Chapter 11 Flashcards

Question

can you depreciate something all the way

Answer 1

NOOOOO you can only record depreciation expense up to the depreciable base if you beginning BV x depreciation rate per year exceeds the difference left over for the useful life of the asset, you record remaining depreciation for whats left, the following year might be 0.

Answer 2

- straight line is easy: results in less depreciation in the earlier years of an asset's life compared to accelerated methods - positive effect on net income in earlier years -negative effect on net income in later years

Answer 3

result in more depreciation in the earlier years of an asset's life - taxation benefits derived through greater depreciation deduction - unlike the LIFO conformity rule for inventory valuation, no constraints in using different depreciation methods for financial reporting and tax reporting

Answer 4

provides a better match of revenues and expenses

Answer 5

1) component depreciation is allowed but is not often used in practice 2) depreciable base is determined by subtracting estimated residual value from cost 1) various depreciation methods are used in practice

Answer 6

1) each component of an item of PP&E must be depreciated separately if its cost is significant in relation to the total cost of the item 2) depreciable base is determined by subtracting estimated residual value from cost; review of residual values at least annual is required 1) specifically mentions three depreciation methods: straight line, units of production, diminishing balance method

Answer 7

acquisition and/or disposal occurs at times other than beginning or the end of a company's fiscal year

Answer 8

a convention where one-half of a full year's depreciation is recorded in the year of acquisition and another half in the year of disposal

Answer 9

gain or loss recognized for the difference between the consideration received and the assets book value Debit: selling price (cash) - consideration received Debit: AD Credit: original cost Will either debit loss or credit gain (compare BV and cash recieved) if BV is less than cash thats a gain if BV is greater than cash, thats a loss

Answer 10

this means ...net increase in the book value of total assets is an accounting gain (not an economic gain)

Answer 11

there is a net decrease in the book value of total assets

Answer 12

1) management commits to a plan to sell the asset 2) the asset is available for immediate sale in its present condition 3) an active plan to locate a buyer and sell the asset has been initiated 4) the completed sale of the asset is probable and typically expected to occur within one year 5) the asset is being offered for sale at a resonable price relative to its current fair value 6) management's actions indicate the plan is unlikely to change significantly or be withdrawn

Answer 13

reported at lower of its current book value or its fair value less any costs to sell

Answer 14

at the time of retirement: - the asset account and the corresponding accumulated depreciation account are removed from the books - a loss equal to the remaining book value of the asset is recorded

Answer 15

- depreciate assets collectively rather than individually to reduce record keeping costs 1) group depreciation method: collection of depreciable assets that share similar service lives and other attributables 2) composite depreciation method: collection of depreciable assets that are physically dissimilar but aer aggregated anyway to gain the convience of a collective depreciation calculation. For example, all of the depreicable assets in one manufacturing plant

Answer 16

total depreciation per year (straight line)/total cost

Answer 17

total depreciable base/total depreciation for the year

Answer 18

any actual gain or loss is included in the AD account delivery truck cost 15,000 sold for 3,000 debit: cash 3,000 Debit: AD 12,000 Credit: vehicles 15,000

Answer 19

possibility of changes in constitution of asset group as new assets are added and others are retired or sold additions are recorded by increasing group asset account for the cost of the addition after group or composite rate and the average service life are determined, they normally are continued despite the addition and disposition of individual assets no gain or loss is recorded when a group or composite asset is retired/sold

Answer 20

a company reports PP&E in the balance sheet at cost less AD GAAP prohibits revaluation

Answer 21

allows co. to report PP&E at book value or at its fair value (revaluation) if co chooses revaluation, all assets within a class of PP&E must be revalued on a regular basis

Answer 22

uses activity based unit method - this is because usefulness of NR is directly related to the amount of the resources extracted service life: estimated amount of NR to be extracted depletion base = cost - residual value depletion per unit = depletion base/estimated extractable units depletion rate: restoration/cost of acquistion JE: Debit: depletion (depletion rate x units extracted) credit: NR

Answer 23

if the asset is moveable and useable on future projects: assets depreciable base should be allocated over its useful life if the asset is not movable: the asset should be depreciated over its useful life or the life of the NR (whichever is shorter) units of production method often used to determine depreciation on assets used in the extraction of NR depreciation per unit = depreciation base/estimated extractable units

Answer 24

depreciation per ton = 600,000-60,000/1,00,000 = .54 per ton 600,000 is the purchase of equipment for excavation 60,000 is the residual value of the equipment 1,000,000 is the payment for right to explore copper deposit calculate depreciation = .54 per ton x 300,000 tons how much was actually extracted is the 300,000

Answer 25

These assets, such as a timber tract or a fruit orchard, are valued at cost less accumulated depletion or depreciation

Answer 26

Valued at fair value less estimated costs to sell, with changes in fair value included in the calculation of net income

Answer 27

Living animals and plants, including the trees in a timber tract or in a fruit orchard, are referred to as biological assets

Answer 28

- Legal, regulatory, or contractual provisions often limit the useful life of an intangible asset. * Useful life might sometimes be less than the asset’s legal or contractual life.

Answer 29

- Expected residual value of an intangible asset usually is zero. - The residual value is not zero if at the end of the asset’s useful life to the reporting entity the asset will benefit another entity

Answer 30

The method of amortization should reflect the pattern of use of the asset in generating benefits

Answer 31

debit: amortization expense credit: IA

Answer 32

Debit: cash Credit: Patent (amortization expense for 8yrs x 5yrs, which is what already passed) Credit: gain on sale of patent (selling price - BV)

Answer 33

- Amortization of capitalized software development costs begins after the point of technological feasibility and before the product is available for sale. - The periodic amortization percentage is: 1) Percentage-of- revenue method, which is the ratio of current revenues to current and anticipated revenues OR 2) Straight-line method

Answer 34

ratio of current revenues to current and anticipated revenues sales in 2025/[sales in 2025 + estimated sales for future period]

Answer 35

1/4 = .25 x 800,000 = 200,000

Answer 36

of the percentage revenue method and straight line method is used

Answer 37

debit: amortization expense credit: software development costs

Answer 38

will have indefinite useful life so no foreseeable limit on the period of time over which the asset is expected to contribute to cash flows of the entity does not necessarily mean permanent they are subject to impairment examples: goodwill, trademarks, tradenames

Answer 39

prohibits revaluation of any IA's

Answer 40

allows a co. to value an intangible asset subsequent to initial valuation at: (1) cost less accumulated amortization or (2) fair value, if fair value can be determined by reference to an active market. Goodwill, however, cannot be revalued

Answer 41

accounted for prospectively reflected in FS of current/future period disclosure note should describe the effect of a change in estimate for the current period on: net income related per share amounts KNOW how to do these calculations --> in class packet?

Answer 42

prospectively requires clear justification as to why the new method is preferable --> because this change in estimate is a result of a change in acct principle KNOW how to do --> like the hw problem

Answer 43

- Computational errors in the calculation of depreciation, depletion, or amortization. - Mistakes made in determining whether expenditures should be capitalized or expensed. Treatment of material errors occurring in a previous year: * Previous years’ financial statements are retrospectively restated. * Account balances are corrected. * If retained earnings requires correction, the correction is reported as a prior period adjustment. * A note describes the nature of the error and the impact of the correction on income

Answer 44

implicit assumption in allocating to cost of an asset over its useful life: - no significant reduction in the anticipated total benefits or service potential of the asset - situations can arise that cause a significant decline or impairment of those benefits or service protentials

Answer 45

held/used OR being held for sale

Answer 46

should be written down if there has been a significant IV write down provides info about the future cash flows that a co. can generate from using the asset even if the significant IV has occurred, often is difficult to measure the amount of required write down

Answer 47

subject to depreciation, depletion, amortization

Answer 48

not subject to amortization

Answer 49

only if events or changes in circumstances indicate that the book value of the asset or asset group may not be recoverable under GAAP = assets are grouped at the lowest level for which identifiable cash flows are largely independent of the cash flows of other assets. Said another way, assets should not be grouped for determining impairment unless those assets are dependent on on another

Answer 50

- signifcant decrease in market price - significant adverse change in how the asset is being used or in its physical condition - significant adverse change in legal factors or in the business climate - accumulation of costs significantly higher than the amount originally expected for the acquisition or construction of an asset - current period loss combined with a history of losses or a projection of continuing losses associated with the asset - realization that the asset will be disposed of significantly before the end of its estimated useful life

Answer 51

1) recoverability test: is the asset impaired: An impairment occurs when the undiscounted sum of estimated future cash flows from an asset is less than the asset’s book value 2) measurement:If impaired (from Step 1), record an impairment loss for the amount by which the asset’s fair value is less than its book value. * If not impaired (from Step 1), no impairment loss is recorded

Answer 52

if impairment loss is recognized, written down book value becomes new cost base for future allocation FV: - amount at which asset could be bought or sold in a current transaction between willing parties - if FV is not determinable, must be estimated - FV often is estimated as the discounted present value of future cash flows

Answer 53

undiscounted - estimates of cash flows are used to determine whether an impairment loss has occurred (these are not adjusted for time value of money) Discounted estimates of cash flows often are used to estimate fair value to determine the amount of the loss The note should include: Description of the impaired asset or asset group * The facts and circumstances leading to the impairment. * The amount of the loss if not separately disclosed on the face of the income statement. * The method used to determine fair value

Answer 54

debit: loss on impairment debit: AD credit: factory assets

Answer 55

when to test: events or changes in circumstances indicate that the BV might not be recoverable recoverability: impairment loss is required when the undiscounted sum of estimated future cash flows from an asset is less than assets BV measurement: impairment loss is amount by which FV is less than BV subsequent reversal of loss: prohibited

Answer 56

when to test: assets must be assessed for indicators of impairment at the end of each reporting period --> indicators of impairment are similar to US GAAP recoverability: there is no equivalent recoverabiltiy test --> impairment loss is required when the recoverable amount (higher of assets value in use and FV less costs to sell) is less than the assets BV -- asstes value in use is calc by present value of estimated future cash flows measurement: impairment loss is the amount by which the recoverable amount is less than the BV subsequent reversal of loss: required if the circumstances that caused the impairment are resolved

Answer 57

tested for impairment annually and more frequently if events change co. has option of first undertaking a qualitative assessment to avoid the quantitative test measurement of impairment loss is one step if FV is less than BV --> impairment loss no recoverability test if impairmnet loss recognized, written down book value becomes the new cost base for future cost allocation

Answer 58

its cost (unlike other assets) - cant be directly associated with any specific idenitifiable right - is not separable from the company as a whole level of testing is the reporting unit

Answer 59

compare value of reporting unit with its BV if the FV of the reporting unit is less than the BV --> impairment loss is recognized for the difference BUT recognized impairment loss cant exceed BV of goodwill = If goodwill is tested for impairment at the same time as other assets of the reporting unit, the other assets must be tested first, and any impairment losses and asset write-downs are recorded prior to testing goodwill. * Subsequent reversal (recovery) of a previous goodwill impairment loss is not allowed

Answer 60

immediatetly sell in present condition for which sale is probable of BV exceeds FV less costs to less --> impairment loss assets are NOT depreciated or amortized - reported separately in BS

Answer 61

expeditures that produce benefits beyond the current fiscal year are capitilized (increase in net assets) expenditures that maintain a given level of benefits are expensed in the period they are incurred capitalizing: increasing assets BV + creating a new asset expensing: maintaining given level of benefits

Answer 62

- an extension of the useful life of the asset - an increase in the operating efficiency of the asset: increase quantity of goods or services produced, decrease in future operating costs - increase in the quality of goods or services produced by asset

Answer 63

repairs and maintenance additions improvements rearragnements

Answer 64

- Made to maintain a given level of benefits provided by the asset. * Do not increase future benefits. * Future benefits are not provided beyond those originally anticipated. * Expenditures for these activities should be expensed in the period incurred Example: The cost of an engine tune-up or the repair of an engine part for a delivery truck allows the truck to continue its productive activity. If the maintenance is not performed, the truck will not provide the benefits originally anticipated. In that sense, future benefits are provided; without the repair, the truck will no longer operate.

Answer 65

Adding a new major component to an existing asset should be capitalized because future benefits increased example: Adding a refrigeration unit to a delivery truck increases the capability of the truck, thus increasing its future benefits. * Capitalized cost includes all necessary expenditures that are required to bring the addition to a condition and location for use. Example: For a building addition, this might include the costs of tearing down and removing a wall of the existing building.

Answer 66

Involves the replacement of a major component of an asset. Replacement * New component with the same characteristics as the old component. * New component with enhanced operating capabilities. * In either case, the cost of the improvement usually increases future benefits. * It should be capitalized by increasing the book value of the related asset and depreciated over the useful life of the improved asset Example: An existing refrigeration unit in a delivery truck could be replaced with a new but similar unit or with a new and improved refrigeration unit. Methods used to record the cost of improvements * Substitution. * Capitalization of new cost. * Reduction of accumulated depreciation.

Answer 67

- Disposition of the old component. * Acquisition of the new component JE: debit: cash Debtit: AD debit: loss on disposal credit: buildings (old) debit: buidlings (new) credit: cash

Answer 68

- The cost of the improvement is included as a debit to the related asset account. * The original cost and accumulated depreciation of the original component are not removed. * Acceptable only if the book value of the original component has been reduced to an immaterial amount through prior depreciation. debit: buidlings credit: cash

Answer 69

Asset account is left unaltered but its related accumulated depreciation is decreased. * Book value is same as in capitalization of cost method, but the cost and the accumulated depreciation amounts both differ under the two methods. debit: AD credit: cash

Answer 70

Expenditures made to restructure an asset without addition, replacement, or improvement Objective: * Create a new capability for the asset and not necessarily extend its useful life. Examples: * The rearrangement of machinery on the production line to increase operational efficiency. * The relocation of a company’s operating plant or office building. If rearrangement expenditures are material If they clearly increase future benefits: * They should be capitalized and then expensed in the future periods benefited. If rearrangement expenditures are not material or if it’s uncertain that future benefits have increased * They should be expensed in the period incurred

Answer 71

If an intangible right is successfully defended * The litigation costs should be capitalized and amortized over the remaining useful life of the related intangible. If an intangible right is unsuccessfully defended * The litigation costs should be expensed immediately as incurred because they provide no future benefit. * The book value of any intangible asset should be reduced to realizable value.

Chapter 11 Flashcards

(95 cards)