CHAPTER 11

AMORTIZATION, IMPAIRMENT, AND DISPOSITION

MULTIPLE CHOICE—Conceptual
Answer No. Description
d 1. Knowledge of amortization accounting.
b 2. Conceptual rationale for amortization accounting.
c 3. Amortization and retaining funds.
d 4. Economic factors affecting useful service life.
a 5. Activity method of amortization.
a 6. Units-of-production method of amortization.
d 7. Units-of-production method of amortization.
d 8. Knowledge of double declining-balance method.
c 9. Estimating an asset’s useful life.
c 10. Graphic depiction of straight-line and declining-balance methods.
b 11. Disadvantage of using straight-line method.
b 12. Group method of amortization.
d 13. Identification of composite life.
b 14. Amortization for part year.
c 15. Change in estimated life of depreciable asset.
b 16. Reporting a change in estimate.
b 17. Recording an asset impairment.
d 18. Disclosure of amortization policy.
d 19. Amortization and liquidating dividends.
a 20. Classification of depletion expense.
d 21. Units-of-production depletion expense.
d 22. Depletion methods for oil and gas industry.
d 23. Asset turnover ratio.
d 24. Determine loss on sale of depreciable asset.
c 25. Knowledge of involuntary conversions.
c *26. Objectives of CCA method.
d *27. Factors to consider in CCA tax amortization.
c *28. Effect of accelerated amortization on the income statement.
a 29 Capital Asset – minimum book value
a 30 Amortization method – increasing charge
a 31 Time based amortization
a 32 Part year amortization
a 33 Productive output method of amortization
*This topic is dealt with in an Appendix to the chapter.
11 - 2 Test Bank for Intermediate Accounting, Eighth Canadian Edition

MULTIPLE CHOICE—Computational
Answer No. Description
b 34. Calculate amortization using double declining-balance.
b 35. Calculate amortization using double declining-balance.
b 36. Calculate amortization using double declining-balance.
b 37. Calculate amortization using double declining-balance.
b 38. Amortization on asset held for sale.
b 39. Double declining-balance method.
d 40. Double declining-balance method.
d 41. Calculate amortization using straight-line method.
a 42. Calculate amortization using double declining-balance.
d 43. Determine acquisition cost from straight-line amortization.
a 44. Determine acquisition cost from activity method.
c 45. Calculate gain on sale of machinery.
a 46. Determine amortization expense from change in Accumulated
Amortization account.
c 47. Determine amortization expense from change in Accumulated
Amortization account.
a 48. Determine composite rate of amortization.
a 49. Determine composite life of a group of assets.
b 50. Change in estimated life of equipment.
a 51. Determine amortization expense after major overhaul.
b 52. Determine amortization expense after major overhaul.
c 53. Record permanent impairment in value of fixed asset.
d 54. Fair value adjustment on equipment held for sale.
c 55. Calculate units-of-production depletion expense.
c 56. Calculate units-of-production depletion expense.
b 57. Calculate units-of-production depletion expense.
d 58. Calculate units-of-production depletion expense.
d 59. Calculate asset turnover ratio.
c 60. Calculate return on total assets.
b 61 Calculate loss on sale of machine.
b 62. Calculate gain on sale of equipment.
b *63. Calculate CCA for the year.
a 64 Calculate loss on disposal

MULTIPLE CHOICE—CPA Adapted

Answer No. Description
c 65. Calculate amortization using 150% declining-balance.
b 66. Double declining-balance method.
a 67. Determine accumulated amortization balance using declining-balance.
a 68. Calculate amortization expense using declining-balance.
d 69. Effect of residual value on accumulated amortization.
b 70. Effect of including residual value in amortization base.
c 71. Effect of decreasing charge methods on sale of asset.
b 72. Units-of-production depletion expense.
c 73. Calculate depletion expense for the year.
 Amortization, Impairment, and Disposition 11 - 3

EXERCISES

Item Description
E11-74 Definitions.
E11-75 Amortization methods.
E11-76 True or False.
E11-77 Calculate amortization.
E11-78 Calculate amortization.
E11-79 Asset amortization and disposition.
E11-80 Composite amortization.
E11-81 Depletion allowance.

PROBLEMS
Item Description
P11-82 Fair value impairment.
P11-83 Amortization methods.
P11-84 Adjustment of depreciable base.

MULTIPLE CHOICE—Conceptual
1. The following is true of amortization accounting.
a. It is not a matter of valuation.
b. It is part of the matching of revenues and expenses.
c. It retains funds by reducing income taxes and dividends.
d. All of these.

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

3. Amortization accounting
a. provides funds.
b. funds replacements.
c. retains funds.
d. all of these.

4. Economic factors that shorten the service life of an asset include

a. obsolescence.
b. supersession.
11 - 4 Test Bank for Intermediate Accounting, Eighth Canadian Edition

c. inadequacy.
d. all of these.

5. The activity method of amortization

a. is a variable charge approach.
b. assumes that amortization is a function of the passage of time.
c. conceptually associates cost in terms of input measures.
d. all of these.

6. For income statement purposes, amortization is a variable expense if the amortization

method used is
a. units-of-production.
b. straight-line.
c. increasing charge.
d. declining-balance.

7. If an industrial firm uses the units-of-production method for calculating amortization on its
only plant asset, factory machinery, the credit to accumulated amortization from period to
period during the life of the firm will
a. be constant.
b. vary with unit sales.
c. vary with sales revenue.
d. vary with production.

8. Use of the double declining-balance method

a. results in a decreasing charge to amortization expense.
b. means residual value is not deducted in calculating the amortization base.
c. means the book value should not be reduced below residual value.
d. all of these.

9. An asset’s useful life

a. remains unchanged once it has been determined.
b. is the same as its physical life.
c. is affected by physical and economic factors.
d. all of these.

10. A graph is set up with "yearly amortization expense" on the vertical axis and "time" on the
horizontal axis. Assuming linear relationships, how would the graphs for straight-line and
declining-balance amortization, respectively, be drawn?
a. Vertically and sloping down to the right
b. Vertically and sloping up to the right
c. Horizontally and sloping down to the right
d. Horizontally and sloping up to the right

11. A principal objection to the straight-line method of amortization is that it

a. provides for the declining productivity of an aging asset.
b. ignores variations in the rate of asset use.
c. tends to result in a constant rate of return on a diminishing investment base.
d. gives smaller periodic write-offs than decreasing charge methods.
 Amortization, Impairment, and Disposition 11 - 5

12. Each year a company has been investing an increasingly greater amount in machinery.
Since there is a large number of small items with relatively similar useful lives, the
company has been applying straight-line amortization at a uniform rate to the machinery
as a group. The ratio of this group's total accumulated amortization to the total cost of the
machinery has been steadily increasing and now stands at .75 to 1.00. The most likely
explanation for this increasing ratio is the
a. company should have been using one of the accelerated methods of amortization.
b. estimated average life of the machinery is less than the actual average useful life.
c. estimated average life of the machinery is greater than the actual average useful life.
d. company has been retiring fully amortized machinery that should have remained in
service.

13. For the composite method, the composite

a. rate is the total cost divided by the total annual amortization.
b. rate is the total annual amortization divided by the total depreciable cost.
c. life is the total cost divided by the total annual amortization.
d. life is the total depreciable cost divided by the total annual amortization.

14. Amortization is normally calculated on the basis of the nearest

a. full month and to the nearest cent.
b. full month and to the nearest dollar.
c. day and to the nearest cent.
d. day and to the nearest dollar.

15. Quayle Company acquired machinery on January 1, 2001 which it amortized under the
straight-line method with an estimated life of fifteen years and no residual value. On
January 1, 2006, Quayle estimated that the remaining life of this machinery was six years
with no residual value. How should this change be accounted for by Quayle?
a. As a prior period adjustment
b. As the cumulative effect of a change in accounting principle in 2006
c. By setting future annual amortization equal to one-sixth of the book value on January
1, 2006
d. By continuing to amortize the machinery over the original fifteen year life

16. A change in estimate should

a. result in restatement of prior period statements.
b. be handled in current and future periods.
c. be handled in future periods only.
d. be handled retroactively.

17. White Printing Company determines that a printing press used in its operations has
suffered a permanent impairment in value because of technological changes. An entry to
record the impairment should
a. recognize an extraordinary loss for the period.
b. include a credit to Equipment—Accumulated Amortization.
c. include a credit to the equipment account.
d. not be made if the equipment is still being used.
11 - 6 Test Bank for Intermediate Accounting, Eighth Canadian Edition

18. A general description of the amortization methods applicable to major classes of

depreciable assets
a. is not a current practice in financial reporting.
b. is not essential to a fair presentation of financial position.
c. is needed in financial reporting when company policy differs from income tax policy.
d. should be included in corporate financial statements or notes thereto.

19. Dividends representing a return of capital to shareholders are not uncommon among
companies which
a. use accelerated amortization methods.
b. use straight-line amortization methods.
c. recognize both functional and physical factors in amortization.
d. none of these.

20. Depletion expense

a. is usually part of cost of goods sold.
b. includes tangible equipment costs in the depletion base.
c. excludes intangible development costs from the depletion base.
d. excludes restoration costs from the depletion base.

21. The most common method of recording depletion for accounting purposes is the
a. percentage depletion method.
b. decreasing charge method.
c. straight-line method.
d. units-of-production method.

22. Which of the following methods must be used to account for the depletion of oil and gas
resources for financial reporting purposes?
a. Successful efforts method
b. Full-cost method
c. Reserve recognition accounting method
d. Either the successful efforts or the full-cost method

23. The asset turnover ratio is calculated by dividing

a. net income by ending total assets.
b. net income by average total assets.
c. net sales by ending total assets.
d. net sales by average total assets.

24. The sale of a depreciable asset resulting in a loss indicates that the proceeds from the
sale were
a. less than current market value.
b. greater than cost.
c. greater than book value.
d. less than book value.

25. Which of the following statements about involuntary conversions is false?

a. An involuntary conversion may result from condemnation or fire.
b. The gain or loss from an involuntary conversion may be reported as an extraordinary
item.
c. The gain or loss from an involuntary conversion should not be recognized when the
enterprise reinvests in replacement assets.
d. All of these.
 Amortization, Impairment, and Disposition 11 - 7

*26. A major objective of capital cost allowance for tax amortization is to

a. reduce the amount of amortization deduction on business firms' tax returns.
b. assure that the amount of amortization for tax and book purposes will be the same.
c. help companies achieve a faster write-off of their capital assets.
d. require companies to use the actual economic lives of assets in calculating tax
amortization.

*27. Under capital cost allowance, which one of the following is not considered in determining
amortization for tax purposes?
a. Cost of the asset
b. Class of the asset
c. Half-year convention
d. Residual value

*28. If income tax effects are ignored, accelerated amortization methods

a. provide funds for the earlier replacement of fixed assets.
b. increase funds provided by operations.
c. tend to offset the effect of steadily increasing repair and maintenance costs on the
income statement.
d. tend to decrease the fixed asset turnover ratio.

29. A Capital Assets minimum book value is its

a. Residual Value
b. Salvage value
c. Amortizable cost
d. Capital cost less accumulated amortization

30. The amortization method that always produces increasing charges to income is
a. Sinking-fund method
b. Straight line method
c. Service hours method
d. Sum of the years’-digits method

31. Which of the following is not a time based amortization method

a. Productive output method
b. Straight line method
c. Double declining method
d. Sum of the years digit

32. Which of the following does not give rise to an increasing problem of part year
amortization?
a. Productive output method
b. Straight line amortization
c. Sinking fund method
d. Double declining balance method
11 - 8 Test Bank for Intermediate Accounting, Eighth Canadian Edition

33.. When the productive output method of depreciation is used, which of the following best
describes amortization expense?
a. amortization expense will vary directly with output
b. amortization rate per unit will vary directly with output
c. amortization rate per unit will vary directly with sales
d. amortization expense will vary directly with sales

Multiple Choice Answers—Conceptual

Item Ans. Item Ans. Item Ans. Item Ans. Item Ans. Item Ans. Item Ans. Item Ans. Item
1. d 5. a 9. c 13. d 17. b 21. d 25. c 29 a 33
2. b 6. a 10. c 14. b 18. d 22. d *26. c 30 a
3. c 7. d 11. b 15. c 19. d 23. d *27. d 31 a
4. d 8. d 12. b 16. b 20. a 24. d *28. c 32 a

Solutions to those Multiple Choice questions for which the answer is “none of these.”
19. do not expect to purchase additional property after depleting existing property.

MULTIPLE CHOICE—Computational
34. On July 1, 2006, Blenko Corporation purchased factory equipment for $300,000. Residual
value was estimated to be $8,000. The equipment will be amortized over ten years using
the double declining-balance method. Counting the year of acquisition as one-half year,
Blenko should record amortization expense for 2007 on this equipment of
a. $60,000.
b. $54,000.
c. $52,560.
d. $48,000.

35. Marsh Corporation purchased factory equipment that was installed and put into service
January 2, 2006, at a total cost of $90,000. Residual value was estimated at $6,000. The
equipment is being amortized over four years using the double declining-balance method.
For the year 2007, Marsh should record amortization expense on this equipment of
a. $21,000.
b. $22,500.
c. $42,000.
d. $45,000.

36. On April 13, 2006, Foley Co. purchased machinery for $240,000. Residual value was
estimated to be $10,000. The machinery will be amortized over ten years using the double
declining-balance method. If amortization is calculated on the basis of the nearest full
month, Foley should record amortization expense for 2007 on this machinery of
 Amortization, Impairment, and Disposition 11 - 9

a. $41,600.
b. $40,800.
c. $41,100.
d. $41,866.

37. Vincent Co. purchased machinery that was installed and ready for use on January 3,
2006, at a total cost of $115,000. Residual value was estimated at $15,000. The
machinery will be amortized over five years using the double declining-balance method.
For the year 2007, Vincent should record amortization expense on this machinery of
a. $24,000.
b. $27,600.
c. $30,000.
d. $46,000.

38. Hermitage Inc. purchased a building for $800,000 on January 1, 1996. At the time of
acquisition, the building had an estimated residual value of $300,000 and an estimated
useful life of twenty years. The company has recorded monthly amortization using the
straight-line method. On January 1, 2006, it is decided to put the building up for sale at the
price of $1,200,000. At December 31, 2006, the building is still for sale. The correct
amortization to record for 2006 is
a. $25,000.
b. nil.
c. $40,000.
d. $60,000.

39. A plant asset has a cost of $48,000 and a residual value of $12,000. The asset has a
three-year life. If amortization in the second year amounted to $4,000, which amortization
method was used?
a. Straight-line
b. Declining-balance
c. Activity method
d. Cannot tell from information given

40. On January 1, 2006, Storey Company purchased a new machine for $1,400,000. The new
machine has an estimated useful life of nine years and the residual value was estimated
to be $50,000. Amortization was calculated on the double declining-balance method. What
amount should be shown in Storey's balance sheet at December 31, 2007, net of
accumulated amortization, for this machine?
a. $1,100,000
b. $890,000
c. $855,556
d. $846,914

41. On January 1, 1999, Barnes Company purchased equipment at a cost of $80,000. The
equipment was estimated to have a residual value of $8,000 and it is being amortized
over eight years under the straight-line method. What should be the charge for
amortization of this equipment for the year ended December 31, 2006?
a. $2,000
b. $2,222
c. $4,000
d. $9,000
11 - 10 Test Bank for Intermediate Accounting, Eighth Canadian Edition

42. On September 19, 2006, Trane Co. purchased machinery for $285,000. Residual value was
estimated to be $15,000. The machinery will be amortized over eight years using the
declining-balance method. If amortization is calculated on the basis of the nearest full
month, Trane should record amortization expense for 2007 on this machinery of
a. $66,797.
b. $65,313.
c. $53,125.
d. $52,500.

43. On January 3, 2004, Lopez Co. purchased machinery. The machinery has an estimated
useful life of eight years and an estimated residual value of $42,000. The amortization
applicable to this machinery was $91,000 for 2006, calculated by the straight-line method.
The acquisition cost of the machinery was
a. $546,000.
b. $588,000.
c. $655,200.
d. $770,000.

44. On January 2, 2005, Payne Company acquired equipment to be used in its manufacturing
operations. The equipment has an estimated useful life of ten years, an estimated residual
value of $18,000, and was estimated to be used 40,000 hours. The amortization
applicable to this equipment was $84,000 for 2007, calculated under the activities method
after the machine was used for 4,800 hours. What was the acquisition cost of the
equipment?
a. $718,000
b. $700,000
c. $678,000
d. $660,000

45. Snead Corporation, which has a calendar year accounting period, purchased a new
machine for $60,000 on April 1, 2001. At that time, Snead expected to use the machine for
nine years and then sell it for $6,000. The machine was sold for $33,000 on Sept. 30,
2006. Assuming straight-line amortization, no amortization in the year of acquisition, and a
full year of amortization in the year of retirement, the gain to be recognized at the time of
sale would be
a. $6,000.
b. $4,500.
c. $3,000.
d. $0.

46. On January 1, 2006, the Accumulated Amortization—Machinery account of a particular

company showed a balance of $740,000. At the end of 2006, after the adjusting entries
were posted, it showed a balance of $790,000. During 2006, one of the machines which
cost $250,000 was sold for $121,000 cash. This resulted in a loss of $8,000. Assuming
that no other assets were disposed of during the year, how much was amortization
expense for 2006?
a. $171,000
b. $187,000
c. $50,000
d. $121,000
 Amortization, Impairment, and Disposition 11 - 11

47. During 2006, Geiger Co. sold equipment that had cost $196,000 for $117,600. This
resulted in a gain of $8,600. The balance in Accumulated Amortization—Equipment was
$650,000 on January 1, 2006, and $620,000 on December 31. No other equipment was
disposed of during 2006. Amortization expense for 2006 was
a. $30,000.
b. $38,600.
c. $57,000.
d. $117,000.

Use the following information for questions 48 and 49:

A schedule of machinery owned by Dooley Co. is presented below:
Estimated Estimated
Total Cost Residual Value Life in Years
Machine A $380,000 $20,000 12
Machine C 430,000 30,000 10
Machine M 225,000 15,000 6
Dooley calculates amortization by the composite method.

48. The composite rate of amortization (in percent) for these assets is
a. 10.14.
b. 10.84.
c. 10.82.
d. 11.52.

49. The composite life (in years) for these assets is

a. 9.2.
b. 9.3.
c. 9.9.
d. 10.0.
50. Jantz Corporation purchased a machine on July 1, 2003, for $250,000. The machine was
estimated to have a useful life of 10 years with an estimated residual value of $14,000.
During 2006, it became apparent that the machine would become uneconomical after
December 31, 2010, and that the machine would have no scrap value. Accumulated
amortization on this machine as of December 31, 2005, was $59,000. What should be the
charge for amortization in 2006 under generally accepted accounting principles?
a. $35,400
b. $38,200
c. $41,000
d. $47,750

51. Weston Company purchased a tooling machine on January 3, 1999 for $600,000. The
machine was being amortized on the straight-line method over an estimated useful life of
ten years, with no residual value. At the beginning of 2006, the company paid $150,000 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 (15 years total).
What should be the amortization expense recorded for the machine in 2006?
a. $41,250
b. $50,000
c. $60,000
d. $66,000
11 - 12 Test Bank for Intermediate Accounting, Eighth Canadian Edition

52. Long Co. purchased machinery on January 2, 2000, for $660,000. The straight-line
method is used and useful life is estimated to be ten years, with a $60,000 residual value.
At the beginning of 2006, Long spent $144,000 to overhaul the machinery. After the
overhaul, Long estimated that the useful life would be extended four years (14 years
total), and the residual value would be $30,000. The amortization expense for 2006
should be
a. $42,375.
b. $51,750.
c. $60,000.
d. $55,500.

53. Unruh, Inc. purchased equipment in 2004 at a cost of $800,000. Two years later it became
apparent to Unruh that this equipment had suffered an impairment of value and the sum of
the expected future net cash flows from its use is less than $480,000. In early 2006, the
book value of the asset is $480,000 and it is estimated that the fair value is now only
$320,000. The entry to record the impairment is
a. No entry is necessary as a write-off violates the historical cost principle.
b. Retained Earnings ........................................................ 160,000
Accumulated Amortization—Equipment ............ 160,000
c. Loss on Impairment of Equipment ................................. 160,000
Accumulated Amortization—Equipment ............ 160,000
d. Retained Earnings ........................................................ 160,000
Reserve for Loss on Impairment of Equipment .. 160,000

54. Prado Corp. has a piece of equipment held for sale with a carrying value of $120,000.
Previously it had been written down from a carrying value of $180,000 when the decision
to sell had been made. At December 31, 2006, it is estimated that the fair value less
disposition costs is $130,000. Prado Corp. should recognize as at December 31, 2006 a
loss recovery (gain) of
a, $50,000.
b. $60,000.
c. $10,000.
d. nil.

55. Seymor Resources Company acquired a tract of land containing an extractable natural
resource. Seymor is required by its 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 3 million tons, and that the land will have a
value of $1.2 million after restoration. Relevant cost information follows:
Land $9,000,000
Estimated restoration costs 1,800,000
If Seymor maintains no inventories of extracted material, what should be the charge to
depletion expense per ton of extracted material?
a. $2.60
b. $3.00
c. $3.20
d. $3.60

56. In January, 2006, Pratt Corporation purchased a mineral mine for $5.1 million with
removable ore estimated by geological surveys at 2 million tons. The property has an
 Amortization, Impairment, and Disposition 11 - 13

estimated value of $300,000 after the ore has been extracted. The company incurred $1.5
million of development costs preparing the mine for production. During 2006, 500,000 tons
were removed and 400,000 tons were sold. What is the amount of depletion that Pratt
should expense for 2006?
a. $960,000
b. $1,200,000
c. $1,260,000
d. $1,680,000

57. During 2006, Bolton Corporation acquired a mineral mine for $1.5 million of which
$200,000 was ascribed to land value after the mineral has been removed. Geological
surveys have indicated that 10 million units of the mineral could be extracted. During
2006, 2 million units were extracted and 1.6 million units were sold. What is the amount of
depletion expensed for 2006?
a. $300,000.
b. $208,000.
c. $240,000.
d. $260,000.

58. In March, 2006, Sauder Mines Co. purchased a coal mine for $6 million. Removable coal
is estimated at 1.5 million tons. Sauder is required to restore the land at an estimated cost
of $720,000, and the land should have a value of $630,000. The company incurred $1.5
million of development costs preparing the mine for production. During 2006, 600,000 tons
were removed and 400,000 tons were sold. The total amount of depletion that Sauder
should record for 2006 is
a. $1,832,000.
b. $2,024,000.
c. $2,748,000.
d. $3,036,000.

Use the following information for questions 59 and 60:

For 2006, Cline Company reports beginning of the year total assets of $900,000, end of the year
total assets of $1.1 million, net sales of $1.5 million, and net income of $300,000.

59. Cline’s 2006 asset turnover ratio is

a. .27 times.
b. .30 times.
c. 1.36 times.
d. 1.50 times.

60. The rate of return on assets for Cline in 2006 is

a. 20.0%.
b. 27.3%.
c. 30.0%.
d. 33.3%.

61. Jeter Company purchased a new machine on May 1, 1997 for $132,000. At the time of
acquisition, the machine was estimated to have a useful life of ten years and an estimated
residual value of $6,000. The company has recorded monthly amortization using the
straight-line method. On March 1, 2006, the machine was sold for $18,000. What should
be the loss recognized from the sale of the machine?
11 - 14 Test Bank for Intermediate Accounting, Eighth Canadian Edition

a. $0
b. $2,700
c. $6,000
d. $8,700

62. On January 1, 1998, Flynn Corporation purchased for $76,000, equipment having a useful
life of ten years and an estimated residual value of $4,000. Flynn has recorded monthly
amortization of the equipment on the straight-line method. On December 31, 2006, the
equipment was sold for $14,000. As a result of this sale, Flynn should recognize a gain of
a. $0.
b. $2,800.
c. $6,800.
d. $14,000.

*63. On January 1, 2006, Newton Company purchased a machine costing $200,000. The
machine is a class 8 asset for tax purposes with a CCA rate of 20%. It has an estimated
$40,000 residual value at the end of its economic life. Assuming the company uses the
capital cost allowance method, the amount of CCA deduction for tax purposes for the year
2006 is
a. $40,000.
b. $20,000.
c. $16,000.
d. $12,000.

64. On June 1, 2007 ABC manufacturer acquired a machine for $100,000 with an estimated
useful life of 5 years and an estimated residual value of $10,000. The company uses the
double declining method of amortization and takes a full year’s amortization in the year of
acquisition and none in the year of disposition. If the machine was disposed of for $16,000
on May 1, 2008, what amount should the loss to be recognized on disposal be?
a. $20,000
b. $26,400
c. $13,800
d. $24,000
 Amortization, Impairment, and Disposition 11 - 15

Multiple Choice Answers—Computational

Item Ans. Item Ans. Item Ans. Item Ans. Item Ans. Item Ans. Item Ans.
34. b 39. b 44. a 49. a 54. d 59. d 64 a
35. b 40. d 45. c 50. b 55. c 60. c
36. b 41. d 46. a 51. a 56. c 61. b
37. b 42. a 47. c 52. b 57. b 62. b
38. b 43 d 48. a 53. c 58. d 63. b

MULTIPLE CHOICE—CPA Adapted

65. Gant Co. purchased a machine on July 1, 2005, for $500,000. The machine has an
estimated useful life of five years and a residual value of $100,000. The machine is being
amortized from the date of acquisition by the 150% declining-balance method. For the
year ended December 31, 2005, Gant should record amortization expense on this
machine of
a. $150,000.
b. $100,000.
c. $75,000.
d. $60,000.

66. A machine with an eight-year estimated useful life and an estimated ten percent residual
value was acquired on January 1, 2004. The amortization expense for 2006 using the
double declining-balance method would be original cost multiplied by
a. 90% × 25% × 25%.
b. 75% × 75% × 25%.
c. 90% × 75% × 25%.
d. 25% × 25%.

67. On April 1, 2004, Reiley Co. purchased new machinery for $360,000. The machinery has
an estimated useful life of five years, a residual value of $20,000, and amortization is
calculated by the declining-balance method. The accumulated amortization on this
machinery at March 31, 2006, should be
a. $223,920.
b. $220,680.
c. $219,240.
d. $136,000.
68. Irvin Co. takes a full year's amortization expense in the year of an asset's acquisition and
no amortization expense in the year of disposition. Data relating to one of Irvin's tangible
capital assets at December 31, 2006 are as follows:
Acquisition year 2004
Cost $280,000
Residual value 40,000
Accumulated amortization 219,520
11 - 16 Test Bank for Intermediate Accounting, Eighth Canadian Edition

Estimated useful life 5 years

Using the same amortization method as used in 2004, 2005, and 2006, how much
amortization expense should Irvin record in 2007 for this asset?
a. $20,480
b. $32,000
c. $48,000
d. $56,000

69. An item of property, plant, and equipment has an estimated 15% residual value. At the
end of its estimated useful life, the accumulated amortization would equal the original cost
of the asset under which of the following amortization methods?
Straight-line Productive Output
a. Yes No
b. Yes Yes
c. No Yes
d. No No

70. Net income is understated if, in the first year, estimated residual value is excluded from
the amortization calculation when using the
Straight-line Production or
Method Use Method
a. Yes No
b. Yes Yes
c. No No
d. No Yes

71. A plant asset with a five-year estimated useful life and no residual value is sold at the end
of the second year of its useful life. How would using the declining-balance method of
amortization instead of the straight-line method of amortization affect a gain or loss on the
sale of the plant asset?
Gain Loss
a. Decrease Decrease
b. Decrease Increase
c. Increase Decrease
d. Increase Increase
 Amortization, Impairment, and Disposition 11 - 17

72. Lane Company acquired a tract of land containing an extractable natural resource. Lane 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 6 million tons, and that the land will have a value of
$1 million after restoration. Relevant cost information follows:
Land $7,000,000
Estimated restoration costs 1,500,000
If Lane maintains no inventories of extracted material, what should be the charge to
depletion expense per ton of extracted material?
a. $1.42
b. $1.25
c. $1.17
d. $1.00

73. In January 2006, Jenks Mining Corporation purchased a mineral mine for $4.2 million with
removable ore estimated by geological surveys at 3 million tons. The property has an
estimated value of $400,000 after the ore has been extracted. Jenks incurred $1,150,000
of development costs preparing the property for the extraction of ore. During 2006,
340,000 tons were removed and 300,000 tons were sold. For the year ended December
31, 2006, Jenks should include what amount of depletion in its cost of goods sold?
a. $430,667
b. $380,000
c. $495,000
d. $561,000

Multiple Choice Answers—CPA Adapted

Item Ans. Item Ans. Item Ans. Item Ans. Item Ans.
65. c 67. a 69. d 71. c 73. c
66. b 68. a 70. b 72. b

DERIVATIONS — Computational
No. Answer Derivation
34 b [$300,000 – ($300,000 × 0.1)] × 0.2 = $54,000.

35. b [$90,000 × (1 – 0.5)] × 0.5 = $22,500.

36. b [$240,000 – ($240,000 × 0.2 × 0.75)] × 0.2 = $40,800.

37. b [$115,000 – ($115,000 × 0.4)] × 0.4 = $27,600.

38 b nil (no amortization on property held for sale)

39. b $48,000 × 2/3 = $32,000; ($48,000 - $32,000) × 2/3 = $10,667 but need $4,000
to arrive at residual value of $12,000.
11 - 18 Test Bank for Intermediate Accounting, Eighth Canadian Edition

40. d $1,400,000 × 2/9 = $311,111; ($1,400,000 - $311,111) × 2/9 = $241,975

$1,400,000 – ($311,111 + $241,975) = $846,914.

41. d ($80,000 – $8,000) × 1/8 = $9,000.

42. a ($285,000 × 2/8 × 3/12) = $17,813; ($285,000 - $17,813) × 2/8 = $66,797.

43. d AC = ($91,000 × 8) + $42,000 = $770,000.

44. a AC = ($84,000 ÷ $4,800 × $40,000) + $18,000 = $718,000.

45. c $60,000 – [($60,000 – $6,000) ÷ 9 × 5] = $30,000 (BV)

$33,000 – $30,000 = $3,000 (gain).

46. a ($790,000 – $740,000) + [$250,000 – ($121,000 + $8,000)] = $171,000.

47. c $620,000 – {$650,000 – [$196,000 – ($117,600 – $8,600)]} = $57,000.

48. a ($ 380,000 – $20,000) ÷ 12 = $30,000

($ 430,000 – $30,000) ÷ 10 = 40,000
($ 225,000 – $15,000) ÷ 6 = 35,000
$1,035,000 $105,000

$105,000 ÷ $1,035,000 = 10.14

49. a ($360,000 + $400,000 + $210,000) ÷ $105,000 = 9.2.

50. b ($250,000 – $59,000) ÷ 5 = $38,200.

51. a [($600,000 ÷ 10) × 7] – $150,000 = $270,000 new (AD)

$600,000 – $270,000 = $330,000; $330,000 ÷ 8 = $41,250 per year.

52. b [($600,000  10) × 6] – $144,000 = $216,000 new (AD)

$660,000 – $216,000 = $444,000 (BV)
($444,000 – $30,000) ÷ 8 = $51,750 per year.

53. c $480,000 – $320,000 = $160,000.

54. c $130,000 – $120,000 = $10,000.

55. c ($9,000,000 + $1,800,000 – $1,200,000) ÷ 3,000,000 = $3.20.

56. c [($5,100,000 – $300,000 + $1,500,000) ÷ 2,000,000] × 400,000 = $1,260,000.

57. b [($1,500,000 – $200,000) ÷ 10,000,000] × 1,600,000 = $208,000.

58. d [($6,000,000 + $720,000 – $630,000 + $1,500,000) ÷ 1,500,000] × 600,000

= $3,036,000.

59. d $1,500,000 ÷ [($900,00 + $1,100,000) ÷ 2] = 1.50

60. c $300,000 ÷ [(900,000 + $1,100,000) ÷ 2] = 30%

 Amortization, Impairment, and Disposition 11 - 19

61. b ($132,000 – $6,000) ÷ (10 × 12) = $1,050 per month

$18,000 – [$132,000 – ($1,050 × 106 mo.)] = –2,700.

62. b ($76,000 – $4,000) ÷ (10 × 12) = $600/mo.;

$14,000 – [$76,000 – ($600 × 108)] = $2,800.

*63. a $200,000 × 20% × .5 = $20,000.

64. a $100,000 x2/5= 40,000

$40,000+$14,400+ $24,000=$78,400
The carrying value is $100,000-$78,400= $21,600
The loss on disposal is $21,600-$16,000=$5,600

DERIVATIONS — CPA Adapted

No. Answer Derivation
65. c $500,000 × 0.3 × 0.5 = $75,000.

66. b Conceptual.

67. a $360,000 × (1/5 × 2) × 9/12 = $108,000; ($360,000 - $108,000) × .4 = $100,800

($360,000 – $108,000 – $100,800) × .4 × 3/12 = $15,120
$108,000 + $100,800 + $15,120 = $223,920.

68. a $280,000 × .6 × .6 × .6 = $60,480.

$60,480 – $40,000 = $20,480.

69. d Conceptual.

70. b Conceptual.

71. c Conceptual.

72. b ($7,000,000 + $1,500,000 – $1,000,000) ÷ 6,000,000 = $1.25.

73. c [($4,200,000 – $400,000 + $1,150,000) ÷ 3,000,000] × 300,000 = $495,000.

EXERCISES

Ex. 11-74—Definitions.
Provide clear, concise answers for the following.
11 - 20 Test Bank for Intermediate Accounting, Eighth Canadian Edition

1. Define amortization.

2. Define amortization accounting.

3. Does amortization accounting provide funds? If not, what does provide funds? What does
amortization accounting do related to funds?

Solution 11-74
1. Amortization is the decline in service potentials or in future benefits of a plant asset due to
physical or economic factors.

2. Amortization accounting is the systematic and rational allocation of the cost of plant assets to
the periods benefited from the use of the assets.

3. Amortization accounting does not provide funds. Revenues provide funds. Amortization
accounting retains funds by reducing income taxes and dividends.

Ex. 11-75—Amortization methods.

Each of the statements appearing below is descriptive of one or more of the following
amortization methods. In the spaces below, place the letter(s) belonging to the method(s) to
which the statement best applies.
a. Declining-balance e. Capital cost allowance
b. Group f. Units of output
c. Composite g. Working hours
d. Straight-line

______ 1. The amortization rate is determined by the class of the asset being amortized.

______ 2. These methods are used for amortizing 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.

Solution 11-75
1. e 4. a, e
2. b, c 5. d
3. f, g
 Amortization, Impairment, and Disposition 11 - 21

Ex. 11-76—True or False.

Place T or F in front of each of the following statements.

_____ 1. The straight-line method of amortization is based on the assumption that amortization
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 amortization equals its book value.

_____ 5. The declining-balance method of amortization ignores residual value in the calculation
of an asset's depreciable base.

_____ 6. When using the double declining-balance method of determining amortization, a

declining percentage is applied to a constant book value.

_____ 7. The book value of plant assets declines more rapidly under decreasing-charge
methods than under the straight-line method.

_____ 8. Accounting amortization is calculated by determining the change in the market value
of a company's plant assets during the period under review.

_____ 9. The methods of amortization based upon output assume that obsolescence will not
significantly affect the usefulness of the asset.

_____ 10. The correction of prior periods' amortization estimates would be disclosed on the
retained earnings statement.

Solution 11-76
1. T 3. T 5. T 7. T 9. T
2. F 4. T 6. F 8. F 10. F

Ex. 11-77—Calculate amortization.

A machine which cost $400,000 is acquired on October 1, 2006. Its estimated residual value is
$40,000 and its expected life is eight years. The company has a calendar year end. The asset is
a Class 8 asset with a maximum CCA rate of 20%.

Instructions
11 - 22 Test Bank for Intermediate Accounting, Eighth Canadian Edition

Calculate amortization expense for 2006 and 2007 by each of the following methods, showing the
figures used.
(a) Double declining-balance
(b) Capital cost allowance
Solution 11-77
(a) 2006: 25% × $400,000 × 3/12 = $25,000

2007: 25% × $375,000 = $93,750

(b) 2006: 20% × $400,000 × 1/2 = $40,000

2007: 20% × $360,000 = $72,000

Ex. 11-78—Calculate amortization.

A machine cost $500,000 on April 1, 2006. Its estimated residual value is $50,000 and its
expected life is eight years. The asset is a Class 8 asset with a maximum CCA rate of 20%.

Instructions
Calculate the amortization expense (to the nearest dollar) by each of the following methods,
showing the figures used.
(a) Straight-line for 2006
(b) Double declining-balance for 2007
(c) Capital cost allowance for 2007

Solution 11-78
(a) 1/8 × $450,000 × 9/12 = $42,188

(b) 2006: 25% × $500,000 × 9/12 = $93,750

2007: 25% × $406,250 = $101,562

(c) 2006: 20% × $500,000 × 1/2 = $50,000

2007: 20% × $450,000 = $90,000

Ex. 11-79—Asset amortization and disposition.

Answer each of the following questions.

1. A plant asset purchased for $180,000 has an estimated life of ten years and a residual value
of $14,000. Amortization for the second year of use, determined by the declining-balance
method at twice the straight-line rate is $_____________.
 Amortization, Impairment, and Disposition 11 - 23

2. A plant asset purchased for $30,000 at the beginning of the year has an estimated life of five
years and a residual value of $3,000. It is expected to be driven 210,000 kilometres.
Amortization for the second year, determined by the activities method is $______________.
The asset was driven 45,000 kilometres.

3. A plant asset with a cost of $43,000 and accumulated amortization of $12,000, is given
together with cash of $16,000 in exchange for a similar asset worth $44,000. The gain or loss
recognized on the disposal (indicate by "G" or "L" is $______________.

4. A plant asset with a cost of $72,000, estimated life of five years, and residual value of
$12,000, is amortized by the straight-line method. This asset is sold for $50,000 at the end of
the second year of use. The gain or loss on the disposal (indicate by "G" or "L") is
$___________.

Solution 11-79
1. $28,800
2. $5,786
3. $3,000 L
4. $2,000 G

Ex. 11-80—Composite amortization.

Gail Co. uses the composite method to amortize its equipment. The following totals are for all of
the equipment in the group:
Initial Residual Depreciable Amortization
Cost Value Cost Per Year
$800,000 $100,000 $700,000 $64,000

Instructions
(a) What is the composite rate of amortization? (To nearest tenth of a percent.)
(b) A machine with a cost of $24,000 was sold for $15,000 at the end of the third year. What entry
should be made?

Solution 11-80
(a) $64,000
———— = 8.0%
$800,000

(b) Cash ........................................................................................ 15,000

Accumulated Amortization........................................................ 9,000
Equipment...................................................................... 24,000
11 - 24 Test Bank for Intermediate Accounting, Eighth Canadian Edition

Ex. 11-81—Depletion allowance.

Hormoz Company purchased for $3,650,000 a mine estimated to contain two million tons of ore.
When the ore is completely extracted, it was expected that the land would be worth $250,000. A
building and equipment costing $2.1 million were constructed on the mine site, and they will be
completely used up and have no residual value when the ore is exhausted. During the first year,
750,000 tons of ore were mined, and $600,000 was spent for labour and other operating costs.

Instructions
Calculate the total cost per ton of ore mined in the first year. (Show calculations by setting up a
schedule giving cost per ton.)

Solution 11-81
Item Base Tons Per Ton
Ore $3,400,000 2,000,000 $1.70
Building and Equipment 2,100,000 2,000,000 1.05
Labour and Operating Expenses 600,000 750,000 .80
Total Cost $3.55

PROBLEMS

Pr. 11-82—Far value impairment.

Agora Corporation has factory equipment that has a cost of $2,500,000 and accumulated
amortization of $600,000. A change of operations has resulted in this equipment not being fully
utilized. A review indicates that future net cash inflows from its use will be approximately
$1,500,000. The current market value of similar equipment is about $1,200,000.

Instructions
(a) Determine if there is an asset impairment. Explain your reasoning.
(b) Assuming that there is an impairment, determine the amount of impairment and provide the
journal entry to record the impairment.
(c) In the subsequent year, the market improves and the market value increases to $1,600,000.
What action, if any, should Agora take with respect to the accounting for this equipment?
Explain your answer.
 Amortization, Impairment, and Disposition 11 - 25

Solution 11-82
(a) There is an impairment as the undiscounted net cash flows from the use of the asset,
$1,500,000, are less than the carrying value, $1,900,000, of the asset.

(b) The impairment loss is measured as the difference between the carrying value and the fair
value.
Cost $2,500,000
Accumulated amortization 600,000
Carrying value $1,900,000
Fair value 1,200,000
Impairment $ 700,000
Debit Loss on Impairment of Equipment................................ 700,000
Credit Accumulated Amortization—Equipment............. 700,000

(c) CICA Handbook Section 3063.06 does not allow an impairment loss to be restored for an
asset held for use. Therefore, no accounting action is to be taken.

Pr. 11-83—Amortization methods.

On July 2, 2006, Sundemon Company purchased for $720,000 snow-making equipment having
an estimated useful life of six years with an estimated residual value of $30,000. Amortization is
taken for the portion of the year the asset is used. The asset is a Class 8 asset with a maximum
CCA rate of 20%.

Instructions
(a) Complete the form below by determining the amortization expense and year-end book
values for 2006 and 2007 using the
1. capital cost allowance method.
2. double declining-balance method.

Capital Cost Allowance Method 2006 2007

Equipment $720,000 $720,000
Less: Accumulated Amortization ________ ________
Year-End Book Value ________ ________
Amortization Expense for the Year ________ ________
Double Declining-Balance Method
Equipment $720,000 $720,000
Less: Accumulated Amortization ________ ________
Year-End Book Value ________ ________
Amortization Expense for the Year ________ ________

(b) Assume the company had used straight-line amortization during 2006 and 2007. During
2008, the company determined that the equipment would be useful to the company for only
one more year beyond 2008. Residual value is estimated at $40,000. Calculate the amount
of amortization expense for the 2008 income statement.
11 - 26 Test Bank for Intermediate Accounting, Eighth Canadian Edition

Solution 11-83
(a) Capital Cost Allowance Method 2006 2007
Accumulated Amortization $ 72,000 $201,600
Book Value 648,000 518,400
Amortization Expense 72,000 129,600

Double Declining-Balance Method

Accumulated Amortization $120,000 $320,000
Book Value 600,000 400,600
Amortization Expense 120,000 200,000

(b) Cost $720,000

Amortization (172,500)
Residual (40,000)
$507,500 × 1/2 = $253,750, 2008 amortization

Pr. 11-84—Adjustment of Depreciable Base.

A truck was acquired on July 1, 2003, at a cost of $162,000. The truck had a six-year useful life
and an estimated residual value of $24,000. The straight-line method of amortization was used.
On January 1, 2006, the truck was overhauled at a cost of $15,000, which extended the useful life
of the truck for an additional two years beyond that originally estimated (residual value is still
estimated at $24,000). In calculating amortization for annual adjustment purposes, expense is
calculated for each month the asset is owned.

Instructions
Prepare the appropriate entries for January 1, 2006 and December 31, 2006.

Solution 11-84
Cost $162,000
Less residual value 24,000
Depreciable base, July 1, 2003 138,000
Less amortization to date [($138,000 ÷ 6) × 2½] 57,500
Depreciable base, Jan. 1, 2006 (unadjusted) 80,500
Overhaul 15,000
Depreciable base, Jan. 1, 2006 (adjusted) $ 95,500

January 1, 2006
Accumulated Amortization..................................................................... 15,000
Cash.......................................................................................... 15,000

December 31, 2006

Amortization Expense........................................................................... 17,364
Accumulated Amortization ($95,500 ÷ 5.5 yrs)............................. 17,364