Question 1

Under the half-year convention, six months' depreciation is recorded on an asset in the year of acquisition and in the year of retirement regardless of the month in which the asset is actually purchased or retired.

Accepted Answer

A) True 
 B)False  True

Question 2

Research and development-financial reporting
Alert Industries has spent $5 billion over the last three years in developing a new drug labeled BJ13. FDA approval is expected by the end of the month, at which time the drug will be available for sale. None of Alert's competitors has a product similar to BJ13, and the medical community is anxiously awaiting availability of this drug. Although BJ13 promises to be a "wonder drug" with huge financial success, Alert's income statements for the last few years have shown substantial losses and Alert's statement of financial position only includes $ 0.3 billion product BJ13 among the assets of the business.
Explain why one of Alert's seemingly most valuable assets apparently has been reported for only $0.3 billion in the statement of financial position, and why Alert's income statements for the past few years reported substantial losses.
IFRS currently require that amounts spent for research be expensed as incurred and amounts spent for development be capitalized as intangible assets if and only if all the following six specific recognition criteria are met:
1. The technical feasibility of completing the intangible asset for use or sale;
2. The entity intends to complete the intangible asset and use or sell it;
3. The entity has the ability to use or sell the intangible asset;
4. How the intangible asset will generate probable future economic benefits, for example, the existence of a market for the output of the intangible asset, or the usefulness of the intangible asset for internal purpose;
5. The availability of adequate technical, financial, and other resources to complete the development and to use or sell the intangible asset; and
6. The entity's ability to measure reliably the expenditure attributable to the intangible asset during its development.

Accepted Answer

This has resulted in $4.7 billion of expenses for R & D over the last three years, which contributed to and may have been responsible for the substantial losses reported by Alert. Because $4.7 billion spent on R & D were expensed, only $0.3 billion has been capitalized or reported as assets. In the case of firms heavily involved in R & D activities, there are frequently no dollar amounts, or very insignificant amounts, in the statement of financial position representing these companies' most valuable assets.

Question 3

Prepare journal entries for the following:
(a) 1 November 2013. Purchased machinery for $93,600 with a $7,200 residual value and a six year life by paying $14,400 down and the balance with a Note Payable.(Ignore interest)
(b) 31 December 2013. Record the adjusting entry for depreciation using the straight line method to the nearest month.
(c) 1 July 2014. Sold the equipment for $81,600 cash and paid off the Note Payable.

Accepted Answer

$$\begin{array} { | l | c | r | r | } 
\hline \text { a. } & \text { Machinery } & 93,600 & \
\hline & \text { Cash } & & 14,400 \
\hline & \text { Note Payable } & & 79,200 \
\hline \text { b. } & \text { Depreciation Expense } & 2,400 & \
\hline & \text { Accumulated Depreciation } & & 2,400 \
\hline \text { c. } & \text { Depreciation Expense } & 7,200 & \
\hline & \text { Accumulated Depreciation } & & 7,200 \
\hline & \text { Cash } & 81,600 & \
\hline & \text { Accumulated Depreciation } & 9,600 & \
\hline & \text { Loss on Sale } & 2,400 & \
\hline & \text { Equipment } & & 93,600 \
\hline & \text { Note Payable } & 79,200 & \
\hline & \text { Cash } & & 79,200 \
\hline
\end{array}$$

Question 4

Which of the following situations is impossible?

Accepted Answer

A)   Book value is greater than residual value.
B)   Book value is equal to the residual value.
C)   Book value is less than residual value.
D)   Book value is less than the original cost.

Question 5

On 30 April 2013, Tilton Products purchased machinery for $88,000. The useful life of this machinery is estimated at 8 years, with an $8,000 residual value.
-Refer to the above data. In the year 2020, Tilton Products sells this machinery for $4,500. At the date of sale, the machinery had been depreciated by Tilton Products to its estimated residual value of $8,000. This sale results in:

Accepted Answer

A)   A $3,500 loss in both the company's financial statements and income tax return.
B)   No gain or loss in either the financial statements or income tax return.
C)   A $3,500 loss in the financial statements, a $3,500 gain in the income tax return.
D)   A $3,500 loss in the financial statements, but no gain or loss in the income tax return.

Question 6

If an asset is determined to be impaired, it should be:

Accepted Answer

A)   depreciated only using the straight-line method.
B)   written up to its historical cost.
C)   reclassified as a liability.
D)   written down to its fair market value.

Question 7

Throughout the current year, Chan Company treated sales taxes paid on purchases of PPE assets as revenue expenditures. As a result, the current year's:

Accepted Answer

A)   Profit is overstated.
B)   Revenue is overstated.
C)   Depreciation expense is understated.
D)   None of the above; payments of sales taxes should be treated as revenue expenditures.

Question 8

Declining balance depreciation
On 6 July 2011, Grayson purchased new machinery with an estimated useful life of 10 years. Cost of the equipment was $80,000, with a residual value of $8,000.
Compute the depreciation on this machinery in 2011 and 2012 using each of the following methods. $\begin{array}{|l|l|l|}
\hline
& \$ 2011 & 2012\ 
\hline\text { (a) } 150 \% \text {-declining-balance, using the half-year } \
\text { convention }
 & \$ \underline{\quad\quad} & \$\underline{\quad\quad}\
\hline \begin{array}{l}
\text { (b) } 200 \% \text {-declining-balance, using the half-year } \
\text { convention }
\end{array} & \$ \underline{\quad\quad}& \$\underline{\quad\quad} \
\hline 
\end{array}$

Accepted Answer

The answer of Declining balance depreciation
On 6 July 2011, Grayson...

Question 9

Once the estimated life is determined for a depreciable asset it can never be changed.

Accepted Answer

A) True 
 B)False

Question 10

Book value represents the cost of an asset that has yet to be allocated to expense.

Accepted Answer

A) True 
 B)False

Question 11

In the fixed-percentage-of-declining-balance depreciation method, the book value of the asset is multiplied by:

Accepted Answer

A)   An increasing depreciation rate.
B)   A constant depreciation rate.
C)   A decreasing depreciation rate.
D)   A rate that changes each year but is determined from a table.

Question 12

Harvard Company purchased equipment having an invoice price of $11,500. The terms of sale were 2/10, n/30, and Harvard paid within the discount period. In addition, Harvard paid a $160 delivery charge, $185 installation charge, and $931 sales tax. The amount recorded as the cost of this equipment is:

Accepted Answer

A)   $11,845.
B)   $12,776.
C)   $11,615.
D)   $12,546

Question 13

Most companies benefit by using accelerated depreciation methods for income tax purposes.

Accepted Answer

A) True 
 B)False

Question 14

Which of the following statements about accelerated depreciation methods is not correct?

Accepted Answer

A)   An accelerated depreciation method may be used on newly acquired assets for income tax purposes.
B)   The method permits "depreciating" the asset to a tax basis of $0 over a specified recovery period.
C)   If a company uses an accelerated depreciation method in its income tax returns, it also must use the accelerated depreciation method in its financial statements.
D)   Most businesses would benefit from using an accelerated depreciation method rather than straight-line depreciation in their income tax returns.

Question 15

Four events pertaining to PPE assets are described below.
(a) Computed depreciation for use in the annual income tax return (a different method is used in the financial statements).
(b) Made a year-end adjusting entry to record depreciation expense for financial reporting purposes.
(c) Sold old equipment for cash at a price below its book value, but above its income tax basis.
(d) Traded an old automobile in on a new one. The dealer granted a trade-in allowance on the old vehicle that was substantially above its book value and its tax basis. However, the trade-in allowance amounted to only a small portion of the price of the new car; most of the purchase price was paid in cash.
Indicate the immediate effects of each of these events upon the financial measurements in the four column headings listed below. Use the code letters, I for increase, D for decrease, and NE for no effect.
Note: Indicate only the immediate effects of each transaction. Do not attempt to anticipate how changes in taxable income will affect future cash flows.
 $\begin{array}{|c|c|c|c|c|}
\hline \text { Transaction } & \text { Current assets } & \text { Profit } & \text { Taxable income } & \begin{array}{c}
\text { Net cash flow } \
\text { (all activities } \
\text { combined) }
\end{array} \
\hline \text { (a) } &\underline{\quad\quad} &\underline{\quad\quad} & \underline{\quad\quad}&\underline{\quad\quad} \
\hline \text { (b) } & \underline{\quad\quad}& \underline{\quad\quad} & \underline{\quad\quad} &\underline{\quad\quad} \
\hline \text { (c) } & \underline{\quad\quad}&\underline{\quad\quad}& \underline{\quad\quad} &\underline{\quad\quad} \
\hline \text { (d) } &\underline{\quad\quad} & \underline{\quad\quad}& \underline{\quad\quad}&\underline{\quad\quad} \
\hline
\end{array}$

Accepted Answer

The answer of Four events pertaining to PPE assets are...

Question 16

Armstrong Company recently acquired a new computer system. Which of the following costs associated with the computer should not be debited to the Equipment account?

Accepted Answer

A)   Insurance coverage purchased by United to cover the computer during shipment from the manufacturer.
B)   Wages paid to system programmers hired to prepare the new computer for use.
C)   Replacement of several circuit boards damaged during installation.
D)   Installation of new electrical power supplies required for the computer.

Question 17

With respect to depreciation policies, the principle of consistency means:

Accepted Answer

A)   A company should use the same depreciation methods in its financial statements that it uses in its income tax returns.
B)   A company should use the same depreciation methods as other companies in the same industry.
C)   A company should use the same depreciation method from year to year for a given PPE asset.
D)   A company should use the same depreciation method in computing depreciation expense on all its assets.

Question 18

Depreciation in financial statements
Dynasty Co. uses straight-line depreciation in its financial statements, with depreciation for a partial year rounded to the nearest full month.
On 28 September 2006 Dynasty purchased equipment at a cost of $140,000. For financial reporting purposes, the useful life of this equipment was estimated at 5 years, with a $30,000 salvage value.
Compute the depreciation expense relating to this equipment that Dynasty will recognize in its financial statements in the following years. If no depreciation will be recognized in a particular year, write zero. $$\begin{array} { | l | l | } 
\hline \text { Year } & \text { Amount } \
\hline & \
\hline 2006 & \$ \
\hline 2007 & \$ \
\hline 2008 & \$ \
\hline 2009 & \$ \
\hline 2010 & \$ \
\hline 2011 & \$ \
\hline
\end{array}$$

Accepted Answer

The answer of Depreciation in financial statements
Dynasty Co. uses straight-line...

Question 19

Capital expenditures are recorded as:

Accepted Answer

A)   An expense.
B)   An asset.
C)   A liability.
D)   Income.

Question 20

It is an acceptable accounting practice to treat an expenditure that is not material in dollar amount as an expense of the current period even though the expenditure may benefit several periods.

Accepted Answer

A) True 
 B)False

Exam 9: Property, Plant, and Equipment, Intangible Assets and Natural Resources

Under the half-year convention, six months' depreciation is recorded on an asset in the year of acquisition and in the year of retirement regardless of the month in which the asset is actually purchased or retired.

Which of the following situations is impossible?

If an asset is determined to be impaired, it should be:

Throughout the current year, Chan Company treated sales taxes paid on purchases of PPE assets as revenue expenditures. As a result, the current year's:

Once the estimated life is determined for a depreciable asset it can never be changed.

Book value represents the cost of an asset that has yet to be allocated to expense.

In the fixed-percentage-of-declining-balance depreciation method, the book value of the asset is multiplied by:

Most companies benefit by using accelerated depreciation methods for income tax purposes.

Which of the following statements about accelerated depreciation methods is not correct?

Armstrong Company recently acquired a new computer system. Which of the following costs associated with the computer should not be debited to the Equipment account?

With respect to depreciation policies, the principle of consistency means:

Capital expenditures are recorded as:

It is an acceptable accounting practice to treat an expenditure that is not material in dollar amount as an expense of the current period even though the expenditure may benefit several periods.