 CHAPTER 13 

Investments in Noncurrent Operating

Assets—Utilization and Retirement
MULTIPLE CHOICE QUESTIONS
Theory/Definitional Questions

1 Purpose of depreciation
2 Depreciation as systematic and rational allocation
3 Information necessary to compute depletion per unit
4 Composite depreciation method
5 Determine fraction for fourth year under five-year SYD
6 Depreciation using SYD method
7 Assumptions of straight-line depreciation
8 DDB ignores salvage value
9 Reporting and disclosure requirements of assets/depreciation
10 Depreciation of natural resources
11 Considerations in determining useful life of intangible asset
12 Straight-line amortization recommended for intangible assets
13 Depreciation method that applies a uniform depreciation rate
14 Forty-year amortization for intangible assets if indefinite benefit
15 Theoretical support for accelerated depreciation
16 Effect of changing the estimate of an asset’s useful life
17 Productive output depreciation same as depletion
18 When sale of depreciable asset results in loss
19 The exchange of similar assets that involves a gain
20 Depreciation expense for the double-declining-balance method
21 Capitalization of legal fees to defend patents
22 Composite and group depreciation both use straight-line
23 Depreciation under productive output, SYD, and DDB-Comparison
24 The exchange of similar assets that involves a loss
25 Carrying amount of group assets upon retirement of one
26 Journal entry for trade of assets
27 MACRS and optional straight-line tax depreciation

Computational Questions
28 Computation of DDB depreciation expense
29 Computation of DDB depreciation expense
30 Amortization of organizational costs

235
236 Chapter 13  Investments in Noncurrent Operating Assets—Utilization and Retirement

31 Computation of DDB depreciation expense

32 Computation of cost of new product with trade-in
33 Computation of 150% DB accumulated depreciation balance
34 Amortization of trademark
35 Computation of cost of new product with exchange
36 Computation of SYD accumulated depreciation
37 Computation of SYD accumulated depreciation balance
38 Computation of SYD depreciation expense
39 Computation of gain/loss on disposition
40 Computation of SYD depreciation expense
41 Computation of SYD depreciation expense
42 Computation of value of truck on books
43 Computation of SYD depreciation expense
44 Straight-line depreciation expense
45 Computation of recognized profit on exchange
46 Straight-line depreciation expense with extension of life
47 SYD depreciation expense
48 Computation of straight-line depreciation expense
49 Life of assets under straight-line composite method
50 Computation of straight-line depreciation expense
51 Straight-line accumulated depreciation
52 SYD depreciation expense
53 DDB depreciation expense
54 Units-of-production depreciation expense
55 SYD depreciation and the exchange of assets
56 SYD depreciation and the exchange of assets
57 Computation of patent amortization expense
58 Computation of new asset’s value with trade-in
59 Computation of new asset’s value with trade-in
60 Computation of patent amortization expense
61 Computation of trademark amortization expense
62 Computation of depletion charge per ton
63 Computation of new asset’s value with trade-in
64 Computation of depletion included in COGS
65 Computation of depletion rate per ton
66 Computation of new asset’s value with trade-in
67 Value of machine acquired by exchange
68 Computation of gain/loss on disposal
69 Computation of gain on forced sale
70 Computation of loss on machine sale
71 Value of machine acquired by exchange
72 Value of land acquired by exchange
73 Journalize exchange of land
74 Computation of gain on exchange
Test Bank, Intermediate Accounting, 14th ed. 237

PROBLEMS
1 Computation of expense under DDB, SYD, straight-line, service hours
2 Computation of expense under DDB, SYD, straight-line
3 Computation of composite life and depreciation rate
4 Computation of annual rate and charge under straight-line, service
hours, productive-output
5 Computation of amortization for four years
6 Computation of depletion charge
7 Prepare intangible assets section of balance sheet
8 Journalize exchange on both parties' books
9 Journalize exchange on similar, dissimilar assets
10 Journalize exchange on similar, dissimilar assets
11 Recording an impairment loss
12 Recording an impairment loss with goodwill
13 Impairment and revaluation under international accounting standards
14 MACRS computation
15 Impairment of assets

MULTIPLE CHOICE QUESTIONS

b 1. Depreciation of noncurrent operating assets is an accounting process for
the
LO1 purpose of
a. reporting declining asset values on the balance sheet.
b. allocating asset costs over the periods benefitted by use of the assets.
c. accounting for costs to reflect the change in general price levels.
d. setting aside funds to replace assets when their economic usefulness
expires.

c 2. Which of the following principles best describes the conceptual rationale for
LO1 the methods of matching depreciation expense with revenues?
a. Partial recognition
b. Immediate recognition
c. Systematic and rational allocation
d. Associating cause and effect

a 3. Information needed to compute a depletion charge per unit includes the

LO3 a. estimated total amount of resources available for removal.
238 Chapter 13  Investments in Noncurrent Operating Assets—Utilization and Retirement

b. amount of resources removed during the period.

c. cumulative amount of resources removed.
d. amount of resources sold during the period.

c 4. The composite depreciation method

LO1 a. is applied to a group of homogeneous assets.
b. is an accelerated method of depreciation.
c. does not recognize gain or loss on the retirement of specific assets in
the group.
d. excludes salvage value from the base of the depreciation calculation.

d 5. The sum-of-the-years’-digits method of depreciation is being used for a

LO1 machine with a five-year estimated useful life. What would be the fraction
applied to the cost to be depreciated in the fourth year?
a. 4/5
b. 2/5
c. 4/15
d. 2/15

d 6. In order to calculate the third year’s depreciation on an asset using the

sum-of-
LO1 the-years'-digits method, which of the following must be known about the
asset?
a. Its acquisition cost
b. Its estimated salvage value
c. Its estimated useful life
d. All the above must be known.

b 7. Which of the following statements is the assumption on which straight-line

LO1 depreciation is based?
a. The operating efficiency of the asset decreases in later years.
b. Service value declines as a function of time rather than use.
c. Service value declines as a function of obsolescence rather than time.
d. Physical wear and tear are more important than economic
obsolescence.

d 8. A method that ignores salvage value in calculating periodic depreciation

LO1 expense is the
a. productive-output method.
b. group composite method.
c. sum-of-the-years’-digits method.
d. double-declining-balance method.
Test Bank, Intermediate Accounting, 14th ed. 239

b 9. Which of the following is not required to be reported in the financial

statements
LO1 or disclosed in the accompanying notes?
a. Balances of major classes of noncurrent operating assets at the balance
sheet date
b. Gross historical cost and accumulated amortization for intangible assets
at the balance sheet date
c. Gross historical cost and accumulated depreciation for tangible
noncurrent operating assets at the balance sheet date
d. A general description of the cost allocation methods used with respect to
major classes of noncurrent operating assets

d 10. Which of the following depreciation methods most closely approximates the
LO3 method used to deplete the cost of natural resources?
a. Straight-line method
b. Double-declining-balance method
c. Sum-of-the-years’-digits method
d. Units-of-production method

d 11. Which of the following is not a consideration in determining the useful life of
LO2 an intangible asset?
a. Legal, regulatory, or contractual provisions
b. Provisions for renewal or extension
c. Expected actions of competitors
d. Minimum amortization period prescribed by generally accepted
accounting principles for all intangible assets

b 12. In accordance with generally accepted accounting principles, which of the

LO2 following methods of amortization is normally recommended for intangible
assets?
a. Sum-of-the-years’-digits
b. Straight-line
c. Group composite
d. Double-declining-balance

c 13. Which of the following depreciation methods applies a uniform depreciation

LO1 rate each period to an asset’s book value?
a. Straight-line
b. Units-of-production
c. Declining-balance
d. Sum-of-the-years’-digits
240 Chapter 13  Investments in Noncurrent Operating Assets—Utilization and Retirement

b 14. What is the proper time or time period over which to match costs of an
LO2 intangible asset with revenues if it is likely that the benefit of the asset will
last for an indeterminate but very long period of time?
a. Fifty years
b. Forty years
c. Twenty years
d. Five years

a 15. Which of the following reasons provides the best theoretical support for
LO1 accelerated depreciation?
a. Assets are more efficient in early years and initially generate more
revenue.
b. Expenses should be allocated in a manner that “smooths” earnings.
c. Repairs and maintenance costs will probably increase in later periods,
so depreciation should decline.
d. Accelerated depreciation provides easier replacement because of the
time value of money.

c 16. When the estimate of an asset’s useful life is changed,

LO4 a. depreciation expense for all past periods must be recalculated.
b. there is no change in the amount of depreciation expense recorded for
future years.
c. only the depreciation expense in the remaining years is changed.
d. None of the above are true.

d 17. Which of the following depreciation methods is computed in the same way
as
LO3 depletion?
a. Straight-line
b. Sum-of-the-years’-digits
c. Double-declining-balance
d. Productive-output

d 18. The sale of a depreciable asset resulting in a loss indicates that the
proceeds
LO6 from the sale were
a. less than current market value.
b. greater than cost.
c. greater than book value.
d. less than book value.
Test Bank, Intermediate Accounting, 14th ed. 241

c 19. When an exchange of similar assets involves a gain,

LO6 a. the recorded amount of the new asset is the cost of the old asset plus
any cash paid.
b. the recorded amount of the new asset is its fair market value less any
cash paid.
c. the recorded amount of the new asset is the net book value of the old
asset plus any cash paid.
d. None of the above are true.

c 20. On January 1 Stockton Company acquired a machine with a four-year

useful
LO1 life. Stockton estimates the salvage value of the machine will be equal to
ten percent of the acquisition cost. The company is debating between
using either the double-declining-balance method or the
sum-of-the-years'-digits method of depreciation. Comparing the
depreciation expense for the first two years computed using these methods,
the depreciation expense for the double-declining-balance method
(compared to the sum-of-the-years'-digits method) will match which of the
patterns shown below?
First Second
Year Year
a. Lower Lower
b. Lower Higher
c. Higher Lower
d. Higher Higher

b 21. Legal fees incurred in successfully defending a patent suit should be

LO2 capitalized when the patent has been
Internally Purchased from
Developed an Inventor
a. Yes No
b. Yes Yes
c. No Yes
d. No No

a 22. Which of the following utilizes the straight-line depreciation method?

LO1 Composite Group
Depreciation Depreciation
a. Yes Yes
b. Yes No
c. No Yes
d. No No
242 Chapter 13  Investments in Noncurrent Operating Assets—Utilization and Retirement

b 23. A depreciable asset has an estimated 15 percent salvage value. At the end
LO1 of its estimated useful life, the accumulated depreciation would equal the
original cost of the asset under which of the following depreciation
methods?
Productive- Sum-of-the- Double-
Output Years’-Digits Declining-Balance
a. Yes No No
b. No No No
c. No Yes No
d. Yes Yes Yes

c 24. When similar assets are exchanged at a loss, the basis of the new asset is
LO6 usually
a. the list price of the new asset.
b. the book value of the old asset plus any cash paid on the trade-in.
c. the fair market value of the new asset.
d. Either b or c.

c 25. A company using the group depreciation method for its delivery trucks
retired
LO6 one of the trucks after the average service life of the group was reached.
Cash proceeds were received from a salvage company. The net carrying
amount of these group asset accounts would be decreased by the
a. original cost of the truck.
b. original cost of the truck less the cash proceeds.
c. cash proceeds received.
d. cash proceeds received and original cost of the truck.

a 26. In recording the trade of one asset for another, which of the following
accounts
LO6 is usually debited?
a. Accumulated Depreciation—Old Asset
b. Cash
c. Gain on Exchange of Asset
d. None of the above

b 27. Which of the following is correct?

LO8 a. Use of the MACRS tables requires that salvage value be deducted in
computing depreciation deductions.
b. Use of the optional straight-line method requires that salvage value not
be
Test Bank, Intermediate Accounting, 14th ed. 243

considered in computing depreciation deductions.

c. The use of both the MACRS tables and the optional straight-line method
requires that salvage value be deducted in computing depreciation
deductions.
d. None of the above are true.

b 28. Dewey Company purchased a machine that was installed and placed in
service
LO1 on January 2, 2001, at a total cost of $480,000. Residual value was
estimated at $80,000. The machine is being depreciated over ten years by
the double-declining-balance method. For the year 2002, Dewey should
record depreciation expense of
a. $64,000.
b. $76,800.
c. $80,000.
d. $96,000.

c 29. On July 1, 2001, Ewell Corporation purchased factory equipment for

$100,000.
LO7 Salvage value was estimated at $4,000. The equipment will be depreciated
over ten years using the double-declining-balance method. Counting the
year of acquisition as one-half year, Ewell should record 2002 depreciation
expense of
a. $15,366.
b. $16,000.
c. $18,000.
d. $19,200.

d 30. Mackay, Inc. was organized late in 2001 and began operations on January
1,
LO2 2002. Prior to the start of operations, the following costs were incurred:
Attorney’s fees for incorporating........................................... $18,000
State incorporation filing fees................................................ 12,000

Mackay amortizes organization costs over the maximum period allowable

under GAAP. How much amortization should Mackay record for the year
ended December 31, 2002?
a. $750
b $3,600
c. $6,000
d. $30,000

b 31. Luther Soaps purchased a machine on January 1, 2000, for $18,000 cash.
244 Chapter 13  Investments in Noncurrent Operating Assets—Utilization and Retirement

LO1 The machine has an estimated useful life of four years and a salvage value
of $4,700. Luther uses the double-declining-balance method of
depreciation for all its assets. What will be the machine’s book value as of
December 31, 2001?
a. $5,100
b. $4,700
c. $4,500
d. $4,300

c 32. Malone Company traded in an old machine with a book value of $15,000 on
LO6 a new similar machine. The new machine, which had a cash price of
$75,000, was purchased for $64,000 cash plus the old machine. Malone
should record the cost of the new machine as
a. $64,000.
b. $71,000.
c. $75,000.
d. $79,000.

d 33. Overberg Company purchased a machine on January 2, 2001, for

$1,000,000.
LO1 The machine has an estimated useful life of five years and a salvage value
of $100,000. Depreciation was computed by the 150% declining-balance
method. The accumulated depreciation balance at December 31, 2002,
should be
a. $360,000.
b. $459,000.
c. $490,000.
d. $510,000.

d 34. Zufelt Company bought a trademark from Basin Corporation on January 1,

LO2 2002, for $168,000. An independent consultant retained by Zufelt
estimated that the remaining useful life is 50 years. Its unamortized cost on
Basin’s accounting records was $84,000. Zufelt decided to write off the
trademark over the maximum period allowed. How much should be
amortized for the year ended December 31, 2002?
a. $1,680
b. $2,100
c. $3,360
d. $4,200

a 35. Jordan Company exchanged a used autograph-signing machine with

Rodman
LO6 Company for a similar machine with less use. Jordan’s old machine
originally cost $50,000 and had accumulated depreciation of $40,000, as
Test Bank, Intermediate Accounting, 14th ed. 245

well as a market value of $40,000, at the time of the exchange. Rodman’s

old machine originally cost $60,000 and at the time of the exchange had a
book value of $30,000 and a market value of $32,000. Rodman gave
Jordan $8,000 cash as part of the exchange. Jordan should record the cost
of the new machine at
a. $8,000.
b. $10,000.
c. $16,000.
d. $32,000.
246 Chapter 13  Investments in Noncurrent Operating Assets—Utilization and Retirement

c 36. XYZ Corporation bought a machine on January 1, 2002. In purchasing the

LO1 machine, the company paid $50,000 cash and signed an interest-bearing
note for $100,000. The estimated useful life of the machine is five years,
after which time the salvage value is expected to be $15,000. Given this
information, how much depreciation expense would be recorded for the
year ending December 31, 2003, if the company uses the sum-of-the-
years’-digits depreciation method?
a. $45,000
b. $40,000
c. $36,000
d. $34,000

c 37. On January 1, 2002, Carson Company purchased equipment at a cost of

LO1 $420,000. The equipment was estimated to have a useful life of five years
and a salvage value of $60,000. Carson uses the sum-of-the-years’-digits
method of depreciation. What should the accumulated depreciation be at
December 31, 2002?
a. $240,000
b. $288,000
c. $336,000
d. $360,000

c 38. On September 30, 2002, Ira Party Supplies purchased catering equipment
for
LO7 $4,680. The equipment is estimated to have a useful life of eight years and
no salvage value. If Ira selected the sum-of-the-years’-digits method, what
will be the depreciation expense for 2002?
a. $1,040
b. $347
c. $260
d. $130

d 39. On June 30, 2002, a fire in Oak Company’s plant caused the total loss of a
LO6 production machine. The machine was being depreciated at $20,000
annually and had a carrying amount of $160,000 at December 31, 2001.
On the date of the fire, the fair value of the machine was $220,000, and
Pine received insurance proceeds of $200,000 in October 2002. In its
income statement for the year ended December 31, 2002, what amount
should Oak recognize as a gain or loss on disposition?
a. $0
b. $20,000 loss
c. $40,000 gain
d. $50,000 gain
Test Bank, Intermediate Accounting, 14th ed. 247

a 40. On January 1, 2000, Kalos Co. purchased a new machine for $2,500,000.
The
LO1 new machine has an estimated useful life of five years and the salvage
value was estimated to be $250,000. Kalos uses the sum-of-the-years’-
digits method of depreciation. The amount of depreciation expense for
2002 is
a. $450,000.
b. $600,000.
c. $666,667.
d. $750,000.

b 41. On September 30, 2001, Ira Party Supplies purchased catering equipment
for
LO7 $4,680. The equipment is estimated to have a useful life of eight years and
no salvage value. Assuming that the sum-of-the-years’-digits method is
used, what will be the depreciation expense for 2002?
a. $1,040.00
b. $1,007.50
c. $945.50
d. $910.00

c 42. On December 2, 2001, Part Company, which operates a furniture rental

LO6 business, traded in a used delivery truck with a carrying amount of $5,400
for a new delivery truck having a list price of $16,000 and paid a cash
difference of $7,500 to the dealer. The used truck had a fair value of
$6,000 on the date of the exchange. At what amount should the new truck
be recorded on Part’s books?
a. $10,600
b. $12,900
c. $13,500
d. $16,000

b 43. On January 1, 2002, Carson Company purchased equipment at a cost of

LO1 $420,000. The equipment was estimated to have a useful life of five years
and a salvage value of $60,000. Carson uses the sum-of-the-years’-digits
method of depreciation. What should the accumulated depreciation be at
December 31, 2001?
a. $240,000
b. $288,000
c. $336,000
d. $360,000
 a 44. In January, Hunter Corporation entered into a contract to acquire a new
LO1 machine for its factory. The machine, which had a cash price of $300,000,
was paid for as follows:
Down payment....................................................................... $ 30,000
Note payable in 10 equal monthly installments.................... 240,000
1,000 shares of Hunter common stock with an agreed
value of $50 per share.................................................... 50,000
Total....................................................................................... $320,000

Prior to the machine’s use, installation costs of $8,000 were incurred. The
machine has an estimated useful life of ten years and an estimated salvage
value of $10,000. What should Hunter record as depreciation expense for
the first year under the straight-line method?
a. $29,800
b. $30,000
c. $31,000
d. $31,800

b 45. Melvin Motor Sales exchanged a car from its inventory for a computer to be
LO6 used as a noncurrent operating asset. The following information relates to
this exchange that took place on July 31, 2002:
Carrying amount of the car.................................................... $30,000
Listed selling price of the car................................................. 45,000
Fair value of the computer.................................................... 43,000
Cash difference paid by Melvin............................................. 5,000

On July 31, 2002, how much profit should Melvin recognize on this
exchange?
a. $0
b. $8,000
c. $10,000
d. $13,000
 b 46. The Bucol Company purchased a tooling machine in 1992 for $120,000.
The
LO4 machine was being depreciated on the straight-line method over an
estimated useful life of 20 years, with no salvage value. At the beginning of
2002, when the machine had been in use for ten years, the company paid
$20,000 to overhaul the machine. As a result of this improvement, the
company estimated that the useful life of the machine would be extended
an additional five years. What would be the depreciation expense recorded
for the above machine in 2002?
a. $4,000
b. $5,333
c. $6,000
d. $7,333

c 47. Tillman Company owns a machine that was bought on January 2, 1999, for
LO4 $376,000. The machine was estimated to have a useful life of five years
and a salvage value of $24,000. Tillman uses the sum-of-the-years’-digits
method of depreciation. At the beginning of 2002, Tillman determined that
the useful life of the machine should have been four years and the salvage
value $35,200. For the year 2002, Tillman should record depreciation
expense on this machine of
a. $19,200.
b. $44,400.
c. $59,200.
d. $70,400.

b 48. Hendricks Construction purchased a crane on January 1, 2001, for

$102,750.
LO4 At the time of purchase, the crane was estimated to have a life of six years
and a residual value of $6,750. In 2003, Hendricks determined that the
crane had a total useful life of seven years and a residual value of $4,500.
If Hendricks uses the straight-line method of depreciation, what will be the
depreciation expense for the crane in 2003?
a. $16,000
b. $13,250
c. $9,464
d. $8,000
 b 49. At the start of its business, Snell Corp. decided to use the composite
method
LO1 of depreciation and prepared the following schedule of machinery owned.
Total Estimated Estimated Life
Cost Salvage Value in Years
Machine A $275,000 $25,000 20
Machine B 100,000 10,000 15
Machine C 20,000 -- 5

Snell computes depreciation on the straight-line method. Based on the

information presented, the composite life of these assets (in years) should
be
a. 13.3.
b. 16.0.
c. 18.0.
d. 19.8.

c 50. A truck that cost $8,000 was originally being depreciated over four years
using
LO4 the straight-line method with no salvage value. If after one year, it was
decided that the truck would last an additional four years (or a total of five
years), the second year’s depreciation would be
a. $2,000.
b. $1,000.
c. $1,500.
d. $2,500.

d 51. Andrews Manufacturing Company purchased a new machine on July 1,

2001.
LO7 It was expected to produce 200,000 units of product over its estimated
useful life of eight years. Total cost of the machine was $600,000, and
salvage value was estimated to be $60,000. Actual units produced by the
machine in 2001 and 2002 are shown below.
2001...................................................................... 16,000 units
2002...................................................................... 30,000 units

Andrews reports on a calendar-year basis and uses the straight-line

method of depreciation, computed to the nearest month. The amount of
accumulated depreciation on this machine at December 31, 2002 would be
a. $150,000.
b. $135,000.
c. $112,500.
d. $101,250.
 c 52. Andrews Manufacturing Company purchased a new machine on July 1,
2001.
LO7 It was expected to produce 200,000 units of product over its estimated
useful life of eight years. Total cost of the machine was $600,000, and
salvage value was estimated to be $60,000. Actual units produced by the
machine in 2001 and 2002 are shown below.
2001...................................................................... 16,000 units
2002...................................................................... 30,000 units

Andrews reports on a calendar-year basis and uses the sum-of-the-years’-

digits method of depreciation, computed to the nearest month. The amount
of depreciation expense for this machine in 2002 would be
a. $135,000.
b. $125,000.
c. $112,500.
d. $105,000.

a 53. Andrews Manufacturing Company purchased a new machine on July 1,

2001.
LO7 It was expected to produce 200,000 units of product over its estimated
useful life of eight years. Total cost of the machine was $600,000, and
salvage value was estimated to be $60,000. Actual units produced by the
machine in 2001 and 2002 are shown below.
2001...................................................................... 16,000 units
2002...................................................................... 30,000 units

Andrews reports on a calendar-year basis and uses the double-declining-

balance method of depreciation, computed to the nearest month. The
amount of depreciation expense for this machine in 2002 would be
a. $131,250.
b. $118,125.
c. $112,500.
d. $101,250.
 c 54. Andrews Manufacturing Company purchased a new machine on July 1,
2001.
LO7 It was expected to produce 200,000 units of product over its estimated
useful life of eight years. Total cost of the machine was $600,000, and
salvage value was estimated to be $60,000. Actual units produced by the
machine in 2001 and 2002 are shown below.
2001...................................................................... 16,000 units
2002...................................................................... 30,000 units

Andrews reports on a calendar-year basis and uses the units-of-production

method of depreciation. The amount of depreciation expense for this
machine in 2002 would be
a. $124,200.
b. $90,000.
c. $81,000.
d. $74,520.

a 55. On January 1, 2001, Herschel Locks Corporation purchased drilling

equipment
LO6 for $11,500. The equipment has an estimated useful life of four years and
a salvage value of $200. Given this information, if Herschel uses the sum-
of-the-years’-digits method of depreciation and then trades the equipment
for new, dissimilar equipment with a fair market value of $16,000 on
December 31, 2002, and pays $8,000 cash in the exchange, the new
equipment should be recorded at
a. $16,000.
b. $12,475.
c. $11,590.
d. $8,110.

d 56. On January 1, 2001, Herschel Locks Corporation purchased drilling

equipment
LO6 for $11,500. The equipment has an estimated useful life of four years and
a salvage value of $200. Assuming that Herschel uses the straight-line
method of depreciation, if it trades the equipment for new similar equipment
with a list price of $15,500 on December 31, 2002, and pays $4,050 in the
exchange, the new equipment should be recorded at
a. $15,500.
b. $11,450.
c. $9,850.
d. $9,900.
 c 57. Pastel Co. purchased a patent on January 1, 1999, for $714,000. The
patent
LO4 was being amortized over its remaining legal life of 15 years expiring on
January 1, 2008. During 2002, Pastel determined that the economic
benefits of the patent would not last longer than 10 years from the date of
acquisition. What amount should be charged to patent amortization
expense for the year ended December 31, 2002?
a. $47,600
b. $71,400
c. $81,600
d. $142,800

b 58. Hartwell Trucking traded a used truck with a book value of $1,700 and a fair
LO6 market value of $2,300 for a new similar truck with a list price of $17,800.
Hartwell agreed to pay $13,000 in cash for the exchange in addition to
giving up the used truck. At what amount should the new truck be
recorded?
a. $17,800
b. $15,300
c. $14,700
d. None of the above

c 59. Monier Carpet traded cleaning equipment with a cost of $17,000 and
LO6 accumulated depreciation of $3,250 for new similar equipment with a fair
market value of $11,500. Monier should record the new equipment at
a. $14,750.
b. $13,750.
c. $11,500.
d. $7,500.

b 60. During 1997, Volvo Machine Company spent $352,000 on research and
LO2 development costs for an invention. This invention was patented on
January 2, 1998, at a nominal cost that was expensed in 1998. The patent
has a legal life of 17 years and an estimated useful life of 8 years. In
January 2002, Volvo paid $32,000 for legal fees in a successful defense of
the patent. Amortization for 2002 should be
a. $2,462.
b. $8,000.
c. $32,000.
d. $52,000.
 c 61. On January 1, 1998, Barry Company purchased for $600,000, a trademark
LO2 with an estimated useful life of 16 years. In January 2002, Barry paid
$90,000 for legal fees in a successful defense of the trademark. Trademark
amortization expense for the year ended December 31, 2002, should be
a. $37,500.
b. $43,125.
c. $45,000.
d. $90,000.

b 62. Joseph Company acquired a tract of land containing an extractable natural

LO3 resource. Joseph is required by the purchase contract to restore the land
to a condition suitable for recreational use after it has extracted the natural
resource. Geological surveys estimate that the recoverable reserves will be
2,500,000 tons and that the land will have a value of $1,000,000 after
restoration. Relevant cost information follows:
Land....................................................................................... $9,000,000
Estimated restoration costs................................................... 1,500,000

What should be the depletion charge per ton of extracted material?

a. $4.00
b. $3.80
c. $3.60
d. $3.20

c 63. Bunker Construction Company recently exchanged an old truck, which cost
LO6 $108,000 and was one-third depreciated, and paid $70,000 cash for a used
crane having a current fair value of $130,000. At what amount should the
crane be recorded on the books of Bunker?
a. $70,000
b. $108,000
c. $130,000
d. $142,000
 c 64. In January 2002, Vance Mining Corporation purchased a mineral mine for
LO3 $7,200,000 with removable ore estimated by geological surveys at
4,320,000 tons. The property has an estimated value of $720,000 after the
ore has been extracted. Vance incurred $2,160,000 of development costs
preparing the property for the extraction of ore. During 2002, 540,000 tons
were removed and 480,000 tons were sold. For the year ended December
31, 2002, Vance should include what amount of depletion in its cost of
goods sold?
a. $720,000
b. $810,000
c. $960,000
d. $1,080,000

a 65. In 2001, Newman Company paid $1,000,000 to purchase land containing a

LO3 total estimated 160,000 tons of extractable mineral deposits. The estimated
value of the property after the mineral has been removed is $200,000.
Extraction activities began in 2002, and by the end of the year, 20,000 tons
had been recovered and sold. In 2003, geological studies indicated that the
total amount of mineral deposits had been underestimated by 25,000 tons.
During 2003, 30,000 tons were extracted, and 28,000 tons were sold. What
is the depletion rate per ton (rounded to the nearest cent) in 2003?
a. $4.24
b. $4.32
c. $4.85
d. $5.19

b 66. In January 2002, Bevis Company exchanged an old machine, with a book
LO6 value of $156,000 and a fair value of $160,000, and paid $40,000 cash for
a similar used machine having a fair value of $200,000. At what amount
should the machine acquired in the exchange be recorded on Bevis’
books?
a. $156,000
b. $196,000
c. $200,000
d. $204,000

c 67. Ellis Construction Company recently exchanged an old truck, which cost
LO6 $108,000 and was one-third depreciated, and paid $70,000 cash for a
similar truck having a current fair value of $130,000. At what amount
should the truck be recorded on the books of Ellis?
a. $70,000
b. $108,000
c. $130,000
d. $142,000
 b 68. Post Company’s depreciation policy on machinery and equipment is as
follows:
LO7
• A full year’s depreciation is taken in the year of an asset’s acquisition.
• No depreciation is taken in the year of an asset’s disposition.
• The estimated useful life is five years.
• The straight-line method is used.

On June 30, 2002, Post sold for $230,000 a machine acquired in 1999 for
$420,000. The accumulated depreciation for this machine was $216,000 at
December 31, 2001, and the original estimated salvage value was $60,000.
How much gain or (loss) on the disposal should Post record in 2002?
a. A $14,000 gain
b. A $26,000 gain
c. A $26,000 loss
d. A $34,000 loss

d 69. On July 1, Phoenix Corporation, a calendar-year company, received a

LO6 condemnation award of $150,000 as compensation for the forced sale of a
plant located on company property that stood in the path of a new highway.
On this date, the plant building had a depreciated cost of $75,000 and the
land cost was $25,000. On October 1, Phoenix purchased a parcel of land
for a new plant site at a cost of $62,500. Ignoring income taxes, Phoenix
should report in its income statement for the year ended December 31 a
gain of
a. $0.
b. $12,500.
c. $37,500.
d. $50,000.

c 70. The John Company purchased a machine on November 1, 1993, for

$148,000.
LO6 At the time of acquisition, the machine was estimated to have a useful life of
ten years and an estimated salvage value of $4,000. John has recorded
monthly depreciation using the straight-line method. On July 1, 2002, the
machine was sold for $13,000. What should be the loss recognized from
the sale of the machine?
a. $4,000
b. $5,000
c. $10,200
d. $13,000
 d 71. In January 2002, Butz Company exchanged an old machine, with a book
value
LO6 of $156,000 and a fair value of $140,000, and paid $40,000 cash for a
similar used machine having a list price of $200,000. At what amount
should the machine acquired in the exchange be recorded on Butz’s
books?
a. $200,000
b. $196,000
c. $184,000
d. $180,000

b 73. Eagle Company owns a tract of land that it purchased in 1999 for $200,000.
LO6 The land is held as a future plant site and has a fair market value of
$280,000 on July 1, 2002. Hall Company also owns a tract of land held as
a future plant site. Hall paid $360,000 for the land in 2001 and the land has
a fair market value of $380,000 on July 1, 2002. On this date, Eagle
exchanged its land and paid $100,000 cash for the land owned by Hall. At
what amount should Eagle record the land acquired in the exchange?
a. $280,000
b. $300,000
c. $320,000
d. $380,000

b 74. A company owns a piece of land that originally cost $10,000 and has a fair
LO6 market value of $8,000. It is exchanged along with $5,000 cash for another
piece of land having a fair value of $13,000. The proper journal entry to
record this transaction is
a. Land (new)............................................................ 15,000
Land (old)......................................................... 10,000
Cash................................................................. 5,000
b. Land (new)............................................................ 13,000
Loss on Exchange................................................. 2,000
Land................................................................. 10,000
Cash................................................................. 5,000
c. Land (new)............................................................ 18,000
Land (old)......................................................... 10,000
Cash................................................................. 5,000
Gain on Exchange........................................... 3,000
d. Land (new)............................................................ 13,000
Retained Earnings................................................. 2,000
Land (old)......................................................... 10,000
Cash................................................................. 5,000
 d 75. In October 2002, Daryl Company exchanged a used packaging machine
LO6 having a book value of $240,000 for a dissimilar new machine and paid a
cash difference of $30,000. The market value of the used packaging
machine was determined to be $280,000. In its income statement for the
year ended December 31, 2002, how much gain should Daryl recognize on
this exchange?
a. $0
b. $10,000
c. $30,000
d. $40,000

PROBLEMS
Problem 1
Burton Excavating purchased a bulldozer on June 1, 2002. The following
information regarding this asset and its acquisition is available:

Cost .......................................................................................... $380,000

Residual value.......................................................................... $30,000
Estimated useful life................................................................. 8 years
Estimated service hours........................................................... 60,000

The bulldozer was operated for a total of 6,100 hours in 2002 and 8,200 hours in
2003. It is company policy to take a half-year’s depreciation on all assets in the
year of acquisition.

Compute the depreciation expense for 2002 and 2003 under each of the following
methods:

(1) Double-declining-balance
(2) Sum-of-the-years’-digits
(3) Straight-line
(4) Service hours (round rate to the nearest cent)

Solution 1
LO7
(1) Double-declining-balance (200%)

2002: 25% x $380,000 x ½ = $47,500

2003: 25% ($380,000 - $47,500) = $83,125
(2) Sum-of-the-years’-digits: [8(8+1)/2] = 36

2002: (8/36 x $350,000 x 1/2) = $38,889

2003: (8/36 x $350,000 x 1/2) = $38,889
(7/36 x $350,000 x 1/2) = 34,028
$72,917

(3) Straight-line

2002: ($350,000/8) x ½ = $21,875

2003: $350,000/8 = $43,750

(4) Service hours ($350,000)

Depreciation expense per hour = ($350,000/60,000) = $5.83 (rounded)

2002: 6,100 x $5.83 = $35,563

2003: 8,200 x $5.83 = $47,806

Problem 2
On May 1, 2002, Reginald Inc. purchased equipment at a cost of $280,000. The
equipment has an estimated salvage value of $12,000 and is being depreciated
over an estimated life of six years. The company’s policy is to recognize
depreciation to the nearest whole month.

Compute the charge for depreciation on this equipment for the years ended
December 31, 2002 and 2003, under the following methods:

(1) Double-declining-balance
(2) Sum-of-the-years’-digits
(3) Straight-line

Solution 2
LO7
(1) Double-declining-balance

2002: $280,000 x 33 1/3% x 8/12 = $62,222

2003: ($280,000 - $62,222) x 33 1/3% = $72,593
(2) Sum-of-the-years’-digits: [6(7)/2] = 21

2002: $268,000 x 6/21 x 8/12 = $51,048

2003: $268,000 x 6/21 x 4/12 = $25,524
$268,000 x 5/21 x 8/12 = 42,540
$68,064

(3) Straight-line

2002: $268,000/6 x 8/12 = $29,778

2003: $268,000/6 = $44,667

Problem 3
The following is a schedule of machinery owned by Martin Manufacturing
Company.
Estimated Estimated
Total Salvage Life in
Cost Value Years
Machine A $ 600,000 $110,000 20
Machine B 315,000 30,000 10
Machine C 84,000 0 15
Machine D 107,000 7,000 5
$1,106,000

Martin computes depreciation on the straight-line basis. Based on the information

presented, compute the:

(1) Composite life of these assets (in years).

(2) Composite depreciation rate.

Solution 3
LO1 Salvage Depreciable Estimated Annual
Asset Cost Value Cost Life Depreciation
A $ 600,000 $110,000 $490,000 20 $24,500
B 315,000 30,000 285,000 10 28,500
C 84,000 0 84,000 15 5,600
D 107,000 7,000 100,000 5 20,000
$1,106,000 $147,000 $959,000 $78,600

(1) $959,000/$78,600 = 12.20 years

(2) $78,600/$1,106,000 = 7.11%

Problem 4
Hearsa Manufacturing Inc. purchased a new machine on January 2, 2002, that was
built to perform one function on its assembly line. Data pertaining to this machine
are:

Acquisition cost...................................................................... $330,000

Residual value....................................................................... $30,000
Estimated service life:
Years................................................................................ 5
Service hours................................................................... 250,000
Production output............................................................. 300,000

Using each of the following methods, compute the annual depreciation rate and
charge for the years ended December 31, 2002 and 2003:

(1) Straight-line
(2) Service hours (assume 32,000 hours for 2002 and 36,000 hours for 2003).
(3) Productive-output (assume 31,000 units for 2002 and 37,000 units for 2003).

Solution 4
LO1
(1) Straight-line:
2002: ($330,000 - $30,000)/5 = $60,000
2003: $60,000

(2) Service hours: ($330,000 - $30,000)/250,000 = $1.20 per hour depreciation

rate
2002: $1.20 x 32,000 = $38,400
2003: $1.20 x 36,000 = $43,200

(3) Productive-output: ($330,000 - $30,000)/300,000 = $1.00 per unit depreciation

rate
2002: $1.00 x 31,000 = $31,000
2003: $1.00 x 37,000 = $37,000

Problem 5
The Fitzsimmons Company applied for and received numerous patents at a total
cost of $286,500 at the beginning of 1999. It is assumed the patents will be useful
evenly during their full legal lives. At the beginning of 2001, the company paid
$48,600 in legal fees for successful defense in a patent infringement suit. At the
beginning of 2002, information became available that caused the company to
reduce the remaining life of the patents to five years.
Calculate the amortization expense for the years 1999, 2000, 2001, and 2002.
Round to the nearest dollar.

Solution 5
LO2
1999: $286,500/17 = $16,853

2000: $286,500/17 = $16,853

2001: Acquisition cost $286,500

Less: amortization to date 33,706
Carrying value $252,794
Successful defense 48,600
New carrying value $301,394
Remaining life = 15 years
$301,394/15 = $20,093

2002: Carrying value, Jan. 1, 2001 $301,394

Amortization for 2001 20,093
Carrying value, Jan. 1, 2002 $281,301

Remaining life = 5 years

$281,301/5 = $56,260

Problem 6
In 2001, Silverspur Mining Inc. purchased land for $5,600,000 that had a natural
resource supply estimated at 4,000,000 tons. When the natural resources are
removed, the land has an estimated value of $640,000. The required restoration
cost for the property is estimated to be $800,000.

Development and road construction costs on the land were $560,000, and a
building was constructed at a cost of $88,000 with an estimated $8,000 salvage
value when all the natural resources have been extracted.

During 2002, additional development costs of $272,000 were incurred, but

additional resources were not discovered. Production for 2001 and 2002 was
700,000 tons and 900,000 tons, respectively.

Compute the depletion charge for 2001 and 2002. (Include depreciation on the
building, if any, as a depletion charge.) Round depletion charge to the nearest
cent.
Solution 6
LO3
Acquisition costs.................................................................... $5,600,000
Restoration costs................................................................... 800,000
Residual value--land.............................................................. (640,000)
Development costs................................................................ 560,000
Building ................................................................................. 88,000
Salvage value--building......................................................... (8,000)
$6,400,000
$6,400,000/4,000,000 tons = $1.60 per ton

2001: 700,000 tons x $1.60 = $1,120,000

2002: Original cost $6,400,000
Additional costs--2002 272,000
6,672,000
Estimated depletion--2001 (1,120,000)
Balance subject to depletion $5,552,000

$5,552,000/3,300,000 tons = $1.68 per ton (rounded)

900,000 tons x $1.68 = $1,512,000

Problem 7
Information concerning Thomas Corporation’s intangible assets is as follows:

Thomas incurred $352,000 of experimental and development costs in its laboratory

to develop a patent that was granted on January 2, 2002. Legal fees and other
costs associated with registration of the patent totaled $65,600. Thomas estimates
that the useful life of the patent will be eight years.

A trademark was purchased from Johnson Company for $160,000 on July 1, 1999.
Expenditures for successful litigation in defense of the trademark totaling $40,000
were paid on July 1, 2002. Thomas estimates that the useful life of the trademark
will be 20 years from the date of acquisition.

Prepare a schedule showing the intangible assets section of Thomas’ balance

sheet at December 31, 2002.
Solution 7
LO2
Thomas Corporation
Balance Sheet (partial)
December 31, 2002

Patent, net of accumulated amortization of $8,200..................... $ 57,400 *

Trademark, net of accumulated amortization of $29,176............ 170,824
**
$ 228,224
* Patent
Capitalized cost of patent at January 2, 2002......................... $ 65,600
Amortization ($65,600/8 years)...................................................... (8,200)
Balance: December 31, 2002................................................. $ 57,400

Accumulated
** Trademark Cost Amortization
Cost of Trademark..................................... $160,000
Amortization (July 1, 1999 - Dec. 31, 2001)
($160,000/20 x 2 1/2)................................ $20,000
Amortization (Jan. 1, 1999 - June 30, 2002)
($8,000 x 1/2).......................................... 4,000
Cost of successful defense........................ 40,000
$200,000 $24,000
Amortization (July 1, 2002 - Dec. 31, 2002)
[($200,000 - $24,000)/17] x ½...................... 5,176
$200,000
$29,176
Deduct accumulated amortization............. 29,176
Trademark balance.................................... $170,824

Problem 8
Riley Company owns a machine that cost $560,000, has a book value of $240,000,
and an estimated fair value of $480,000. Fizzer Company has a machine that cost
$720,000, has accumulated depreciation of $400,000, and an estimated fair value
of $640,000. The machines of both companies are of the same type and perform
the same function. Riley and Fizzer, both in the same line of business, trade
assets and Riley pays Fizzer cash of $160,000.

(1) Record the exchange on Riley Company’s books.

(2) Record the exchange on Fizzer Company’s books.
Solution 8
LO6
(1) Riley Company’s books
Machinery................................................................... 640,000
Accumulated Depreciation......................................... 320,000
Machinery........................................................... 560,000
Cash................................................................... 160,000
Gain on Exchange of Asset................................ 240,000 *

* Because cash equals 25% or more of the fair value of the exchange.

(2) Fizzer Company’s books

Cash............................................................................ 160,000
Machinery................................................................... 480,000
Accumulated Depreciation......................................... 400,000
Machinery........................................................... 720,000
Gain on Exchange of Asset................................ 320,000 *

* Cost.......................................................................... $720,000
Accumulated depreciation........................................ 400,000
Book value................................................................ $320,000
Fair value.................................................................. 640,000
Gain.......................................................................... $320,000

Problem 9
The Chase Company exchanged equipment costing $240,000 with accumulated
depreciation of $90,000 for equipment owned by Jones Corporation. The Jones
equipment cost $330,000 with accumulated depreciation of $120,000. The fair
value of both pieces of equipment was $300,000.

Provide the necessary entries to record the transaction on both companies’ books
assuming:

(1) The assets exchanged are similar and Chase and Jones are in the same line
of business.
(2) The assets exchanged are dissimilar.
Solution 9
LO6
(1) Chase: Equipment.................................................. 150,000
Accumulated Depreciation......................... 90,000
Equipment............................................. 240,000

Jones: Equipment.................................................. 210,000

Accumulated Depreciation......................... 120,000
Equipment............................................. 330,000

(2) Chase: Equipment.................................................. 300,000

Accumulated Depreciation......................... 90,000
Equipment............................................. 240,000
Gain on Exchange of Equipment.......... 150,000

Jones: Equipment.................................................. 300,000

Accumulated Depreciation......................... 120,000
Equipment............................................. 330,000
Gain on Exchange of Equipment.......... 90,000

Problem 10
Seaver Inc. exchanged a machine costing $400,000 with accumulated depreciation
of $280,000 for a machine from the Goodin Company. Goodin paid $20,800 cash
in addition to its machine (which cost $200,000 with accumulated depreciation of
$68,000) for the Seaver machine. The Goodin machine has a fair value of
$160,000.

Provide the necessary entries to record the transactions on both companies’ books
assuming the machines are similar and Seaver and Goodin are in the same line of
business.

Solution 10
LO6
Goodin: Machinery........................................................... 152,800
Accumulated Depreciation................................. 68,000
Machinery................................................... 200,000
Cash........................................................... 20,800
 Seaver: Machinery........................................................... 106,195
Accumulated Depreciation................................. 280,000
Cash................................................................... 20,800
Machinery................................................... 400,000
Gain on Exchange of Machinery................ 6,995 *
* [$20,800/($20,800 + $160,000)] x ($180,800 - $120,000) = $6,995

Problem 11
Johnson Company purchased equipment 8 years ago for $1,000,000. The
equipment has been depreciated using the straight-line method with a 20-year
useful life and 10% residual value. Johnson’s operations have experienced
significant losses for the past 2 years and, as a result, the company has decided
that the equipment should be evaluated for possible impairment. The
management of Johnson Company estimates that the equipment has a remaining
useful life of 7 years. Net cash inflow from the equipment will be $80,000 per
year. The fair value of the equipment is $240,000. No goodwill was associated
with the purchase of the equipment.

(1) Determine if an impairment loss should be recognized.

(2) Determine the amount of the loss and prepare the journal entry to record the
loss.
(3) How would your answer to (1) change if the fair value of the building was
$500,000?

Solution 11
LO5
(1) Annual depreciation for the equipment has been $45,000 ($1,000,000 -
$100,000)/20 years. Current book value of the equipment is:

Original cost........................................................ $1,000,000

Accumulated depreciation ($45,000 x 8 years). 360,000
Book value.......................................................... $ 640,000

The book value of $640,000 is compared to the undiscounted sum of the future
cash flows to determine whether the equipment is impaired. The sum of the
future cash flows is less, so an impairment loss should be recognized.

(2) The impairment loss is equal to the $400,000 ($640,000 - $240,000) difference
between the book value of the equipment and its fair value. The impairment
loss would be recorded as follows:
 Accumulated Depreciation--Equipment ...........................360,000
Loss on Impairment of Equipment.....................400,000
Equipment ($1,000,000 - $240,000).......... 760,000

(3) The answer to (1) is unaffected by the fair value of the asset. The existence of
an impairment loss is determined solely by using the undiscounted sum of
estimated future cash flow, not the fair value of the asset.

Problem 12
Johnson Company purchased equipment 8 years ago for $1,000,000. The
equipment has been depreciated using the straight-line method with a 20-year
useful life and 10% residual value. Johnson’s operations have experienced
significant losses for the past 2 years and, as a result, the company has decided
that the equipment should be evaluated for possible impairment. The
management of Johnson Company estimates that the equipment has a remaining
useful life of 7 years. Net cash inflow from the equipment will be $80,000 per
year. The fair value of the equipment is $240,000. Goodwill of $80,000 was
associated with the purchase of the equipment.

(1) Determine if an impairment loss should be recognized.

(2) Determine the amount of the loss and prepare the journal entry to record the
loss.

Solution 12
LO5
(1) Annual depreciation for the equipment has been $45,000 ($1,000,000 -
$100,000)/20 years. Current book value of the equipment is:

Original cost........................................................ $1,000,000

Accumulated depreciation ($45,000 x 8 years). 360,000
Book value.......................................................... $ 640,000

In addition to the book value of the equipment, the remaining book value of the
goodwill is computed as follows:

Original cost........................................................$80,000
Accumulated amortization:
($80,000/20 = $4,000; $4,000 x 8)............ 32,000
Book value..........................................................$48,000

The total book value of $688,000 ($640,000 + $48,000) is compared to the

undiscounted sum of the future cash flows of $560,000 ($80,000 x 7years) to
determine whether the equipment is impaired. The sum of the future cash
flows is less, so an impairment loss should be recognized.
(2) The impairment loss is equal to the $448,000 ($688,000 - $240,000) difference
between the book value of the equipment and its fair value. The impairment
loss would be recorded as follows:

Accumulated Depreciation--Equipment ............ 360,000

Loss on Impairment of Equipment..................... 448,000
Equipment ($1,000,000 - $240,000).......... 760,000
Goodwill...................................................... 48,000

Problem 13
Johnson Company is located in Hong Kong and uses international accounting
standards. Johnson Company purchased equipment 8 years ago for $1,000,000.
The equipment has been depreciated using the straight-line method with a 20-year
useful life and 10% residual value. Johnson’s operations have experienced
significant losses for the past 2 years and, as a result, the company has decided
that the equipment should be evaluated for possible impairment. The management
of Johnson Company estimates that the equipment has a remaining useful life of 7
years. Net cash inflow from the equipment will be $80,000 per year. The fair value
of the equipment is $240,000. No goodwill was associated with the purchase of the
equipment. Johnson Company has chosen to recognize increases in the value of
long-term operating assets in accordance to the allowable alternative under IAS 16.

(1) Determine if an impairment loss should be recognized.

(2) Determine the amount of the loss and prepare the journal entry to record the
loss.
(3) What journal entry should Johnson Company make if the fair value of the
building was $980,000?
270 Chapter 13  Investments in Noncurrent Operating Assets—Utilization and Retirement

Solution 13
LO5
(1) Annual depreciation for the equipment has been $45,000 ($1,000,000 -
$100,000)/20 years. Current book value of the equipment is:

Original cost........................................................ $1,000,000

Accumulated depreciation ($45,000 x 8 years). 360,000
Book value.......................................................... $ 640,000

According to IAS 36, the existence of impairment is determined by comparing

book value of $640,000 to the fair value of $240,000. The fair value is lower,
so an impairment loss should be recognized. In this case, the determination of
the existence of an impairment loss is based on is based on a comparison of
book value and fair value; under U.S. GAAP, the test is based on a comparison
of book value and the undiscounted sum of future cash flows.

(2) The impairment loss is equal to the $400,000 ($640,000 - $240,000) difference
between the book value of the equipment and its fair value. The impairment
loss would be recorded as follows:

Accumulated Depreciation--Equipment ............ 360,000

Loss on Impairment of Equipment..................... 400,000
Equipment ($1,000,000 - $240,000).......... 760,000

(3) Since the fair value of $980,000 is greater than the book value of $640,000,
Johnson Company will recognize $340,000 ($980,000 - $640,000) as an
upward asset revaluation. The upward revaluation is recorded as follows:

Accumulated Depreciation--Equipment............. 360,000

Revaluation Equity Reserve....................... 340,000
Equipment ($1,000,000 - $980,000).......... 20,000

Problem 14
The McCloud Company purchased a new piece of factory equipment on May 20,
2002,
for $40,000. For income tax purposes, the equipment is classified as a 7-year
asset. Since the tax life is similar to the estimated economic life of the asset,
McCloud decides to use tax depreciation for financial reporting purposes. The
equipment is not expected to have any residual value at the end of the 7 years.

Prepare a depreciation schedule for the life of the asset using the MACRS method
of cost recovery.
Test Bank, Intermediate Accounting, 14th ed 271

Solution 14
LO8
Depreciation Schedule
Cost Asset
Year Computation Recovery Amount Book Value
$40,000
2002 $40,000 x .2857 x ½ $5,714 34,286
2003 $34,286 x .2857 9,796 24,490
2004 $24,290 x .2857 6,997 17,493
2005 $17,493 x .2857 4,998 12,495
2006 $12,495 x .2857 3,569 8,926
2007 $ 8,926 ÷ 2.5* 3,570 5,356
2008 $ 5,356 ÷ 1.5 3,570 1,786
2009 1,786 -0-
Switched to straight-line depreciation since depreciation of $3,570
exceeds the double-declining-balance depreciation of $2,550 ($8,926 x .
2857).

Problem 15
A recently issued FASB standard requires that an impairment loss be recognized if
the sum of the expected future net cash inflows (undiscounted and without interest
charges) is less than the carrying value of the asset. The amount of the
impairment loss recognized is the amount by which the carrying amount of the
asset exceeds the fair value of the asset.

Provide examples of events or changes in circumstances that indicate that the

recoverability of the carrying amount of an asset may have been impaired.
Evaluate the recognition criterion proposed by the FASB, specifically addressing
the issue of using the undiscounted sum of the future net cash flows.

Solution 15
LO5
The following are examples of events or changes in circumstances that may
indicate that the carrying amount of an asset may not be recoverable:

a. A significant decrease in the market value of an asset.

b. A significant change in the extent or manner in which an asset is

used.

c. A significant adverse change in legal factors or in the business

climate that affects the value of an asset.
272 Chapter 13  Investments in Noncurrent Operating Assets—Utilization and Retirement

d. An accumulation of costs significantly in excess of the amount

originally
expected to acquire or construct an asset.

e. A projection or forecast that demonstrates continuing losses

associated with an asset.

The use of the sum of the expected future net cash flows (undiscounted and
without interest charges) as a criterion for impairment appears to contradict
modern theories both of accounting and
finance. The time value of money should be considered at a minimum as
an element of cost recovery.

The FASB, however, believes that including the time value of money in the test for
impairment poses some significant problems. The first is the difficulty of
associating the actual outstanding debt with individual assets. The only practical
application would be the use of an incremental borrowing rate which may result in a
very close approximation of the present values of the cash flows. The second
problem relates to the fact that each entity has a different incremental borrowing
rate because different entities have different debt capacities. The result of these
entity-unique borrowing rates is that different present values would result for similar
impaired assets because the assets are owned by different entities having different
debt capacities. The FASB’s solution of using the sum of the expected future net
cash flows (undiscounted and without interest charges) avoids not only the
problems associated with the discount rate but also the necessity of projecting the
timing of cash flows. This approach uses information that is generally available to
the entity and allows a more expeditious evaluation of an asset’s compliance with
the established recognition criterion.
Test Bank, Intermediate Accounting, 14th ed 273

CHAPTER 13 -- QUIZ A
Name _________________________
Section ________________________

T F 1. The cost of property less the expected residual value, if any, is called the
depreciable base.

T F 2. Depreciation is the systematic and rational allocation of asset cost over the
periods benefitted by the use of the asset.

T F 3. The residual (salvage) value of an asset is defined as the estimated amount

that can be realized upon retirement of the asset.

T F 4. The physical factors limiting the lives of noncurrent operating assets are
inadequacy and obsolescence.

T F 5. The FASB requires disclosure of both cost and accumulated depreciation for
property on the balance sheet or notes to the financial statements.

T F 6. The modified accelerated cost recovery system (MACRS) is an example of a

group rate depreciation method.

T F 7. Composite depreciation is not an allowable depreciation method under

generally accepted accounting principles.

T F 8. The sum-of-the-years’-digits method is an example of a decreasing-charge

depreciation method.

T F 9. In the sum-of-the-years’-digits method, residual value is not used in the

computations of depreciation expense.

T F 10. Straight-line depreciation assumes equal usefulness in each time period, and
the periodic charge is not affected by asset productivity or efficiency
variations.
CHAPTER 13 -- QUIZ B
Name _________________________
Section ________________________

T F 1. Under ACRS and MACRS, no depreciation is recognized on acquisitions

during the year, but depreciation for a full year is recognized on retirements.

T F 2. Most companies use the straight-line depreciation method for financial

reporting purposes.

T F 3. Decreasing-charge methods of depreciation are reasonable approaches to

cost allocation when the benefits provided by an asset increase and
maintenance and repair costs decrease as the asset gets older.

T F 4. When group depreciation is used and an asset is retired from the group, no
gain or loss is recognized.

T F 5. When applying the composite depreciation method, a new rate is usually

calculated each period based on the assets currently included in the group.

T F 6. According to APB Opinion No. 17, the straight-line method of amortization

should be applied unless a company demonstrates that another systematic
method is more appropriate.

T F 7. When similar assets are exchanged, at least part of any gain can always be
deferred as long as the assets are also for a similar line of business.

T F 8. When buildings and improvements are constructed in connection with the

removal of natural resources and their usefulness is limited to the duration of
the project, the depreciation should be recognized on an output basis similar
to the one used for the natural resource itself.

T F 9. The acquisition cost of wasting assets includes the purchase price and
developmental costs, such as drilling costs, sinking mine shafts, and
constructing roads.

T F 10. Adjustments for the change in estimated useful lives of both property, plant,
and equipment and intangible assets are reported as a cumulative effect of a
change in accounting principle.

274
CHAPTER 13 -- QUIZ C
Name _________________________
Section ________________________

A. Composite depreciation K. Involuntary conversion

B. Straight-line depreciation L. Unit depreciation
C. Time factor M. Declining-balance depreciation
D. Sum-of-the-years’-digits depreciation N. Current cost
E. Cost recovery period O. Residual value
F. Amortization P. Natural resources
G. Indicated loss Q. Use factor
H. Physical factor R. Impairment
I. Depreciation S. Group depreciation
J. Similar assets

Select the term that best fits each of the following definitions and descriptions. Indicate
your answer by placing the appropriate letter in the space provided.

_____ 1. A depreciation method providing decreasing periodic charges for depreciation by

applying a constant percentage to a declining asset book value.
_____ 2. Periodic cost allocation process for intangible assets.
_____ 3. A method under which like assets are grouped together and depreciation is
computed
for the group rather than for individual assets.
_____ 4. The depreciation method that recognizes equal periodic depreciation charges for
each year of an asset’s life.
_____ 5. Retirement of assets caused by uncontrollable events such as fire, earthquake,
flood, or condemnation.
_____ 6. Most popular depreciation methods, such as straight-line and declining-balance,
are
based on this factor.
_____ 7. Estimated amount that can be realized upon the retirement of an asset.
_____ 8. A factor related to the use of an asset that limits its useful life.
_____ 9. The units-of-production method is the most common depreciation method
emphasizing this factor.
_____ 10. A method under which dissimilar assets are aggregated and depreciation is
computed for the aggregation based on a weighted average life expectancy.
_____ 11. A period of time defined by tax legislation over which the cost of noncurrent
operating assets may be allocated against revenue.
_____ 12. The excess of the book value over the market value of the asset given up in an
exchange of assets.
____13. Periodic cost allocation process for tangible noncurrent operating assets for
financial
reporting purposes.
_____ 14. Unexpected reduction in the value of an asset that significantly reduces its
current

275
 value below its value reported on the financial statements.
_____ 15. Wasting assets such as oil, gas, timber, and ore deposits are all examples.
CHAPTER 13 -- QUIZ SOLUTIONS

Quiz A Quiz B Quiz C

1. T 1. F 1. M
2. T 2. T 2. F
3. T 3. F 3. S
4. F 4. T 4. B
5. T 5. F 5. K
6. F 6. T 6. C
7. F 7. F 7. O
8. T 8. T 8. H
9. F 9. T 9. Q
10. T 10. F 10. A
11. E
12. G
13. I
14. R
15. P

276
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