Flashcards in Chapter 11 Deck (137):
Straight-line depreciation is calculated as the depreciable base divided by:
the estimated useful life of the asset
The amount of use that the company expects to obtain from an asset before disposing of it is referred to as the __________ life of the asset.
What is the impairment for assets to be held and used?
The excess of book value over the fair value.
What is the impairment for goodwill?
The excess of book value over implied fair value.
What is the impairment for assets to be sold?
The excess of book value over fair value less costs to sell.
The cost of a natural resource less its anticipated residual value is called the __________ __________.
The allocation of the cost of an intangible asset over its useful life is called:
What assets are required to be tested for impairment annually?
1. intangible assets with indefinite lives
What is depreciation?
Allocation of the cost of a tangible fixed asset
What is depletion?
Allocation of the cost of natural resources
What is amortization?
Allocation of the cost of an intangible asset
An intangible asset that is measured as the consideration paid less the fair value of the net identifiable assets is called:
The useful life of an intangible asset may be limited by what type of provisions?
The residual value of an intangible asset is usually:
The depreciation method that allocates an equal amount of the depreciable base to each year of the asset's service life is the:
What is service life?
The estimated use that the company expects to receive from the asset.
What is allocation method?
The pattern in which the usefulness is expected to be consumed.
What is the allocation base?
The value of the usefulness that is expected to be consumed.
Intangible assets with __________ useful lives should be tested for impairment annually.
Under what circumstances is depreciation included in inventory?
1. When manufactured goods are not sold at the end of the period
2. In a manufacturing environment
Expenditures classified as __________ involve the replacement of a major component of an asset.
The allocation of the cost of an asset through depreciation, depletion, or amortization is an example of __________ principle.
The two categories for intangible assets are:
1. intangibles with finite lives
2. intangibles with indefinite lives
When should property to be held and used be tested for impairment?
When events or circumstances indicate book value may not be recoverable
When should indefinite life intangible assets other than goodwill be tested for impairment?
At least annually, or more frequently if indicated
When should assets to be sold be tested for impairment?
When considered held for sale
The formula for the sum-of-the-year's digits method is the depreciable base times the depreciation rate, which is calculated as:
the number of years remaining in the asset's life divided by the sum-of-the-years' digits.
What is the journal entry to record the allocation of the cost of a natural resource for the period?
Credit: Natural Resource
A new major component that is added to an existing asset is considered a(n) __________ and should be capitalized.
Consistent with the new ASU on goodwill impairment testing, a company may omit annual testing for impairment based on its assessment of:
An impairment loss for intangible assets with indefinite lives is calculated as the book value less the:
The objective in choosing an appropriate depreciation method is to properly allocate the cost of the asset to the __________ provided by the asset during its life.
What are the issues when accounting for impairments?
1. When to recognize the impairment
2. How to measure the impairment loss
When the two-step process is used for impairment losses, the __________ estimates of cash flows are used in step 1 to determine whether an impairment loss is indicated, but the __________ estimates of cash flows are used to determine the amount of the loss.
T/F: Repairs and maintenance expenditures related to an asset do not increase future benefits.
What occurs if an impairment loss is recognized for an intangible asset with a finite life?
1. The written down book value is the new cost basis for future amortization
2. Recovery of the impairment is prohibited
Under __________ impairment losses must be reversed, whereas under __________ impairment losses cannot be reversed.
In measuring an impairment loss, the difference between the asset's book value and its fair value is:
recognized as an impairment loss
Raphael Corp. incorrectly expensed a major addition to equipment when the company should have capitalized the expenditure. What are the financial statement effects of this error?
1. Assets are understated.
2. Net income is understated.
The amount of time an asset will last is its __________ life, whereas the amount of time the company expects to use the asset to generate revenues is referred to as its __________ life.
Depreciation is a process of cost __________, and not a process of valuation.
The journal entry to record the amortization of an intangible asset is:
Debit: Amortization expense
Credit: Intangible asset
When an asset has a significant decline in value and is written down, this is called __________.
What is the sum-of-the-years'-digits method?
Accelerated method that multiplies the depreciable base by a fraction that declines each year.
What is the straight-line method?
Method that allocates an equal portion of the depreciable base to each year of the asset's service life.
What is the declining balance method?
Accelerated method that multiplies a constant percentage rate by the decreasing book value.
A company discovers a material error in a previous year's financial statements. If retained earnings requires correction. It is reported as a __________ __________ adjustment.
No amortization is recorded for:
intangible assets with indefinite lives
The first step in determining whether an impairment loss should be recorded is to determine if the undiscounted sum of estimated future cash flows from an assets is less than the asset's:
A change in depreciation method is considered a change in accounting __________ that is achieved by a change in accounting principle.
What items are considered changes in estimates that would be treated on a prospective basis in the current period and future periods?
1. Change in useful life of an asset
2. Change in residual value of an asset
If an intangible right is successfully defended, the legal costs should be:
The formula for calculating declining balance depreciation is the depreciation rate per year times:
the book value at the beginning of the year
__________ uses a cash-generating unit, while __________ uses a reporting unit for the level of testing for goodwill impairment.
Under the __________, impairment loss is measured as the difference between book value and fair value, while under __________ the impairment loss is the difference between book value and the recoverable amount.
If a company bases depreciation expense on the life of machine in hours, and depreciates the machine for the number of hours used during the year, it is using the __________ method of depreciation.
The formula to calculate the depletion rate of a natural resource is the __________ divided by the estimated extractable amount of natural resources.
For IFRS reporting, living animals and plants, including trees in a timber tract or fruit orchard, are referred to as __________ assets.
T/F: The sum-of-the-years'-digits (SVD) method of depreciation is an accelerated method in which depreciation expense decreases each year.
Under U.S. GAAP, if a company recognizes an impairment loss,
future recovery of the impairment loss is prohibited
Which methods are acceptable for recording the cost of improvements to an asset?
2. Capitalization of new cost
3. Reduction of accumulated depreciation
What are repairs and maintenance.
Expenditures to maintain a given level of benefit
What are additions?
Expenditures to acquire a new major component to an existing asset
What are improvements?
Expenditures to replace a major component of an asset
What are rearrangements?
Expenditures to restructure an asset without making any improvements to the asset.
T/F: Expenditures that qualify as an addition should be expensed in the period incurred.
For cost allocation purposes, depletion of natural resources typically follows a(n) __________ approach, whereas amortization of intangibles typically follows a(n) __________ approach.
The formula to calculate depreciation for the units-of-production method is ((cost - residual value)/total estimated production) x __________.
current-year activity or production
Under the standard jointly proposed by IASB and FASB, costs associated with obtaining and fulfilling long-term contracts may be __________.
The method of amortization used for intangible assets:
1. is most commonly straight-line
2. should reflect the pattern of use of the asset
What occurs when group depreciation is used, and an asset is sold?
1. The asset's cost is removed from the books
2. No gain or loss is recorded
U.S. GAAP requires property, plant, and equipment to be reported at __________ value, whereas IFRS allows property, plant, and equipment to be reported at either __________ value or __________ value.
fair & book
Expenditures for repairs and maintenance should be __________ in the period incurred.
For property, plant, and equipment, IFRS allows the __________ option.
Consistent with __________, goodwill must be tested annually for impairment, while under __________, goodwill must only be tested if qualitative evaluations indicate that it is more likely than not that goodwill is impaired.
What occurs when the revaluation option is used for IFRS reporting?
1. A revaluation resulting in a write-down is included as expense on the income statement
2. A revaluation surplus is included in other comprehensive income
What should be considered when choosing an allocation method for a long-term asset?
1. a systematic and rational allocation method
2. a pattern in which the services are obtained from its use
An asset impairment for assets to be held for sale is measured as the excess of the:
book value over the fair value less costs to sell
The __________ amount is the amount of consideration a company expects to receive from the sale of goods or services to which capitalized contract obtainment and fulfillment costs relate less costs related directly to providing those goods or services.
What should be included on a disclosure note to describe an impairment loss?
1. The method used to determine fair value
2. The description of the impaired asset
3. The facts and circumstances leading to the impairment
4. The amount of loss
__________ has a specific accounting standard that addresses agricultural issues such as accounting for biological assets.
When a company uses accelerated depreciation, it is a common practice to change to which depreciation method approximately halfway through the asset's life?
Which accounting standard measures goodwill impairment as the difference between the book value of goodwill and the fair value of good will?
U.S. GAAP ONLY
A(n) __________ __________ is an operating segment of a company or a component of an operating segment for which discrete financial information is available and management regularly reviews the operating results of that component.
Consistent with the new ASU on goodwill impairment testing, step one of the impairment test is only required if relevant events and circumstances indicate that it is more likely than not that the __________ value is less than __________ value.
Tax laws allow the use of __________ __________ for oil, gas, and most mineral resources, wherein the producer is allowed to deduct the greater of the cost-based depletion or a fixed percentage of gross income as depletion expense.
A company can manipulate income by overstating an impairment loss. The financial statement effects on this are:
1. future income is unrealistically high
2. future depreciation, depletion, or amortization is unrealistically low
3. current year income is low
The journal entry to record an impairment loss of goodwill is:
Debit: Loss on impairment of goodwill
Under what circumstances are accelerated deprecation methods most appropriate?
1. For an asset that will be used less in the later years of its life
2. For an asset that will be used extensively in earlier years of its life.
Consistent with U.S. GAAP, timber tracts are valued at cost less accumulated __________.
The term "more likely than not" describes a likelihood that is:
more than 50%
FASB changed its requirement to test goodwill annually for impairment because of the:
cost and complexity of applying step ONE of the impairment test
The __________ depreciation method is used when assets have similar service lives and other attributes, whereas the __________ depreciation method is used for dissimilar assets.
What expenditures are classified as repairs and maintenance for a vehicle?
1. engine tune-up
2. routine oil-change
Group depreciation is calculated by:
multiplying the group depreciation rate by the total cost of assets in the group for that period
Expenditures subsequent to acquisition may be properly capitalized when they increase the asset's useful life or increase its productive capacity. However, most companies set thresholds for capitalizing these expenditures based on:
A subsequent expenditure for an asset increases the future benefits of the asset if it:
1. increases the operating efficiency of the asset
2. increases the quality of goods or services by the asset
3. extends the asset's useful life
For IFRS reporting, intangible assets may be valued at:
1. fair value
2. cost less accumulated amortization
Although activity-based depreciation methods are theoretically superior to time-based methods, activity-based methods are:
1. difficult to apply in practice
2. too costly to use
If equipment used in excavation of natural resources is not movable from site to site, it should be:
depreciated over the shorter period of its useful life or the life of the natural resource
What are the financial statement effects of using the declining balance method of depreciation as compared to the straight-line method in the first year of an asset's life?
1. Net income is lower
2. Total assets are lower
Subsequent to acquisition, an IFRS-reporting company may value its property, plant, and equipment at:
either at fair value or cost less accumulated depreciation
The costs of restructuring an asset so that it has new capabilities and will prolong the use of the asset are classified as rearrangements and are:
A common practice for companies that acquire assets during the year is to record depreciation using:
the half-year convention
What events would require the investigation of a possible impairment?
1. A significant decrease in market price.
2. A significant adverse change in how the asset is being used
3. A significant adverse change in legal factors or in the business climate
4. An accumulation of costs significantly higher than the amount originally expected for the acquisition or construction of an asset
5. A current-period loss combined with a history of losses or a projection of continuing losses associated with the asset
6. A realization that the asset will be disposed of significantly before the end of its estimated useful life
Both U.S. GAAP and IFRS prohibit the ___________ of goodwill impairment losses.
What items are used to determine the present value of cash flows when the expected cash flow approach is used?
probabilities and the risk-free interest rate
Consistent with IFRS, biological assets are valued at:
fair value less estimated costs to sell
For a manufacturing company, what type of cost is factory depreciation expense?
The composite depreciation method is used when assets:
are dissimilar and have different service lines
__________ accounting standards allow intangible assets to be reported at fair value subsequent to acquisition.
According to a 2009 survey of 160 IFRS-reporting companies, the percentage of companies that selected the revaluation method for reporting PP&E was:
less than 10 percent
Consistent with the proposed standard on revenue recognition, capitalized costs associated with obtaining and fulfilling long-term contracts are impaired and a loss is recognized if the intangible assets' book value exceeds:
its recoverable amount
For IFRS reporting, the revaluation method is possible only if:
fair value can be determined by reference to an active market
__________ are usually considered to have indefinite lives. (Intangible asset)
T/F: Companies must use the same depreciation method for all assets.
__________ requires that 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.
Consistent with IFRS, the revaluation option can be applied to:
all intangible assets other than goodwill
Under IFRS reporting, the costs of successfully defending an intangible right are usually:
The group and composite methods of depreciation are similar because they both:
apply straight-line depreciation to the assets based on average service lives of the assets
The most common method used to allocate the cost of natural resources is the __________ method.
What is the purpose of group or composite depreciation?
to reduce record-keeping costs of determining depreciation
Under the revaluation method, if the fair value of a PP&E asset declines and the revaluation surplus account relating to the asset has a credit balance, the loss is debited to:
revaluation surplus to the extent of the existing credit balance
If goodwill impairment is indicated, it is measured as the excess of the book value of the asset over its:
Evans Corp. incorrectly expensed $10,000 in the previous year when it purchased equipment. The entry to correct this error will include:
Credit: Retained Earnings
The group depreciation method defines the collection of depreciable assets as those that:
share similar service lines and attributes
Theoretically, which depreciation method provides the best estimate of expense to correspond with the usage of the asset?
If there is a change in an intangible asset's estimated useful life, the change is treated:
on a prospective basis
Impairment losses can be used to manipulate earnings by:
writing off impairments in the current year and taking losses to decrease future depreciation and increase future earnings
Companies use accelerated depreciation for tax purposes because:
it reduces taxable income in the early years of the asset's life and provides better cash flows
For assets using the group or composite method of depreciation, the assets will be depreciated over:
the average service life of assets in the group
The key factor in classifying items as repairs and maintenance is that:
future benefits are not provided beyond those originally anticipated from the asset
For intangible assets used in the manufacturing of a product, amortization expense for the period is:
included in the cost of inventory
Consistent with IFRS, changes in the fair value of biological assets affect:
The most frequently used depreciation method for financial reporting is the __________ method.
Prior to 2012, goodwill had to be tested for impairment: