Question 1

The declining balance method records higher amortization expense in the earlier years of an asset's useful life.

Accepted Answer

The declining balance method is a depreciation method that assumes the asset will lose its value more rapidly in the early years of its useful life. Therefore, it records higher amortization expense in the earlier years and lower expense in the later years, reflecting the asset's declining value over time.

Question 2

Asset groups under ASPE include both assets and liabilities, while cash generating units (CGUs) under IFRS include only assets.

Accepted Answer

Asset groups under ASPE include both assets and liabilities, while cash generating units (CGUs) under IFRS include only assets.

Question 3

Amortization expense is a source of cash because it is a non-cash expense.

Accepted Answer

Amortization expense is a non-cash expense, but it is not a source of cash. It represents the gradual reduction in the value of an intangible asset, such as a patent or trademark. While it affects the net income, it does not impact the actual flow of cash in or out of the company. Therefore, it cannot be considered a source of cash.

Question 4

Goodwill impairment losses are reversible under IFRS but not under ASPE.

Accepted Answer

Under IFRS, goodwill impairment losses are not reversible, whereas ASPE does not allow for the reversal of impairment losses on goodwill either. Both standards treat goodwill impairment losses as irreversible.

Question 5

Amortization expense each period is proportionate to usage of the asset each period with the service hours method.

Accepted Answer

The service hours method calculates amortization expense based on the usage of the asset each period, making the expense proportionate to the level of service provided.

Question 6

The half-year convention is applied to CCA calculations.

Accepted Answer

The half-year convention is a standard method used for Capital Cost Allowance (CCA) calculations in Canada. It assumes that an asset is purchased halfway through the taxation year, and therefore only half of the asset's CCA rate is applied for that year. This convention applies to most depreciable assets, except for certain types with their own special conventions.

Question 7

If an industrial firm uses the units-of-output method for computing amortization on its only plant asset, factory machinery, the credit to accumulated amortization from period to period during the life of the firm will vary with sales revenue.

Accepted Answer

The units-of-output method of amortization is based on the units produced by the machinery, not on sales revenue. This method reflects the wear and tear on the asset based on its actual usage rather than time or revenue.

Question 8

With the exception of Goodwill, all impairment losses are reversible under ASPE.

Accepted Answer

Under ASPE (Accounting Standards for Private Enterprises), impairment losses on assets other than goodwill can be reversed if there is an indication that the impairment has decreased and the new estimate of recoverable amount exceeds the carrying amount. However, this does not apply to all assets, as some, like financial assets, follow specific rules that may not allow reversals.

Question 9

Amortization retains funds by reducing income and thereby impacting the dividend payment decision.

Accepted Answer

Amortization reduces income, which in turn can impact the funds available for dividend payments.

Question 10

Impairment losses on intangible assets are to be amortized over the asset's remaining useful life.

Accepted Answer

Impairment losses on intangible assets are recognized immediately as an expense and are not amortized over the asset's remaining useful life. The remaining useful life may be adjusted after the impairment loss is recognized, but the actual impairment loss is not spread out over time through amortization.

Question 11

GAAP requires that, when recording amortization expense, the credit must always be made to a contra asset account, rather than directly to the asset account.

Accepted Answer

GAAP allows for amortization expense to be recorded either by crediting the asset account directly or by using a contra asset account, depending on the company's accounting policy.

Question 12

Component accounting requires the same amortization method be applied for all of an asset's major components.

Accepted Answer

Component accounting allows for different amortization methods to be applied to the major components of an asset, reflecting their different patterns of benefits or usage over time.

Question 13

The residual value of an asset is the expected value of the asset at the end of its entire useful life, while scrap (salvage) value refers to the expected value of the asset at the end of its useful life to the company.

Accepted Answer

The statement is correct. Residual value refers to the expected value of the asset at the end of its entire useful life, while scrap (salvage) value refers to the expected value of the asset at the end of its useful life to the company.

Question 14

Amortization accounting is not a matter of valuation.

Accepted Answer

Amortization accounting is the process of gradually reducing the value of an intangible asset over time, based on its estimated useful life. This is a method of allocating the cost of the asset to the periods in which it provides benefits. Amortization does not involve valuing the asset, but rather accounting for its cost over time.

Question 15

Accumulated amortization represents the cash set aside for the replacement of assets.

Accepted Answer

Accumulated amortization represents the total amount of depreciation that has been charged to the assets over their useful life. It is not set aside as cash for replacement of assets; rather, it is a contra asset account that reduces the carrying value of the asset on the balance sheet.

Question 16

ASPE specifies a minimum amount of depreciation to be taken each year while IFRS does not.

Accepted Answer

ASPE requires a minimum amount of depreciation to be taken each year, while IFRS does not specify a minimum amount.

Question 17

Under IFRS, depreciation is never taken on Investment Property.

Accepted Answer

Depreciation may be taken on Investment Property under IFRS if it meets certain criteria, such as if the property has a limited useful life or if it is expected to be sold or disposed of within a specific period of time.

Question 18

Held-for-sale capital assets are not depreciated.

Accepted Answer

When an asset is classified as held-for-sale, depreciation is suspended and the asset is reported at the lower of its carrying amount or fair value less costs to sell.

Question 19

Conceptually, the cost of a capital asset (i.e., property, plant and equipment, but not land) represents a long-term prepayment of expense.

Accepted Answer

The cost of a capital asset is typically recorded as an asset on the balance sheet and then gradually expensed through depreciation over its useful life. This reflects the concept of prepaying the expense over a long period of time. Land, however, is not subject to depreciation and is considered an indefinite-lived asset, so its cost is not prepaying a long-term expense.

Question 20

Goodwill impairment losses are reversible under IFRS but not under ASPE.

Accepted Answer

Under IFRS, goodwill impairment losses are not reversible, similar to the treatment under ASPE (Accounting Standards for Private Enterprises in Canada), where impairment losses on goodwill are also not reversible.

Quiz 10: Depreciation, Amortization, and Impairment

The declining balance method records higher amortization expense in the earlier years of an asset's useful life.

Asset groups under ASPE include both assets and liabilities, while cash generating units (CGUs) under IFRS include only assets.

Amortization expense is a source of cash because it is a non-cash expense.

Goodwill impairment losses are reversible under IFRS but not under ASPE.

Amortization expense each period is proportionate to usage of the asset each period with the service hours method.

The half-year convention is applied to CCA calculations.

If an industrial firm uses the units-of-output method for computing amortization on its only plant asset, factory machinery, the credit to accumulated amortization from period to period during the life of the firm will vary with sales revenue.

With the exception of Goodwill, all impairment losses are reversible under ASPE.

Amortization retains funds by reducing income and thereby impacting the dividend payment decision.

Impairment losses on intangible assets are to be amortized over the asset's remaining useful life.

GAAP requires that, when recording amortization expense, the credit must always be made to a contra asset account, rather than directly to the asset account.

Component accounting requires the same amortization method be applied for all of an asset's major components.

The residual value of an asset is the expected value of the asset at the end of its entire useful life, while scrap (salvage) value refers to the expected value of the asset at the end of its useful life to the company.

Amortization accounting is not a matter of valuation.

Accumulated amortization represents the cash set aside for the replacement of assets.

ASPE specifies a minimum amount of depreciation to be taken each year while IFRS does not.

Under IFRS, depreciation is never taken on Investment Property.

Held-for-sale capital assets are not depreciated.

Conceptually, the cost of a capital asset (i.e., property, plant and equipment, but not land) represents a long-term prepayment of expense.

Goodwill impairment losses are reversible under IFRS but not under ASPE.