Chapter 11 Property, Plant, and Equipment and Intangible Assets:
Utilization and Impairment
59. Granite Enterprises acquired a patent from Southern Research Corporation on January 1,
2016, for $4 million. The patent will be used for 5 years, even though its legal life is 20 years.
Rocky Corporation has made a commitment to purchase the patent from Granite for $200,000
at the end of five years. Compute Granite’s patent amortization for 2016, assuming the
straight-line method is used.
a. $380,000.
b. $400,000.
c. $760,000.
d. $800,000.
60. In January 2016, Vega Corporation purchased a patent at a cost of $200,000. Legal and filing
fees of $50,000 were paid to acquire the patent. The company estimated a 10-year useful life
for the patent and uses the straight-line amortization method for all intangible assets. In
January, 2019, Vega spent $40,000 in legal fees for an unsuccessful defense of the patent and
the patent is no longer usable. The amount charged to income (expense and loss) in 2019
related to the patent should be:
a. $ 40,000.
b. $ 65,000.
c. $215,000.
d. $ 25,000.
Chapter 11 Property, Plant, and Equipment and Intangible Assets:
Utilization and Impairment
61. Accounting for a change in the estimated service life of equipment:
a. Is handled prospectively.
b. Requires retroactive restatement of prior year’s financial statements.
c. Requires a prior period adjustment.
d. Is handled currently as a change in accounting principle.
62. A change in the estimated useful life and residual value of machinery in the current year is
handled as:
a. A retrospective change back to the date of acquisition as though the current estimated life
and residual value had been used all along.
b. A prospective change from the current year through the remainder of its useful life, using
the new estimates.
c. A cumulative adjustment to income in the current year for the difference in depreciation
under the new versus old estimates.
d. All of these answer choices are incorrect.
63. Nanki Corporation purchased equipment on January 1, 2014, for $650,000. In 2014 and 2015,
Nanki depreciated the asset on a straight-line basis with an estimated useful life of eight years
and a $10,000 residual value. In 2016, due to changes in technology, Nanki revised the useful
life to a total of six years with no residual value. What depreciation would Nanki record for
the year 2016 on this equipment?
a. $108,333.
b. $106,667.
c. $122,500.
d. None of these answer choices are correct.
Chapter 11 Property, Plant, and Equipment and Intangible Assets:
Utilization and Impairment
64. Fellingham Corporation purchased equipment on January 1, 2014, for $200,000. The company
estimated the equipment would have a useful life of 10 years with a $20,000 residual value.
Fellingham uses the straight-line depreciation method. Early in 2016, Fellingham reassessed
the equipment’s condition and determined that its total useful life would be only six years in
total and that it would have no salvage value. How much would Fellingham report as
depreciation on this equipment for 2016?
a. $24,000.
b. $27,333.
c. $36,000.
d. $41,000.
65. A change from the straight-line method to the sum-of-years’-digits method of depreciation is
handled as:
a. A retrospective change back to the date of acquisition as though the current estimated life
had been used all along.
b. A cumulative adjustment to income in the current year for the difference in depreciation
under the new versus old useful life estimate.
c. A prospective change from the current year through the remainder of its useful life.
d. None of these answer choices are correct.
Chapter 11 Property, Plant, and Equipment and Intangible Assets:
Utilization and Impairment
66. Murgatroyd Co. purchased equipment on January 1, 2014, for $500,000, estimating a four–
year useful life and no residual value. In 2014 and 2015, Murgatroyd depreciated the asset
using the sum-of-years’-digits method. In 2016, Murgatroyd changed to straight-line
depreciation for this equipment. What depreciation would Murgatroyd record for the year
2016 on this equipment?
a. $ 75,000.
b. $125,000.
c. $150,000.
d. None of these answer choices are correct.
67. Broadway Ltd. purchased equipment on January 1, 2014, for $800,000, estimating a five-year
useful life and no residual value. In 2014 and 2015, Broadway depreciated the asset using the
straight-line method. In 2016, Broadway changed to sum-of-years’-digits depreciation for this
equipment. What depreciation would Broadway record for the year 2016 on this equipment?
a. $120,000.
b. $160,000.
c. $200,000.
d. $240,000.
Chapter 11 Property, Plant, and Equipment and Intangible Assets:
Utilization and Impairment
68. On January 1, 2014, Al’s Sporting Goods purchased store fixtures at a cost of $180,000. The
anticipated service life was 10 years with no residual value. Al’s has been using the double-
declining balance method, but in 2016 adopted the straight-line method because the company
believes it provides a better measure of income. Al’s has a December 31 year-end. The journal
entry to record depreciation for 2016 is:
a.
Depreciation expense
23,040
Accumulated depreciation
23,040
b.
Depreciation expense
14,400
Accumulated depreciation
14,400
c.
Accumulated depreciation
28,800
Retained earnings
28,800
d.
No entry
2014: $180,000 x 20% =
2015 ($180,000 – $36,000) x 20% =
2016: Straight-Line
($180,000 – 64,800) 8 =
69. An asset should be written down if there has been an impairment of value that is:
a. Relevant and objectively determined.
b. Material and market driven.
c. Unplanned and sudden.
d. Significant.
Chapter 11 Property, Plant, and Equipment and Intangible Assets:
Utilization and Impairment
70. Recognition of impairment for property, plant, and equipment is required if book value
exceeds:
a. Fair value.
b. Present value of expected cash flows.
c. Undiscounted expected cash flows.
d. Accumulated depreciation.
71. The amount of impairment loss is the excess of book value over:
a. Amortized cost.
b. Undiscounted future cash flows.
c. Fair value.
d. Future revenues.
72. Accounting for impairment losses:
a. Involves a two-step process for recoverability and measurement.
b. Applies only to depreciable assets.
c. Applies only to assets with finite lives.
d. All of these answer choices are correct.
Chapter 11 Property, Plant, and Equipment and Intangible Assets:
Utilization and Impairment
73. In testing for recoverability of property, plant, and equipment, an impairment loss is required
if the:
a. Asset’s book value exceeds the undiscounted sum of expected future cash flows.
b. Undiscounted sum of its expected future cash flows exceeds the asset’s book value.
c. Present value of expected future cash flows exceeds its book value.
d. All of these answer choices are incorrect.
74. At the end of its 2016 fiscal year, a triggering event caused Janero Corporation to perform an
impairment test for one of its manufacturing facilities. The following information is available:
Book value $65 million
Estimated undiscounted future cash flows 60 million
Fair value 50 million
The manufacturing facility is:
a. Impaired because its book value exceeds undiscounted future cash flows.
b. Not impaired because its book value exceeds undiscounted future cash flows.
c. Not impaired because it continues to produce revenue.
d. Impaired because its book value exceeds fair value.
75. Fryer Inc. owns equipment for which it paid $90 million. At the end of 2016, it had
accumulated depreciation on the equipment of $27 million. Due to adverse economic
conditions, Fryer’s management determined that it should assess whether an impairment loss
should be recognized for the equipment. The estimated undiscounted future cash flows to be
provided by the equipment total $60 million, and the equipment’s fair value at that point is
$40 million. Under these circumstances, Fryer:
a. Would record no impairment loss on the equipment.
b. Would record a $3 million impairment loss on the equipment.
c. Would record a $23 million impairment loss on the equipment.
d. None of these answer choices are correct.
Chapter 11 Property, Plant, and Equipment and Intangible Assets:
Utilization and Impairment
76. Wilson Inc. owns equipment for which it paid $70 million. At the end of 2016, it had
accumulated depreciation on the equipment of $12 million. Due to adverse economic
conditions, Wilson’s management determined that it should assess whether an impairment loss
should be recognized for the equipment. The estimated undiscounted future cash flows to be
provided by the equipment total $60 million, and the equipment’s fair value at that point is
$50 million. Under these circumstances, Wilson:
a. Would record no impairment loss on the equipment.
b. Would record an $8 million impairment loss on the equipment.
c. Would record a $20 million impairment loss on the equipment.
d. None of these answer choices are correct.
77. Jung Inc. owns a patent for which it paid $66 million. At the end of 2016, it had accumulated
amortization on the patent of $16 million. Due to adverse economic conditions, Jung’s
management determined that it should assess whether an impairment loss should be
recognized for the patent. The estimated undiscounted future cash flows to be provided by the
patent total $43 million, and the patent’s fair value at that point is $35 million. Under these
circumstances, Lester:
a. Would record no impairment loss on the patent.
b. Would record a $7 million impairment loss on the patent.
c. Would record a $15 million impairment loss on the patent.
d. Would record a $31 million impairment loss on the patent.
Chapter 11 Property, Plant, and Equipment and Intangible Assets:
Utilization and Impairment
78. In 2015, Antle Inc. had acquired Demski Co. and recorded goodwill of $245 million as a
result. The net assets (including goodwill) from Antle’s acquisition of Demski Co. had a 2016
year-end book value of $580 million. Antle assessed the fair value of Demski at this date to be
$700 million, while the fair value of all of Demski’s identifiable tangible and intangible assets
(excluding goodwill) was $550 million. The amount of the impairment loss that Antle would
record for goodwill at the end of 2016 is:
a. $150 million.
b. $ 95 million.
c. $0.
d. None of these answer choices are correct.
79. Which of the following types of subsequent expenditures normally is capitalized?
a. Additions.
b. Improvements.
c. Rearrangements.
d. All of these answer choices are normally capitalized.
80. A major expenditure increased a truck’s life beyond the original estimate of life. GAAP
permits the expenditure to be debited to:
a. Repairs.
b. Accumulated depreciation.
c. Major repairs.
d. None of these answer choices are correct.
Chapter 11 Property, Plant, and Equipment and Intangible Assets:
Utilization and Impairment
81. The replacement of a major component increased the productive capacity of production
equipment from 10 units per hour to 18 units per hour. The expenditure should be debited to:
a. Repairs.
b. Equipment.
c. Maintenance.
d. Gain from repairs.
82. Calloway Shoes purchased a delivery truck on September 30, 2016, for $32,000. The
estimated useful life of the truck is 10 years with no residual value. After five years, the
refrigeration unit will need to be replaced. The $8,000 cost of the unit is included in the cost of
the truck. Calloway uses the straight-line depreciation method. Depreciation for 2016 under
U.S. GAAP and International Financial Reporting Standards (IFRS), respectively, is:
U.S. GAAP
IFRS
a. $3,200. $3,200.
b. $ 800. $ 800.
c. $ 800. $1,000.
d. $3,200. $4,000.
Chapter 11 Property, Plant, and Equipment and Intangible Assets:
Utilization and Impairment
83. Robertson Inc. prepares its financial statements according to International Financial Reporting
Standards (IFRS). At the end of its 2016 fiscal year, the company chooses to revalue its
equipment. The equipment cost $540,000, had accumulated depreciation of $240,000 at the
end of the year after recording annual depreciation, and had a fair value of $330,000. After the
revaluation, the accumulated depreciation account will have a balance of:
a. $240,000.
b. $264,000.
c. $270,000.
d. None of these answer choices are correct.
84. Rice Industries owns a manufacturing plant in a foreign country. Political unrest in the country
indicates that Rice should investigate for possible impairment. Below is information related to
the plant’s assets ($ in millions):
Book value $190
Undiscounted sum of future estimated cash flows 210
Present value of future cash flows 175
Fair value less cost to sell (determined by appraisal) 180
The amount of impairment loss that Rice should recognize according to U.S. GAAP and
IFRS, respectively, is:
U.S. GAAP
IFRS
a. $10 million. $10 million.
b. $15 million. $15 million.
c. $0. $10 million.
d. There is no impairment under both U.S. GAAP and IFRS.
Chapter 11 Property, Plant, and Equipment and Intangible Assets:
Utilization and Impairment
85. Kingston Corporation has $95 million of goodwill on its books from the 2014 acquisition of
Reliant Motors. At the end of its 2016 fiscal year, management has provided the following
information for its required goodwill impairment test ($ in millions):
Fair value of Reliant (approximates fair value less costs to sell) $655
Fair value of Reliant’s net assets (excluding goodwill) 600
Book value of Reliant’s net assets (including goodwill) 700
Present value of estimated future cash flows 670
Assuming that Reliant is considered a reporting unit for U.S. GAAP and a cash-generating
unit for IFRS, the amount of goodwill impairment loss that Kingston should recognize
according to U.S. GAAP and IFRS, respectively, is:
U.S. GAAP
IFRS
a. $45 million. $45 million.
b. $55 million. $45 million.
c. $0. $30 million.
d. $40 million. $30 million.
86. According to International Financial Reporting Standards (IFRS), the revaluation of
equipment when fair value exceeds book value, results in:
a. An increase in net income.
b. A decrease in net income.
c. An increase in other comprehensive income.
Chapter 11 Property, Plant, and Equipment and Intangible Assets:
Utilization and Impairment
d. A decrease in other comprehensive income.
87. According to International Financial Reporting Standards (IFRS), biological assets are valued
at:
a. Cost less accumulated depreciation.
b. Fair value less estimated costs to sell.
c. Cost less accumulated depletion.
d. None of these answer choices are correct.
88. According to International Financial Reporting Standards (IFRS), the impairment loss for
property, plant, and equipment is the difference between book value and:
a. The undiscounted sum of estimated future cash flows.
b. The present value of future cash flows.
c. Fair value less costs to sell.
d. The higher of the present value of estimated future cash flows and the fair value less
costs to sell.
Chapter 11 Property, Plant, and Equipment and Intangible Assets:
Utilization and Impairment
89. According to International Financial Reporting Standards (IFRS), the level of testing for
goodwill impairment is the:
a. Reporting unit.
b. Subsidiary companies.
c. Cash-generating unit.
d. None of these answer choices are correct.
90. The normal treatment of litigation costs to successfully defend an intangible right under U.S.
GAAP and International Financial Reporting Standards (IFRS), respectively, is:
a. Capitalize; expense.
a. Capitalize Expense
b. Capitalize Capitalize
c. Expense Capitalize
d. Expense Expense
91. Canliss Mining uses the retirement method to determine depreciation on its office equipment.
During 2014, its first year of operations, office equipment was purchased at a cost of $14,000.
Useful life of the equipment averages four years and no salvage value is anticipated. In 2016,
equipment costing $5,000 was sold for $600 and replaced with new equipment costing $6,000.
Canliss would record 2016 depreciation of:
a. $3,500.
b. $4,400.
c. $5,400.
d. None of these answer choices are correct.
U.S. GAAP
IFRS
Chapter 11 Property, Plant, and Equipment and Intangible Assets:
Utilization and Impairment
92. Canliss Mining uses the replacement method to determine depreciation on its office
equipment. During 2014, its first year of operations, office equipment was purchased at a cost
of $14,000. Useful life of the equipment averages four years and no salvage value is
anticipated. In 2016, equipment costing $5,000 was sold for $600 and replaced with new
equipment costing $6,000. Canliss would record 2016 depreciation of:
a. $3,500.
b. $4,400.
c. $5,400.
d. None of these answer choices are correct.
Chapter 11 Property, Plant, and Equipment and Intangible Assets:
Utilization and Impairment
Matching Pair Questions
93. Listed below are five terms followed by a list of phrases that describe or characterize each of
the terms. Match each phrase with the number for the correct term.
TERM
PHRASE
NUMBER
1. Write-down of asset
Occurs with a significant decline in value.
____
2. Straight-line method
Estimates service life in units of output.
____
3. Composite method
Does not subtract residual value from cost when
calculating depreciation.
____
4. Double-declining balance
Aggregates assets that are physically dissimilar
when calculating depreciation.
____
5. Activity-based method
Produces a level amount of annual depreciation.
____
1. Write-down of asset
Occurs with a significant decline in value.
2. Straight-line method
Estimates service life in units of output.
3. Composite method
Does not subtract residual value from cost when
4. Double-declining balance
Aggregates assets that are physically dissimilar
when calculating depreciation.
5. Activity-based method
Produces a level amount of annual depreciation.
Chapter 11 Property, Plant, and Equipment and Intangible Assets:
Utilization and Impairment
94. Listed below are five terms followed by a list of phrases that describe or characterize five of
the terms. Match each phrase with the number for the correct term.
TERM
PHRASE
NUMBER
1. Book value
Only used for tax purposes.
____
2. Date placed in service
Cost less accumulated depreciation.
____
3. Percentage depletion
Three methods are employed to record these costs.
____
4. Rearrangements
Expenditures made to restructure an asset without
addition, replacement, or improvement.
____
5. Improvements
Triggers commencement of depreciation.
____
TERM
1. Book value
Only used for tax purposes.
2. Date placed in service
Cost less accumulated depreciation.
3. Percentage depletion
Three methods are employed to record these costs.
4. Rearrangements
Expenditures made to restructure an asset without
5. Improvements
Triggers commencement of depreciation.
Chapter 11 Property, Plant, and Equipment and Intangible Assets:
Utilization and Impairment
95. Listed below are five terms followed by a list of phrases that describe or characterize each of
the terms. Match each phrase with the number for the correct term.
TERM
PHRASE
NUMBER
1. Depletion
Cost allocation for a natural resource.
____
2. Change in depreciation
method
Amount of use expected from plant and equipment
asset.
____
3. Service life
Cost less residual value.
____
4. Allocation base
Treated prospectively like a change in estimate
____
5. Amortization
Cost allocation for an intangible asset.
____
TERM
1. Depletion
Cost allocation for a natural resource.
method
asset.
3. Service life
Cost less residual value.
4. Allocation base
Treated prospectively like a change in estimate
5. Amortization
Cost allocation for an intangible asset.
Chapter 11 Property, Plant, and Equipment and Intangible Assets:
Utilization and Impairment
96. Listed below are five terms followed by a list of phrases that describe or characterize each of
the terms. Match each phrase with the number for the correct term.
TERM
PHRASE
NUMBER
1. Depreciation
Generate declining amounts of depreciation over
time.
____
2. Prior period adjustment
Allocation of cost for plant and equipment.
____
3. Accelerated methods
Expenditures made to maintain a given level of
benefits from an asset.
____
4. Change in useful life
Results from subsequent year correction of a
material error.
____
5. Repairs and maintenance
Is a change in accounting estimate.
____
TERM
1. Depreciation
Generate declining amounts of depreciation over
time.
2. Prior period adjustment
Allocation of cost for plant and equipment.
3. Accelerated methods
Expenditures made to maintain a given level of
benefits from an asset.
4. Change in useful life
Results from subsequent year correction of a
material error.
5. Repairs and maintenance
Is a change in accounting estimate.
Chapter 11 Property, Plant, and Equipment and Intangible Assets:
Utilization and Impairment
97. Listed below are five terms followed by a list of phrases that describe or characterize each of
the terms. Match each phrase with the number for the correct term.
TERM
PHRASE
NUMBER
1. Indefinite life
The reason for not amortizing goodwill.
____
2. Group method
Cost allocation for plant and equipment.
____
3. Depreciation
Aggregates assets that are similar.
____
4. Time-based method
Estimates service life in years.
____
5. Sum-of-the-years’-digits
method
Results in depreciation declining by the same
amount in subsequent years.
____
Answer:
1. Indefinite life
The reason for not amortizing goodwill.
2. Group method
Cost allocation for plant and equipment.
3. Depreciation
Aggregates assets that are similar.
4. Time-based method
Estimates service life in years.
5. Sum-of-the-years’-digits
Results in depreciation declining by the same