2018, Anvil Corp. purchased equipment for $60,000. It was expected to last 5 years, after which it will be sold for $5,000. It is expected to be used for a total of 10,000 machine hours, and was used for 750 hours during the year ended December 31, 2018.
The depreciation expense for 2018 using the double diminishing-balance method will be

A) $11,000.
B) $12,250.
C) $12,000.
D) $24,000.

Question 79

Use the following information for questions.
On January 1, 2017, Flowers Unlimited purchased a new delivery van. The van cost $35,000 with an estimated life of 5 years and $5,000 residual value. Double diminishing-balance depreciation will be used.
What is the balance in the Accumulated Depreciation account at the end of 2018?

A) $22,400
B) $19,200
C) $12,600
D) $10,800

Question 80

On January 1, 2018, a machine with a useful life of five years and a residual value of $2,500 was purchased for $25,000. Using the double diminishing-balance method, the depreciation expense for the year ending December 31, 2019 would be

A) $10,000.
B) $ 9,000.
C) $ 6,000.
D) $ 5,400.