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Exam 11: Property, Plant, and Equipment and Intangible Assets: Utilization and Impairment

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Question 21

Multiple Choice

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Which of the following types of subsequent expenditures normally is capitalized?

A) Additions.
B) Improvements.
C) Rearrangements.
D) All of the above are normally capitalized.

E) A) and B)
F) A) and D)

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Question 22

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By the replacement depreciation method, depreciation is recorded when assets are replaced.

A) True
B) False

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Question 23

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Depreciation that should have been recorded in prior years on the equipment:

The three factors in cost allocation of a depreciable asset are service life, allocation base, and allocation method.

Total depreciation is the same over the life of an asset regardless of the method of depreciation used.

Advocates of accelerated depreciation methods argue that their use tends to level out the total cost of ownership of an asset over its benefit period if one considers both depreciation and repair and maintenance costs.

Briefly explain the differences between the terms depreciation, depletion, and amortization.

On March 30, 2013, Calvin Exploration purchased a drilling machine for $840,000. The estimated useful life of the machine is 10 years and no residual value is anticipated. An important component of the machine is the drill housing component that will need to be replaced in five years. The $200,000 cost of the drill housing component is included in the $840,000 cost of the machine. Calvin uses the straight-line depreciation method for all machinery. The company's fiscal year ends on December 31. Required: 1. Calculate depreciation on the drilling machine for 2013 and 2014 applying the typical U.S. GAAP treatment. 2. Repeat requirement 1 applying IFRS.

MACRS (modified accelerated cost recovery system) depreciation is equivalent to sum-of-the-years' digits depreciation.

In the first year of an asset's life, which of the following methods has the smallest depreciation?

The amount of impairment loss is the excess of book value over:

According to International Financial Reporting Standards, an impairment loss for property, plant, and equipment is required only when an asset's book value exceeds the undiscounted sum of the asset's estimated future cash flows.

On September 30, 2013, Morgan, Inc. acquired all of the outstanding common stock of Pathways, Inc., for $100 million. In addition to tangible assets, Morgan recorded the following assets as a result of the acquisition: Morgan's policy is to amortize intangible assets using the straight-line method, no residual value, and a six-year useful life. Required: What is the total amount of expenses that would appear in Morgan's income statement for the year ended December 31, 2013, related to these items?

Briefly explain the disclosures that are required relative to depreciable assets.

The table below contains data on depreciation for machinery. Required: Fill in the missing data in the table.

2013 amortization: $3,000,000 ÷ 10 = $300,000 x 9/12 = $225,000 2.

In January 2013, Vega Corporation purchased a patent at a cost of $200,000. Legal and filing fees of $50,000 were paid to acquire the patent. The company estimated a 10-year useful life for the patent and uses the straight-line amortization method for all intangible assets. In 2016, Vega spent $40,000 in legal fees for an unsuccessful defense of the patent. The amount charged to income (expense and loss) in 2016 related to the patent should be:

Briefly differentiate between activity-based and time-based allocation methods.

Required: Assume that the undiscounted sum of future cash flows is $18.2 million, instead of $16.5 million. Determine the amount, if any, of the impairment loss that El Dorado must recognize on these assets.

Required: Compute depreciation for 2013 and 2014 and the book value of the spooler at December 31, 2013 and 2014, assuming the double-declining-balance method is used.