Test Bank for Intermediate Accounting, Seventeenth Edition
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DERIVATIONS — Computational (cont.)
No. Answer Derivation
DERIVATIONS — CPA Adapted
No. Answer Derivation
Depreciation, Impairments, and Depletion
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BRIEF EXERCISES
BE. 11-126—Definitions.
Provide clear, concise answers for the following.
1. Define depreciation.
2. Define depreciation accounting.
BE. 11-127—True or False.
Place T or F in front of each of the following statements.
____ 1. The straight-line method of depreciation is based on the assumption that depreciation
expense can be regarded as a constant function of time.
____ 2. Plant assets should be written down (below cost) when their market value has
declined temporarily.
____ 3. The accounting profession has developed specifically recommended procedures for
recording appraisal increases with respect to plant assets.
____ 4. An asset’s cost minus its accumulated depreciation equals its book value.
____ 5. The sum-of–the-years’-digits method of depreciation ignores salvage value in the
computation of an asset’s depreciable base.
____ 6. When using the double-declining balance method of determining depreciation, a
declining percentage is applied to a constant book value.
____ 7. The book value of plant assets initially declines more rapidly under decreasing-charge
methods than under the straight-line method.
____ 8. Accounting depreciation is computed by determining the change in the market value of
a company’s plant assets during the period under review.
Test Bank for Intermediate Accounting, Seventeenth Edition
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Ex. 11–127 (cont.)
____ 9. The methods of depreciation based upon output assume that obsolescence will not
significantly affect the usefulness of the asset.
____ 10. The revision of prior periods’ depreciation estimates would be disclosed on the
retained earnings statement.
BE. 11–128—Depreciation methods.
Each of the statements appearing below is descriptive of one or more of the following
depreciation methods. In the spaces below, place the letter(s) belonging to the method(s) to
which the statement best applies.
a. Declining-balance e. Sum-of–the-years’-digits
b. Group f. Units of output
c. Composite g. Working hours
d. Straight-line
____ 1. The depreciation charged by this method decreases by the same amount each year.
____ 2. These methods are used for depreciating multiple-asset accounts.
____ 3. These methods allocate larger shares of the cost of a plant asset to expense during
the years in which the greatest use is made of the asset.
____ 4. These methods always allocate larger shares of the cost of a plant asset to expense
during the earlier years of its life.
____ 5. Once the depreciable base, scrap value, and life of a plant asset are determined, the
annual charges to operations under this method will be the same.
Depreciation, Impairments, and Depletion
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EXERCISES
Ex. 11-129—Calculate depreciation.
A machine which cost $500,000 is acquired on October 1, 2020. Its estimated salvage value is
$50,000 and its expected life is eight years.
Instructions
(1) Calculate depreciation expense for 2020 and 2021 by each of the following methods, showing
the figures used.
(a) Double-declining balance
(b) Sum-of–the-years’-digits
(2) At the end of 2021, which method results in the larger accumulated depreciation amount?
Ex. 11-130—Calculate depreciation.
A machine cost $900,000 on April 1, 2020. Its estimated salvage value is $90,000 and its
expected life is eight years.
Instructions
(1) Calculate the depreciation expense (to the nearest dollar) by each of the following methods,
showing the amounts used.
(a) Straight-line for 2020
(b) Double-declining balance for 2021
(c) Sum-of–the-years’-digits for 2021
(2) Which method would result in the smallest income amount for 2021?
Test Bank for Intermediate Accounting, Seventeenth Edition
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Solution 11-130
Ex. 11-131—Asset depreciation and disposition.
Answer each of the following questions.
1. A plant asset purchased for $500,000 has an estimated life of 10 years and a residual value
of $25,000. Depreciation for the second year of use, determined by the declining-balance
method at twice the straight-line rate is $_____________.
2. A plant asset purchased for $440,000 at the beginning of the year has an estimated life of 5
years and a residual value of $40,000. Depreciation for the third year, determined by the sum-
of–the-years’-digits method is $______________.
3. A plant asset with a cost of $540,000, estimated life of 5 years, and residual value of $90,000,
is depreciated by the straight-line method. This asset is sold for $380,000 at the end of the
second year of use. The gain or loss on the disposal (indicate by “G” or “L”) is $___________.
Depreciation, Impairments, and Depletion
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Ex. 11-132—Composite depreciation.
Callon Co. uses the composite method to depreciate its equipment. The following totals are for all
of the equipment in the group:
Initial Residual Depreciable Depreciation
Cost Value Cost Per Year
$1,000,000 $100,000 $900,000 $90,000
Instructions
(a) What is the composite rate of depreciation? (To nearest tenth of a percent.)
(b) A machine with a cost of $25,000 was sold for $15,000 at the end of the third year. What
entry should be made?
Ex. 11-133—Depletion allowance.
Mareos Company purchased for $3,800,000 a mine estimated to contain 2.5 million tons of ore.
When the ore is completely extracted, it was expected that the land would be worth $200,000. A
building and equipment costing $1,800,000 were constructed on the mine site, and they will be
completely used up and have no salvage value when the ore is exhausted. During the first year,
750,000 tons of ore were mined, and $300,000 was spent for labor and other operating costs.
Instructions
Compute the total cost per ton of ore mined in the first year. (Show computations by setting up a
schedule giving cost per ton.)
Test Bank for Intermediate Accounting, Seventeenth Edition
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PROBLEMS
Pr. 11-134—Depreciation methods.
On July 1, 2020, Sport Company purchased for $3,600,000 snow-making equipment having an
estimated useful life of 5 years with an estimated salvage value of $150,000. Depreciation is
taken for the portion of the year the asset is used.
Instructions
(a) Complete the form below by determining the depreciation expense and year-end book values
for 2020 and 2021 using the
1. sum-of–the-years’-digits method.
2. double-declining balance method.
Sum-of–the-Years’-Digits Method 2020 2021
Equipment $3,600,000 $3,600,000
Less: Accumulated Depreciation ______ _______
Year-End Book Value ______ _______
Depreciation Expense for the Year ______ _______
Double-Declining Balance Method
Equipment $3,600,000 $3,600,000
Less: Accumulated Depreciation ______ _______
Year-End Book Value ______ _______
Depreciation Expense for the Year ______ _______
(b) Assume the company had used straight-line depreciation during 2020 and 2021. During
2022, the company determined that the equipment would be useful to the company for only
one more year beyond 2022. Salvage value is estimated at $200,000.
(1) Compute the amount of depreciation expense for the 2022 income statement.
(2) What is the depreciation base of this asset?
Depreciation, Impairments, and Depletion
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Pr. 11-135—Adjustment of Depreciable Base.
A truck was acquired on July 1, 2018, at a cost of $189,000. The truck had a six-year useful life
and an estimated salvage value of $21,000. The straight-line method of depreciation was used.
On January 1, 2021, the truck was overhauled at a cost of $17,500, which extended the useful life
of the truck for an additional two years beyond that originally estimated (salvage value is still
estimated at $21,000). In computing depreciation for annual adjustment purposes, expense is
calculated for each month the asset is owned.
Instructions
Prepare the appropriate entries for January 1, 2021 and December 31, 2021.
Pr. 11-136—Impairment.
Presented below is information related to equipment owned by Porto Company at December 31,
2020.
Cost $5,600,000
Accumulated depreciation to date 640,000
Expected future net cash flows 4,000,000
Fair value 2,720,000
Assume that Porto will continue to use this asset in the future. As of December 31, 2020, the
equipment has a remaining useful life of 4 years.
Instructions
(a) For Porto company, the recoverability test compares $______ to $______. As a result, the
asset ______ the recoverability test, because ______ is/are less than ______ so a ______ on
impairment is recorded in 2020.
(b) Prepare the journal entry (if any) to record the impairment of the asset at December 31, 2020.
(c) Prepare the journal entry to record depreciation expense for 2021.
(d) The fair value of the equipment at December 31, 2021 is $4,100,000. Prepare the journal
entry (if any) necessary to record this increase in fair value.
Test Bank for Intermediate Accounting, Seventeenth Edition
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Pr. 11-137—Impairment.
Dolphin Company uses special strapping equipment in its packaging business. The equipment
was purchased in January 2019 for $6,000,000 and had an estimated useful life of 8 years with
no salvage value. At December 31, 2020, new technology was introduced that would accelerate
the obsolescence of Dolphin’s equipment. Dolphin’s controller estimates that expected future net
cash flows on the equipment will be $3,750,000 and that the fair value of the equipment is
$3,300,000. Dolphin intends to continue using the equipment, but it is estimated that the
remaining useful life is 4 years. Dolphin uses straight-line depreciation.
Instructions
(a) What is the carrying value of the equipment at December 31, 2020?
(b) Prepare the journal entry (if any) to record the impairment at December 31, 2020.
(c) Prepare any journal entries for the equipment at December 31, 2021. The fair value of the
equipment at December 31, 2021, is estimated to be $3,450,000.
(d) Repeat the requirements for (a) and (b), assuming that Dolphin intends to dispose of the
equipment and that it has not been disposed of as of December 31, 2021.
Depreciation, Impairments, and Depletion
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Solution 11-137
Test Bank for Intermediate Accounting, Seventeenth Edition
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IFRS QUESTIONS
True / False
1. Under both IFRS and GAAP, interest costs incurred during construction must be
capitalized.
2. Under IFRS, component depreciation is permitted but is rarely used.
3. IFRS, like GAAP, capitalizes interest costs incurred during construction.
4. Even though IFRS does not employ the first-stage recoverability test used under GAAP −
comparing the undiscounted cash flows to the carrying amount, the fact that IFRS uses a
fair value test to measure impairment loss makes IFRS stricter than GAAP
5. GAAP, like IFRS, permits write-up for subsequent recoveries of impairment, back up to
the original amount before the impairment in all circumstances.
6. Unlike GAAP, interest costs incurred during construction are not capitalized under IFRS.
7. Asset revaluations are permitted under IFRS and GAAP.
8. In general, IFRS adheres to very different principles than GAAP.
9. GAAP now requires that gains on exchanges of nonmonetary assets be recognized if the
exchange lacks commercial substance.
10. IFRS permits the same depreciation methods as GAAP, with the exception of the units-of–
production method, which is not allowed under IFRS.
Depreciation, Impairments, and Depletion
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Answers to True / False questions
Multiple-Choice Questions
1. IFRS uses a fair value test to measure impairment loss. However, IFRS does not use the
first-stage recoverability test under GAAP − comparing the undiscounted cash flow to the
carrying amount. As a result, the IFRS test is
a. not as strict as GAAP.
b. more strict than GAAP.
c. essentially the same strictness as GAAP.
d. None of these answers are correct.
2. Acceptable depreciation methods under IFRS include
a. Straight-line.
b. Accelerated.
c. Units-of-production.
d. All of these answers are correct.
3. Which of the following statements is correct?
a. Component depreciation is required under both IFRS and GAAP.
b. Component depreciation is required under GAAP and permitted under IFRS.
c. Component depreciation is required under IFRS and permitted under GAAP.
d. Component depreciation is permitted, but not required under both IFRS and GAAP.
4. The accounting exchanges of nonmonetary assets has recently converged between IFRS
and GAAP, now requires
a. that gains on exchanges of nonmonetary assets be recognized if the exchange has
commercial substance.
b. that gains on exchanges of nonmonetary assets be recognized if the exchange does
not have commercial substance.
c. that gains on exchanges of nonmonetary assets be recognized if the exchange does
not have commercial substance, and has never been impaired.
d. All of these choices are correct.
Test Bank for Intermediate Accounting, Seventeenth Edition
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5. In measuring an impairment loss, IFRS uses
a. undiscounted cash flows.
b. discounted cash flows.
c. a fair value test.
d. a replacement value test.
6. IFRS permits companies to carry assets at historical cost or use a revaluation model for
fixed assets. According to IAS 16, if revaluation is used:
1. it must be applied to all assets in a class of assets.
2. assets must be revalued on an annual basis.
3. assets must be depreciated on the straight-line basis.
4. salvage values must be zero.
a. 1 is correct
b. 2 is correct
c. 1 and 2 are correct
d. All of these answers are correct
Tongas Company applies revaluation accounting to plant assets with a carrying value of
$1,600,000, a useful life of 4 years, and no salvage value. Depreciation is calculated on the
straight-line basis. At the end of year 1, independent appraisers determine that the asset has a
fair value of $1,500,000.
7. The journal entry to record depreciation for year one will include a
a. debit to Accumulated Depreciation for $400,000.
b. debit to Depreciation Expense for $100,000.
c. credit to Accumulated Depreciation for $100,000.
d. debit to Depreciation Expense for $400,000.
Tongas Company applies revaluation accounting to plant assets with a carrying value of
$1,600,000, a useful life of 4 years, and no salvage value. Depreciation is calculated on the
straight-line basis. At the end of year 1, independent appraisers determine that the asset has a
fair value of $1,500,000.
8. The journal entry to adjust the plant assets to fair value in year one will include a
a. debit to Accumulated Depreciation for $100,000.
b. credit to Depreciation Expense for $300,000.
c. credit to Plant Assets for $300,000.
d. credit to Unrealized Gain on Revaluation for $300,000.
Tongas Company applies revaluation accounting to plant assets with a carrying value of
$1,600,000, a useful life of 4 years, and no salvage value. Depreciation is calculated on the
straight-line basis. At the end of year 1, independent appraisers determine that the asset has a
fair value of $1,500,000.
Depreciation, Impairments, and Depletion
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9. The financial statements for year one will include the following information
a. Accumulated depreciation $400,000.
b. Depreciation expense $100,000.
c. Plant assets $1,500,000.
d. Revaluation surplus $100,000.
Tongas Company applies revaluation accounting to plant assets with a carrying value of
$1,600,000, a useful life of 4 years, and no salvage value. Depreciation is calculated on the
straight-line basis. At the end of year 1, independent appraisers determine that the asset has a
fair value of $1,500,000.
10. The entry to record depreciation for this same asset in year two will include a
a. debit to Accumulated Depreciation for $400,000.
b. debit to Depreciation Expense for $500,000.
c. credit to Accumulated Depreciation for $300,000.
d. debit to Depreciation Expense for $400,000.
Answers to multiple choice: