Deck 11: Depreciation, Impairments, and Depletion

Question 1

Under component depreciation, each component of an item of property, plant and equipment whose cost is significant relative to the total cost of the asset must be depreciated separately.

Answer 1

True

Question 2

Depreciation is a means of cost allocation, not a matter of valuation.

Answer 2

True

Question 3

An impairment loss is the amount by which the carrying amount of the asset exceeds the sum of the expected future cash flows from the use of that asset.

Answer 3

False

Question 4

An asset's value in use is defined as the present value of the cash flows expected from its future use and eventual sale at the end its useful life.

Question 5

The declining-balance method does not deduct the residual value in computing the depreciation base.

Question 6

The first step in determining an impairment loss is to identify whether impairment indicators are present.

Question 7

Inadequacy is the replacement of one asset with another more efficient and economical asset.

Question 8

The three factors involved in the depreciation process are the depreciation base, the useful life, and the risk of obsolescence.

Question 9

The units-of-production approach to depreciation is appropriate when depreciation is a function of time instead of activity.

Question 10

An accelerated depreciation method is appropriate when the asset's economic usefulness is the same each year.

Question 11

Depreciation is based on the decline in the fair value of the asset.

Question 12

The recoverable amount used to impairment test a long-lived tangible asset is defined as the asset's fair value less costs to sell.

Question 13

The major objection to the straight-line method is that it assumes the asset's economic usefulness and repair expense are the same each year.

Question 14

A recovery of impairment for a tangible long-lived asset is limited to the carrying value that would have been reported had the impairment not occurred.

Question 15

After an impairment loss is recorded, the recoverable amount becomes the basis for the impaired asset and is used to calculate depreciation in future periods.

Question 16

Recoveries of impairment for tangible long-lived assets are reported as components of other comprehensive income.

Question 17

Depreciation, depletion, and amortization all involve the allocation of the cost of a long-lived asset to expense.

Question 18

Changes in estimates are handled prospectively by dividing the asset's book value less any residual value by the remaining estimated life.

Question 19

Component depreciation must be calculated using the straight-line method.

Question 20

The cost of an asset less its residual value is its depreciation base.

Question 21

The recoverability test is the first step in impairment testing under both IFRS and U.S. GAAP.

Question 22

A graph is set up with "yearly depreciation expense" on the vertical axis and "time" on the horizontal axis. Assuming linear relationships, how would the graphs for straight-line and sum-of-the-years'-digits depreciation, respectively, be drawn?

A) Vertically and sloping down to the right
B) Vertically and sloping up to the right
C) Horizontally and sloping down to the right
D) Horizontally and sloping up to the right

Question 23

The Accumulated Other Comprehensive Income account related to revaluations cannot have a negative balance.

Question 24

The profit margin on sales is a measure for analyzing the use of property, plant, and equipment.

Question 25

Depreciation is normally computed on the basis of the nearest

A) full month and to the nearest cent.
B) full month and to the nearest dollar.
C) day and to the nearest cent.
D) day and to the nearest dollar.

Question 26

Use of the double-declining balance method

A) results in a decreasing charge to depreciation expense.
B) means residual value is not deducted in computing the depreciation base.
C) means the book value should not be reduced below residual value.
D) All of these answer choices are correct.

Question 27

Intangible development costs and restoration costs are part of the depletion base.

Question 28

Revaluation surplus is a temporary account which is closed to Retained Earnings at the end of an accounting period.

Question 29

If an industrial firm uses the units-of-production method for computing depreciation on its only plant asset, factory machinery, the credit to accumulated depreciation from period to period during the life of the firm will

A) be constant.
B) vary with unit sales.
C) vary with sales revenue.
D) vary with production.

Question 30

Lynch Printing Company determines that a printing press used in its operations has suffered an impairment in value because of technological changes. An entry to record the impairment should

A) recognize extra depreciation expense for the period.
B) include a credit to the equipment accumulated depreciation account.
C) include a credit to the equipment account.
D) not be made if the equipment is still being used.

Question 31

Which of the following is true of depreciation accounting?

A) It is not a matter of valuation.
B) It is part of the matching of revenues and expenses.
C) It retains funds by reducing income taxes and dividends.
D) All of these answer choices are correct.

Question 32

Unrealized gains from revaluations do not increase net income but are instead reported as components of other comprehensive income.

Question 33

Use of the sum-of-the-years'-digits method

A) results in residual value being ignored.
B) means the denominator is the years remaining at the beginning of the year.
C) means the book value should not be reduced below residual value.
D) All of these answer choices are correct.

Question 34

Economic factors that shorten the service life of an asset include

A) obsolescence.
B) supersession.
C) inadequacy.
D) All of these answer choices are correct.

Question 35

Recoverable amount is defined as the higher of fair value less costs to sell or value-in-use.

Question 36

The asset turnover is computed by dividing net sales by ending total assets.

Question 37

A change in estimate should

A) result in restatement of prior period statements.
B) be handled in current and future periods.
C) be handled in future periods only.
D) be handled retroactively.

Question 38

Assets held for disposal should be reported at the lower of cost or net realizable value.

Question 39

Although IFRS allows it, most companies do not use revaluation accounting.

Question 40

Myers Company acquired machinery on January 1, 2014 which it depreciated under the straight-line method with an estimated life of fifteen years and no residual value. On January 1, 2019, Myers estimated that the remaining life of this machinery was six years with no residual value. How should this change be accounted for by Myers?

A) As a prior period adjustment
B) As the cumulative effect of a change in accounting principle in 2019
C) By setting future annual depreciation equal to one-sixth of the book value on January 1, 2019
D) By continuing to depreciate the machinery over the original fifteen year life

Question 41

Dividends representing a return of capital to shareholders are not uncommon among companies which

A) use accelerated depreciation methods.
B) use straight-line depreciation methods.
C) recognize both functional and physical factors in depreciation.
D) None of these answer choices are correct.

Question 42

Depletion expense

A) is usually part of cost of goods sold.
B) includes tangible equipment costs in the depletion base.
C) excludes intangible development costs from the depletion base.
D) excludes restoration costs from the depletion base.

Question 43

IFRS and U.S. GAAP differ with regard to accounting for impairment on property, plant and equipment in all of the following ways except

A) U.S. GAAP requires the recoverability test to determine whether impairment has occurred but IFRS does not.
B) Under IFRS, impairment testing is performed at each reporting date. Under U.S. GAAP impairment testing is done only when management has reason to believe that the asset may be impaired.
C) IFRS but not U.S. GAAP, allows for recovery of impairment in assets held for use.
D) U.S. GAAP requires assets held for sale or disposal to be reported at the lower-of-cost or net realizable value. IFRS requires that these assets be reported at the higher of fair value less cost to sell and value-in-use.

Question 44

Under IFRS, how is the account revaluation surplus reported?

A) As "other revenues and expenses" on the income statement.
B) As part of other comprehensive income which can be reported presented in separate statement, combined with income statement, or in changes in stockholders' equity statement.
C) It is included with Reserves in the stockholders' equity section of the Statement of Financial Position.
D) The account is not reported in the financial statements.

Question 45

The asset turnover is computed by dividing

A) net income by ending total assets.
B) net income by average total assets.
C) net sales by ending total assets.
D) net sales by average total assets.

Question 46

Ferguson Company purchased a depreciable asset for €100,000. The estimated residual value is €10,000, and the estimated useful life is 10 years. The straight-line method will be used for depreciation. What is the depreciation base of this asset?

A) €9,000
B) €10,000
C) €90,000
D) €100,000

Question 47

Which of following is not a similarity in the accounting treatment for depreciation and cost depletion?

A) The estimated life is based on economic or productive life.
B) Assets subject to either are reported in the same classification on the statement of financial position.
C) The rates may be changed upon revision of the estimated productive life used in the original rate computations.
D) Both depreciation and depletion are based on time.

Question 48

All of the following are true with regard to impairment testing of long-lived assets except:

A) If impairment indicators are present, the company must conduct an impairment test.
B) The impairment test compares the asset's carrying value with the lower of its fair value less cost to sell and its value-in-use.
C) If the recoverable amount is lower than the carrying value, an impairment loss will be reported on the period's income statement.
D) If either the fair value less cost to sell or the value-in-use is higher than the carrying amount, no impairment loss will be recorded.

Question 49

All of the following are true of the recoverable amount used in the impairment test of a long-lived asset except:

A) An asset's recoverable amount is the lower of its value-in-use and its fair value less cost to sell.
B) An asset's recoverable amount is the higher of its fair value less cost to sell and its value-in-use.
C) The recoverable amount is calculated as the asset's value in use less costs to sell.
D) If an asset's recoverable amount is higher than the carrying amount, no impairment loss will be reported on the period's income statement.

Question 50

Which of the following is not a difference between the accounting treatment for depreciation and cost depletion?

A) Depletion applies to natural resources while depreciation applies to plant and equipment.
B) Depletion refers to the physical exhaustion or consumption of the asset while depreciation refers to the wear, tear, and obsolescence of the asset.
C) Many formulas are used in computing depreciation but only one is used to any extent in computing depletion.
D) The cost of the asset is the starting point from which computation of the amount of the periodic charge is made to operations for depreciation, but the fair value reassessed each year as the starting point for the periodic charge for depletion.

Question 51

The return on total assets is computed by dividing

A) Net income by ending total assets.
B) Net sales by average total assets.
C) Net sales by ending total assets.
D) Net income by average total assets.