Chapter 11 Property, Plant, and Equipment and Intangible Assets:
Utilization and Impairment
True/False Questions
1. The three factors in cost allocation of a depreciable asset are service life, allocation base, and
allocation method.
2. The physical life of a depreciable asset is bounded by its service life.
3. Any method of depreciation should be both systematic and rational.
4. Total depreciation is the same over the life of an asset regardless of the method of depreciation
used.
Chapter 11 Property, Plant, and Equipment and Intangible Assets:
Utilization and Impairment
5. Advocates of accelerated depreciation methods argue that their use tends to level out the total
cost of ownership of an asset over its benefit period if one considers both depreciation and
repair and maintenance costs.
6. Activity-based methods of depreciation are appropriate for assets whose service life is a
function of use rather than time.
7. Once selected for existing assets, a company must consistently use the same method of
depreciation for all subsequent fixed asset acquisitions.
8. Under group and composite depreciation methods, gains and losses on the disposal of
individual assets need not be computed.
Chapter 11 Property, Plant, and Equipment and Intangible Assets:
Utilization and Impairment
9. Statutory depletion is the maximum amount of depletion that may be reported in financial
statements prepared according to GAAP.
10. A change in the estimated recoverable units used to compute depletion requires retroactive
adjustments to the financial statements.
11. Changes in the estimates involved in depreciation, depletion, and amortization require
retroactive restatement of financial statements.
12. Property, plant, and equipment and finite-life intangible assets must be tested for impairment
at least once a year.
Chapter 11 Property, Plant, and Equipment and Intangible Assets:
Utilization and Impairment
13. International Financial Reporting Standards (IFRS) require goodwill to be tested for
impairment at least annually.
14. According to International Financial Reporting Standards (IFRS), property, plant, and
equipment must be valued at cost less accumulated depreciation.
15. Component depreciation, required under International Financial Reporting Standards (IFRS),
is allowed but rarely used by U.S. companies.
16. Biological assets are valued at fair value less estimated costs to sell under International
Financial Reporting Standards (IFRS).
Chapter 11 Property, Plant, and Equipment and Intangible Assets:
Utilization and Impairment
AICPA: FN Measurement
17. According to International Financial Reporting Standards (IFRS), an impairment loss for
property, plant, and equipment is required only when an asset’s book value exceeds the
undiscounted sum of the asset’s estimated future cash flows.
18. According to International Financial Reporting Standards (IFRS), the impairment loss for an
indefinite-life intangible asset other than goodwill is the difference between book value and
the recoverable amount.
19. According to International Financial Reporting Standards (IFRS), the costs to successfully
defend an intangible right normally are capitalized and amortized.
20. MACRS (modified accelerated cost recovery system) depreciation is equivalent to sum–of-the-
years’ digits depreciation.
Chapter 11 Property, Plant, and Equipment and Intangible Assets:
Utilization and Impairment
21. By the replacement depreciation method, depreciation is recorded when assets are replaced.
Multiple Choice Questions
22. The factors that need to be determined to compute depreciation are an asset’s:
a. Cost, residual value, and physical life.
b. Cost, replacement value, and service life.
c. Fair value, residual value, and economic life.
d. Cost, residual value, and service life.
23. The depreciable base for an asset is:
a. Its service life.
b. The excess of its cost over residual value.
c. The difference between its replacement value and cost.
d. The amount allowable under MACRS
24. Depreciation, depletion, and amortization:
a. All refer to the process of allocating the cost of long-term assets used in the business over
future periods.
b. All generally use the same methods of cost allocation.
c. Are all handled the same in arriving at taxable income.
Chapter 11 Property, Plant, and Equipment and Intangible Assets:
Utilization and Impairment
d. All of these answer choices are correct.
25. Gains on the cash sales of fixed assets:
a. Are the excess of the book value over the cash proceeds.
b. Are part of cash flows from operations.
c. Are reported on a net-of-tax basis if material.
d. Are the excess of the cash proceeds over the book value of the assets sold.
26. The overriding principle for all depreciation methods is that the method must be:
a. Conservative and economic.
b. Systematic and rational.
c. Consistent and conservative.
d. Significant and material.
Chapter 11 Property, Plant, and Equipment and Intangible Assets:
Utilization and Impairment
27. Depreciation:
a. Is always considered a period cost.
b. Could be a product cost or a period cost depending on the use of the asset.
c. Is usually based on the declining-balance method.
d. Per books is usually higher than MACRS in the early years of an asset’s life.
28. Assuming an asset is used evenly over a four-year service life, which method of depreciation
will always result in the largest amount of depreciation in the first year?
a. Straight-line.
b. Units-of-production.
c. Double-declining balance.
d. Sum-of-the-year’s digits.
29. In the first year of an asset’s life, which of the following methods has the smallest
depreciation?
a. Straight-line.
b. Declining balance.
c. Sum-of-the-years’ digits.
d. Composite or group.
Chapter 11 Property, Plant, and Equipment and Intangible Assets:
Utilization and Impairment
30. An asset acquired January 1, 2016, for $15,000 with an estimated 10-year life and no residual
value is being depreciated in an equipment group asset account that has an average service life
of eight years. The asset is sold on December 31, 2017, for $6,000. The entry to record the
sale would be:
a.
Cash
6,000
Loss on sale of equipment
9,000
Equipment
15,000
b.
Cash
6,000
Equipment
6,000
c.
Cash
6,000
Accumulated depreciation
3,750
Loss on sale of equipment
5,250
Equipment
15,000
d.
Cash
6,000
Accumulated depreciation
9,000
Equipment
15,000
Use the following to answer questions 31–38:
Cutter Enterprises purchased equipment for $72,000 on January 1, 2016. The equipment is expected to
have a five-year life and a residual value of $6,000.
31. Using the straight-line method, depreciation for 2016 would be:
a. $13,200.
b. $14,400.
c. $72,000.
d. None of these answer choices are correct.
Chapter 11 Property, Plant, and Equipment and Intangible Assets:
Utilization and Impairment
32. Using the straight-line method, the book value at December 31, 2016, would be:
a. $57,600.
b. $51,600.
c. $58,800.
d. $52,800.
33. Using the straight-line method, depreciation for 2017 and the equipment’s book value at
December 31, 2017, would be:
a. $14,400 and $43,200.
b. $28,800 and $37,200.
c. $13,200 and $39,600.
d. $13,200 and $45,600.
34. Using the double-declining balance method, depreciation for 2016 and the book value at
December 31, 2016, would be:
a. $26,400 and $45,600.
b. $28,800 and $43,200.
c. $28,800 and $37,200.
d. $26,400 and $36,600.
Chapter 11 Property, Plant, and Equipment and Intangible Assets:
Utilization and Impairment
35. Using the double-declining balance method, depreciation for 2017 would be:
a. $28,800.
b. $18,240.
c. $17,280.
d. None of these answer choices are correct.
36. Using the double-declining balance method, the book value at December 31, 2017, would be:
a. $14,400.
b. $24,960.
c. $27,360.
d. $25,920.
37. Using the sum-of-the-years’-digits method, depreciation for 2016 and book value at December
31, 2016, would be:
a. $22,000 and $44,000.
b. $22,000 and $50,000.
c. $24,000 and $48,000.
d. $24,000 and $42,000.
Chapter 11 Property, Plant, and Equipment and Intangible Assets:
Utilization and Impairment
38. Using the sum-of-the-years’-digits method, depreciation for 2017 and book value at December
31, 2017, would be:
a. $19,200 and $30,800.
b. $17,600 and $26,400.
c. $19,200 and $28,800.
d. $17,600 and $32,400.
Chapter 11 Property, Plant, and Equipment and Intangible Assets:
Utilization and Impairment
Use the following to answer questions 39 and 40:
On June 30, 2016, Prego Equipment purchased a precision laser-guided steel punch that has an
expected capacity of 300,000 units and no residual value. The cost of the machine was $450,000 and is
to be depreciated using the units-of-production method. During the six months of 2016, 24,000 units
of product were produced. At the beginning of 2017, engineers estimated that the machine can
realistically be used to produce only another 230,000 units. During 2017, 70,000 units were produced.
39. Prego would report depreciation in 2016 of:
a. $36,000.
b. $43,900.
c. $18,000.
d. $21,950.
40. Prego would report depreciation in 2017 of:
a. $135,230.
b. $126,000.
c. $108,000.
d. $105,000.
Use the following to answer questions 41–46:
Archie Co. purchased a framing machine for $45,000 on January 1, 2016. The machine is expected to
have a four-year life, with a residual value of $5,000 at the end of four years.
Chapter 11 Property, Plant, and Equipment and Intangible Assets:
Utilization and Impairment
41. Using the straight-line method, depreciation for 2016 and book value at December 31, 2016,
would be:
a. $10,000 and $30,000.
b. $11,250 and $28,750.
c. $10,000 and $35,000.
d. $11,250 and $33,750.
42. Using the straight-line method, depreciation for 2017 and book value at December 31, 2017,
would be:
a. $10,000 and $20,000.
b. $10,000 and $25,000.
c. $11,250 and $17,500.
d. $11,250 and $22,500.
43. Using the double-declining balance method, depreciation for 2016 and book value at
December 31, 2016, would be:
a. $22,500 and $22,500.
b. $22,500 and $17,500.
c. $20,000 and $25,000.
d. $20,000 and $20,000.
44. Using the double-declining balance method, depreciation for 2017 and book value at
December 31, 2017, would be:
a. $10,000 and $5,000.
b. $10,000 and $10,000.
c. $11,250 and $6,250.
d. $11,250 and $11,250.
Chapter 11 Property, Plant, and Equipment and Intangible Assets:
Utilization and Impairment
45. Using the sum-of-the-years’-digits method, depreciation for 2016 and book value at December
31, 2016, would be:
a. $18,000 and $27,000.
b. $16,000 and $29,000.
c. $16,000 and $24,000.
d. $18,000 and $22,000.
46. Using the sum-of-the years’-digits method, depreciation for 2017 and book value at December
31, 2017, would be
a. $13,500 and $13,500.
b. $13,500 and $8,500.
c. $12,000 and $17,000.
d. $12,000 and $12,000.
Use the following to answer questions 47–51:
On September 30, 2016, Bricker Enterprises purchased a machine for $200,000. The estimated service
life is 10 years with a $20,000 residual value. Bricker records partial-year depreciation based on the
number of months in service.
47. Depreciation for 2016, using the straight-line method is:
a. $13,500.
b. $15,000.
c. $ 4,500.
d. $ 5,000.
Chapter 11 Property, Plant, and Equipment and Intangible Assets:
Utilization and Impairment
48. Depreciation for 2016, using double-declining balance, would be:
a. $40,000.
b. $10,000.
c. $36,000.
d. $ 9,000.
49. Depreciation for 2017, using double-declining balance, would be:
a. $32,000.
b. $34,000.
c. $38,000.
d. $40,000.
50. Depreciation (to the nearest dollar) for 2016, using sum-of-the-years’ digits, would be:
a. $ 9,091.
b. $24,545.
c. $27,273.
d. $ 8,182.
Chapter 11 Property, Plant, and Equipment and Intangible Assets:
Utilization and Impairment
51. Depreciation (to the nearest dollar) for 2017, using sum-of-the-years’ digits, would be:
a. $31,909.
b. $29,455.
c. $35,456.
d. $54,000.
52. Jennings Advertising Inc. reported the following in its December 31, 2016, balance sheet:
Equipment $500,000
Less: Accumulated depreciation—equipment $135,000
In a disclosure note, Jennings indicates that it uses straight-line depreciation over 10 years and
estimates salvage value at 10% of cost. What is the average age of the equipment owned by
Jennings?
a. 2.7 years.
b. 3 years.
c. 7 years.
d. 7.3 years.
53. Gulf Consulting Co. reported the following on its December 31, 2016, balance sheet:
Equipment (at cost)…..$700,000
In a disclosure note, Gulf indicates that it uses straight-line depreciation over five years and
estimates salvage value as 10% of cost. Gulf’s equipment averages 3.5 years at December 31,
2016. What is the book value of Gulf’s equipment at December 31, 2016?
Chapter 11 Property, Plant, and Equipment and Intangible Assets:
Utilization and Impairment
a. $490,000.
b. $441,000.
c. $259,000.
d. $210,000.
54. Asset C3PO has a depreciable base of $16.5 million and a service life of 10 years. What would
the accumulated depreciation be at the end of year five under the sum-of-the-years’ digits
method?
a. $ 4.5 million.
b. $8.25 million.
c. $ 12 million.
d. None of these answer choices are correct.
Use the following to answer questions 55 and 56:
On March 31, 2016, M. Belotti purchased the right to remove gravel from an old rock quarry. The
gravel is to be sold as roadbed for highway construction. The cost of the quarry rights was $164,000,
with estimated salable rock of 20,000 tons. During 2016, Belotti loaded and sold 4,000 tons of rock
and estimated that 16,000 tons remained at December 31, 2016. At January 1, 2017, Belotti estimated
that 20,000 tons still remained. During 2017, Belotti loaded and sold 8,000 tons.
55. Belotti would record depletion in 2016 of:
a. $41,000.
b. $32,800.
c. $30,750.
d. $24,600.
Chapter 11 Property, Plant, and Equipment and Intangible Assets:
Utilization and Impairment
56. Belotti would record depletion in 2017 of:
a. $54,667.
b. $65,600.
c. $52,480.
d. $55,760.
57. The legal life of a patent is:
a. 40 years.
b. 20 years.
c. Life of the inventor plus 50 years.
d. Indefinite.
58. Short Corporation acquired Hathaway, Inc., for $52,000,000. The fair value of all Hathaway’s
identifiable tangible and intangible assets was $48,000,000. Short will amortize any goodwill
over the maximum number of years allowed. What is the annual amortization of goodwill for
this acquisition?
a. $100,000.
b. $400,000.
c. $200,000.
d. $0.