FAR 16 - PPE 3 - Depreciateion Methods/IFRS Flashcards Preview

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Flashcards in FAR 16 - PPE 3 - Depreciateion Methods/IFRS Deck (37):
1

A building suffered uninsured water and related damage. The damaged portion of the building was refurbished with upgraded materials. The cost and related accumulated depreciation of the damaged portion are identifiable.

To account for these events, the owner should:
A. Capitalize the cost of refurbishing and record a loss in the current period equal to the carrying amount of the damaged portion of the building.
B. Capitalize the cost of refurbishing by adding the cost to the carrying amount of the building.
C. Record a loss in the current period equal to the cost of refurbishing, and continue to depreciate the original cost of the building.
D. Record a loss in the current period equal to the sum of the cost of refurbishing and the carrying amount of the damaged portion of the building.

A. When the portion of an asset that is removed from a larger asset has identifiable costs and accumulated depreciation amounts, those amounts are removed from the books. The difference between these two amounts is the carrying value of the damaged portion of the larger asset. There is no insurance. Therefore, the carrying value of the damaged portion is written off as a loss. The replacement assets are capitalized at cost. The entries are:

Portion removed New materials
Loss Asset
Accumulated depreciation Cash
Asset

2

A building suffered uninsured fire damage. The damaged portion of the building was refurbished with higher quality materials. The cost and related accumulated depreciation of the damaged portion are identifiable. To account for these events, the owner should:
A. Reduce accumulated depreciation equal to the cost of refurbishing.
B. Record a loss in the current period equal to the sum of the cost of refurbishing and the carrying amount of the damaged portion of the building.
C. Capitalize the cost of refurbishing, and record a loss in the current period equal to the carrying amount of the damaged portion of the building.
D. Capitalize the cost of refurbishing by adding the cost to the carrying amount of the building.

C. When the cost and accumulated depreciation of a component or portion of a larger asset is identifiable, and that component or portion is replaced, the replacement is treated as two separate transactions:
(1) disposal of the old component (for zero proceeds in this case, due to the fire damage) and
(2) purchase of the new component.

Thus, a loss equal to the book value of the old component is recognized for (1) and the amount paid to purchase the new component is capitalized as a separate purchase for (2).

3

On January 1, 2005, Dix Co. replaced its old boiler. The following information was available on that date:

Carrying amount of old boiler $ 8,000
Fair value of old boiler 2,000
Purchase and installation price of new boiler 100,000

The old boiler was sold for $2,000. What amount should Dix capitalize as the cost of the new boiler?

$100,000
The disposal of the old boiler and purchase of the new boiler are separate transactions. The loss on disposal has no effect on the capitalized cost of the new boiler, which is recorded at its $100,000 purchase cost.

4

In which of the following situations is the units of production method of depreciation most appropriate?
A. An asset's service potential declines with use.
B. An asset's service potential declines with the passage of time.
C. An asset is subject to rapid obsolescence.
D. An asset incurs increasing repairs and maintenance with use.

A. This method is most appropriate when the service potential of an asset can be estimated reliably in terms of a physical variable, such as miles to be driven, or number of units of output that can be produced by the asset.

Over time, as more units are produced, the service potential of the asset declines because the total number of units that can be produced is finite. Over time, the number of units that can be produced by the asset in the future declines. The primary causative agent for depreciation under the units of production method is, thus, the actual use of the asset in production.

5

How is annual depreciation calculated under the units of production (activity) method depreciation?

Annual depreciation under this method is:
[(Cost-salvage value)/(Total estimated production)](units produced year).
The quantity in square brackets is the rate of depreciation per unit.

6

A manufacturing firm purchased used equipment for $135,000. The original owners estimated that the residual value of the equipment was $10,000. The carrying amount of the equipment was $120,000 when ownership transferred. The new owners estimate that the expected remaining useful life of the equipment was 10 years, with a salvage value of $15,000. What amount represents the depreciable base used by the new owners?

$120,000
The purchase price of the asset acquired less its salvage value is the asset's depreciable cost. In this case, total depreciation on the asset is limited to $120,000 ($135,000 purchase price-$15,000 salvage value). The cost to the seller and the previous salvage value are not relevant to the new owner.

7

Zahn Corp.'s comprehensive Balance Sheet at December 31, 2005 and 2004 reported accumulated depreciation balances of $800,000 and $600,000, respectively. Property with a cost of $50,000 and a carrying amount of $40,000 was the only property sold in 2005.

Depreciation charged to operations in 2005 was:
A. $190,000
B. $200,000
C. $210,000
D. $220,000

C. The accumulated depreciation on the property sold was $10,000 ($50,000 cost less $40,000 carrying value). The sale of property requires that the accumulated depreciation on the property be removed from the accounts.

Thus, the $10,000 amount is a decrease in accumulated depreciation. With an overall increase of $200,000 in accumulated depreciation during the period ($800,000-$600,000), depreciation must have been $210,000 ($200,000 + $10,000).

8

Ichor Co. reported equipment with an original cost of $379,000 and $344,000 and accumulated depreciation of $153,000 and $128,000, respectively, in its comparative financial statements for the years ended December 31, 2005 and 2004.
During 2005, Ichor purchased equipment costing $50,000 and sold equipment with a carrying value of $9,000.

What amount should Ichor report as depreciation expense for 2005?
A. $19,000
B. $25,000
C. $31,000
D. $34,000

C. Net equipment at end of 2004: $344,000-$128,000 = $216,000
Equipment purchase 50,000
Book value of equipment sold (9,000)
Depreciation in 2005 ?
Equals net equipment at end of 2005: $379,000-$153,000 = $226,000

Solving for depreciation yields $31,000 depreciation for 2005.

9

On January 2, 2005, Lem Corp. bought machinery under a contract that required a down payment of $10,000, plus 24 monthly payments of $5,000 each, for total cash payments of $130,000.

The cash-equivalent price of the machinery was $110,000. The machinery has an estimated useful life of 10 years and estimated salvage value of $5,000. Lem uses straight-line depreciation.

In its 2005 Income Statement, what amount should Lem report as depreciation for this machinery?

$10,500
The capitalized cost of the equipment is $110,000, not the total of the cash payments to be made. The latter amount includes interest.

Thus, annual depreciation is $10,500:
($110,000-$5,000)/10.

10

T/F: The service hours and units of production methods yield the same amount of depreciation for a period.

False

11

T/F: The service hours and units of production methods use constant rates of depreciation.

True

12

T/F: The minimum book value for an asset with a positive salvage value is zero.

False

13

T/F: Depreciation expense represents the decline in the utility of an asset for a period.

False

14

T/F: Land does not have depreciable cost.

True

15

T/F: Book value always includes salvage value for an asset with a positive salvage value.

True

16

How is the depreciation calculated under the double declining balance method?

Depreciation in year 1 = Cost(2/N)
Depreciation in year 2 = (Cost − depreciation in year 1)(2/N)
Depreciation in year 3 = (Cost − depreciation in years 1 and 2)(2/N)

The rate (2/N) is twice the straight-line rate. N=useful life in years.

17

When calculating depreciation under the 150% of declining-balance method, what is different from the double declining balance method?

The calculations are the same as for double-declining balance except that (1.5/N) is the rate used.

Depreciation in year 1 = Cost(1.5/N)
Depreciation in year 2 = (Cost − depreciation in year 1)(1.5/N)
Depreciation in year 3 = (Cost − depreciation in years 1 and 2)(1.5/N)

The rate (1.5/N) is twice the straight-line rate. N=useful life in years.

18

How is depreciation calculated using the sum-of-the-years' digits method?

1. First the sum of years' digits must be calculated by using the formula: SYD = (N(N+1)/2
N= useful life in years
SYD is the denominator of the fraction used each year to compute depreciation. The numerator is the number of years remaining at the beginning of the year.

2. Year 1 Depreciation: (N/SYD)(Cost − Salvage Value)
Year 2 Depreciation: ((N-1)/SYD)(Cost − Salvage Value))
Year X Depreciation: (N-X/(SYD))(Cost − Salvage Value))
X = number of years

19

T/F: An asset is purchased by a calendar or fiscal year firm for $60,000 on October 1, 1997. The asset has a useful life of four years and salvage value of $10,000. Depreciation for 1998 under the double declining balance method is $26,250.

True

20

T/F: The declining balance methods depreciate assets to zero because they do not subtract salvage value when computing depreciation.

False

21

T/F: One of the advantages of the composite method of depreciation is that accumulated depreciation records are not maintained on an individual asset basis.

True

22

T/F: An asset is purchased by a calendar or fiscal year firm for $60,000 on October 1, 1997. The asset has a useful life of four years and salvage value of $10,000. Depreciation for 1998 under the sum-of-the-years' digits method is $18,750.

True

23

Cantor Co. purchased a coal mine for $2,000,000. It cost $500,000 to prepare the coal mine for the extraction of the coal. It was estimated that 750,000 tons of coal would be extracted from the mine during its useful life. Cantor planned to sell the property for $100,000 at the end of its useful life. During the current year, 15,000 tons of coal were extracted and sold.

What would Cantor's depletion amount be per ton for the current year?
A. $2.50
B. $2.60
C. $3.20
D. $3.30

C. The depletion rate is the sum of the cost incurred to acquire the mineral rights, find the minerals, and develop the site less the salvage value, all divided by the estimated number of units of resource expected to be removed from the site.

The depletion rate per ton is ($2,000,000 + $500,000-$100,000)/750,000 = $3.20. This rate is applied to the units removed each period to determine depletion for that period.

As such, it allocates the total cost of the obtaining and developing the resource to each unit of resource removed.

24

A firm began a mineral exploitation venture during the current year by spending (1) $40 million for the mineral rights; (2) $100 million exploring for the minerals, one-fourth of which were successful; and (3) $60 million to develop the site. Management estimated that 20 million tons of ore would ultimately be removed from the property. Wages and other extraction costs for the current year amounted to $10 million. In total, 2 million tons of ore were removed from the deposit in the current year. The entire production for the period was sold. What amount of depletion is recognized during the current year under the full costing method?
A. $20 million
B. $12.5 million
C. $10 million
D. $21 million

A. The depletion rate = ($40 + $100 + $60)/20 = $10/ton. Depletion = 2,000,000($10/ton) = $20,000,000. Depletion for a period is the cost of the deposit allocated to the inventory removed for the period. In this case, the entire amount is included in cost of goods sold because there is no ending inventory. However, if there had been ore left at the end of the period, the $10/ton rate would have been applied to the units remaining. That would not change the answer to the question, however.

25

A firm began a mineral exploitation venture during the current year by spending (1) $40 million for the mineral rights; (2) $100 million exploring for the minerals, one-fourth of which were successful; and (3) $60 million to develop the site. Management estimated that 20 million tons of ore would ultimately be removed from the property. Wages and other extraction costs for the current year amounted to $10 million. In total, 2 million tons of ore were removed from the deposit in the current year. The entire production for the period was sold. Compute cost of goods sold under the successful efforts method.
A. $30 million
B. $12.5 million
C. $10 million
D. $22.5 million

D. The depletion rate = [$40 + (.25)($100) + $60]/20 = $6.25/ton. Depletion = 2,000,000($6.25/ton) = $12,500,000. Because all the ore removed was sold, cost of goods sold includes the entire amount of depletion and the extraction costs. Cost of goods sold = $12,500,000 $10,000,000 = $22,500,000. Note, that extraction costs is included in inventory (and therefore, cost of goods sold), but not in the deposit (and therefore, not in depletion).

26

Choose the best association of terms in the natural resources accounting area with the conceptual framework.
A. Successful efforts method-matching.
B. Full costing method-definition of asset.
C. Depletion-fair value accounting.
D. Successful efforts method-definition of asset.

D. The successful efforts method capitalizes only the cost of exploration efforts that locate the resource. As such, only those efforts that yield a probable future benefit are capitalized. This is a direct application of the asset definition, which requires that an asset have a probable future benefit.

27

T/F: The natural resources account includes the cost of extraction.

False

28

T/F: Depletion is the cost of the natural resources account allocated to the resources sold in the period.

False

29

On January 1, year one, an entity acquires a new piece of machinery for $100,000 with an estimated useful life of 10 years. The machine has a drum that must be replaced every five years and costs $20,000 to replace. Also included in the cost of the machine is an inspection fee of $8,000. Continued operations of the machine requires an inspection every four years after purchase. The company uses the straight-line method of depreciation. Under IFRS what is the depreciation expense for year one?
A. $10,000
B. $10,800
C. $12,000
D. $13,200

D. Under IFRS the components of the asset must be depreciated over their estimated useful life. Therefore, the $100,000 cost is broken down into the following components:

Depreciable value Life Depreciation
$72,000 10 yr. $7,200
20,000 5 yr. 4,000
8,000 4 yr. 2,000
$13,200

30

A company has a parcel of land to be used for a future production facility. The company applies the revaluation model under IFRS to this class of assets. In year 1, the company acquired the land for $100,000. At the end of year 1, the carrying amount was reduced to $90,000, which represented the fair value at that date. At the end of year 2, the land was revalued, and the fair value increased to $105,000. How should the company account for the year 2 change in fair value?
A. By recognizing $10,000 in other comprehensive income.
B. By recognizing $15,000 in other comprehensive income.
C. By recognizing $15,000 in profit or loss.
D. By recognizing $10,000 in profit or loss and $5,000 in other comprehensive income.

D. Under IFRS an increase in an assets fair value above original cost are recorded in a revaluation surplus account and any decreases in an assets fair value below the original cost are recorded as losses to the income statement. Therefore, the 10,000 decrease in year 1 would have been recorded as a loss to the income statement and the 15,000 increase in year 2 would be recorded as a 10,000 gain to the income statement and 5,000 gain in revaluation surplus (OCI).

31

T/F: Under IFRS plant and equipment can be remeasured to fair value if fair value can be reliably measured.

True

32

T/F: Both IFRS and U.S. GAAP permit revaluation of plant and equipment to fair market value.

False

33

T/F: For those assets under construction, IFRS requires interest capitalization.

False

34

T/F: Under IFRS, if an asset revaluation subsequently decreases, a loss is recognized in earnings.

False

35

T/F: IFRS requires that an asset's estimated useful life and depreciation method be reviewed on an annual basis.

True

36

T/F: U.S. GAAP requires that an asset's estimated useful life and depreciation method be reviewed on an annual basis.

False

37

T/F: When the component parts of an asset have differing useful life, IFRS requires component depreciation.

True

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