121. A depreciable asset has an estimated 15% salvage value. At the end of its estimated useful life, the accumulated depreciation would equal the original cost of the asset under which of the following depreciation methods?
Straight-line Productive Output
a. Yes No
b. Yes Yes
c. No Yes
d. No No
122. Net income is understated if, in the first year, estimated salvage value is excluded from
the depreciation computation when using the
Straight-line Production or
Method Use Method
a. Yes No
b. Yes Yes
c. No No
d. No Yes
123. 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 sum-of-the-years'-digits method of depreciation instead of the double-declining balance method of depreciation 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
124. Galt Company acquired a tract of land containing an extractable natural resource. Galt 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 5,000,000 tons, and that the land will have a value of $600,000 after restoration. Relevant cost information follows:
Land $6,400,000
Estimated restoration costs 1,200,000
If Galt maintains no inventories of extracted material, what should be the charge to depletion expense per ton of extracted material?
a. $1.28
b. $1.40
c. $1.60
d. $1.52
125. In January 2017, Fritz Mining Corporation purchased a mineral mine for $6,300,000 with removable ore estimated by geological surveys at 2,500,000 tons. The property has an estimated value of $600,000 after the ore has been extracted. Fritz incurred $1,725,000 of development costs preparing the property for the extraction of ore. During 2017, 585,000 tons were removed and 525,000 tons were sold. For the year ended December 31, 2017, Fritz should include what amount of depletion in its cost of goods sold?
a. $1,197,000
b. $1,333,800
c. $1,559,250
d. $1,737,000
BRIEF EXERCISES
BE. 11-126—Definitions.
Provide clear, concise answers for the following.
1. Define depreciation.
2. Define depreciation accounting.
BE. 11-127—True or False.
Place T or F in front of each of the following statements.
1. The straight-line method of depreciation is based on the assumption that depreciation expense can be regarded as a constant function of time.
2. Plant assets should be written down (below cost) when their market value has declined temporarily.
3. The accounting profession has developed specifically recommended procedures for recording appraisal increases with respect to plant assets.
4. An asset's cost minus its accumulated depreciation equals its book value.
5. The sum-of-the-years'-digits method of depreciation ignores salvage value in the computation of an asset's depreciable base.
6. When using the double-declining balance method of determining depreciation, a declining percentage is applied to a constant book value.
7. The book value of plant assets initially declines more rapidly under decreasing-charge methods than under the straight-line method.
8. Accounting depreciation is computed by determining the change in the market value of a company's plant assets during the period under review.
Ex. 11-127 (cont.)
9. The methods of depreciation based upon output assume that obsolescence will not significantly affect the usefulness of the asset.
10. The revision of prior periods' depreciation estimates would be disclosed on the retained earnings statement.
BE. 11-128—Depreciation methods.
Each of the statements appearing below is descriptive of one or more of the following depreciation methods. In the spaces below, place the letter(s) belonging to the method(s) to which the statement best applies.
a. Declining-balance e. Sum-of-the-years'-digits
b. Group f. Units of output
c. Composite g. Working hours
d. Straight-line
1. The depreciation charged by this method decreases by the same amount each year.
2. These methods are used for depreciating multiple-asset accounts.
3. These methods allocate larger shares of the cost of a plant asset to expense during the years in which the greatest use is made of the asset.
4. These methods always allocate larger shares of the cost of a plant asset to expense during the earlier years of its life.
5. Once the depreciable base, scrap value, and life of a plant asset are determined, the annual charges to operations under this method will be the same.
EXERCISES
Ex. 11-129—Calculate depreciation.
A machine which cost $500,000 is acquired on October 1, 2017. Its estimated salvage value is $50,000 and its expected life is eight years.
Instructions
(1) Calculate depreciation expense for 2017 and 2018 by each of the following methods, showing the figures used.
(a) Double-declining balance
(b) Sum-of-the-years'-digits
(2) At the end of 2018, which method results in the larger accumulated depreciation amount?
Ex. 11-130—Calculate depreciation.
A machine cost $900,000 on April 1, 2017. Its estimated salvage value is $90,000 and its expected life is eight years.
Instructions
(1) Calculate the depreciation expense (to the nearest dollar) by each of the following methods, showing the figures used.
(a) Straight-line for 2017
(b) Double-declining balance for 2018
(c) Sum-of-the-years'-digits for 2018
(2) Which method would result in the smallest income amount for 2018?
Ex. 11-131—Asset depreciation and disposition.
Answer each of the following questions.
1. A plant asset purchased for $500,000 has an estimated life of 10 years and a residual value of $25,000. Depreciation for the second year of use, determined by the declining-balance method at twice the straight-line rate is $_____________.
2. A plant asset purchased for $440,000 at the beginning of the year has an estimated life of 5 years and a residual value of $40,000. Depreciation for the third year, determined by the sum-of-the-years'-digits method is $______________.
3. A plant asset with a cost of $540,000, estimated life of 5 years, and residual value of $90,000, is depreciated by the straight-line method. This asset is sold for $380,000 at the end of the second year of use. The gain or loss on the disposal (indicate by "G" or "L") is $___________.
Ex. 11-132—Composite depreciation.
Callon Co. uses the composite method to depreciate its equipment. The following totals are for all of the equipment in the group:
Initial Residual Depreciable Depreciation
Cost Value Cost Per Year
$1,000,000 $100,000 $900,000 $90,000
Instructions
(a) What is the composite rate of depreciation? (To nearest tenth of a percent.)
(b) A machine with a cost of $25,000 was sold for $15,000 at the end of the third year. What entry should be made?
Ex. 11-133—Depletion allowance.
Mareos Company purchased for $3,800,000 a mine estimated to contain 2.5 million tons of ore. When the ore is completely extracted, it was expected that the land would be worth $200,000. A building and equipment costing $1,800,000 were constructed on the mine site, and they will be completely used up and have no salvage value when the ore is exhausted. During the first year, 750,000 tons of ore were mined, and $300,000 was spent for labor and other operating costs.
Instructions
Compute the total cost per ton of ore mined in the first year. (Show computations by setting up a schedule giving cost per ton.)
PROBLEMS
Pr. 11-134—Depreciation methods.
On July 1, 2017, Sport Company purchased for $3,600,000 snow-making equipment having an estimated useful life of 5 years with an estimated salvage value of $150,000. Depreciation is taken for the portion of the year the asset is used.
Instructions
(a) Complete the form below by determining the depreciation expense and year-end book values for 2017 and 2018 using the
1. sum-of-the-years'-digits method.
2. double-declining balance method.
Sum-of-the-Years'-Digits Method 2017 2018
Equipment $3,600,000 $3,600,000
Less: Accumulated Depreciation
Year-End Book Value
Depreciation Expense for the Year
Double-Declining Balance Method
Equipment $3,600,000 $3,600,000
Less: Accumulated Depreciation
Year-End Book Value
Depreciation Expense for the Year
(b) Assume the company had used straight-line depreciation during 2017 and 2018. During 2019, the company determined that the equipment would be useful to the company for only one more year beyond 2019. Salvage value is estimated at $200,000.
(1) Compute the amount of depreciation expense for the 2019 income statement.
(2) What is the depreciation base of this asset?
Pr. 11-135—Adjustment of Depreciable Base.
A truck was acquired on July 1, 2015, at a cost of $189,000. The truck had a six-year useful life and an estimated salvage value of $21,000. The straight-line method of depreciation was used. On January 1, 2018, the truck was overhauled at a cost of $17,500, which extended the useful life of the truck for an additional two years beyond that originally estimated (salvage value is still estimated at $21,000). In computing depreciation for annual adjustment purposes, expense is calculated for each month the asset is owned.
Instructions
Prepare the appropriate entries for January 1, 2018 and December 31, 2018.
Pr. 11-136—Impairment.
Presented below is information related to equipment owned by Porto Company at December 31, 2017.
Cost $5,600,000
Accumulated depreciation to date 640,000
Expected future net cash flows 4,000,000
Fair value 2,720,000
Assume that Porto will continue to use this asset in the future. As of December 31, 2017, the equipment has a remaining useful life of 4 years.
Instructions
(a) For Porto company, the recoverability test compares $______ to $______. As a result, the asset ______ the recoverability test, because ______ is/are less than ______ so a ______ on impairment is recorded in 2017.
(b) Prepare the journal entry (if any) to record the impairment of the asset at December 31, 2017.
(c) Prepare the journal entry to record depreciation expense for 2018.
(d) The fair value of the equipment at December 31, 2018 is $4,100,000. Prepare the journal entry (if any) necessary to record this increase in fair value.
Pr. 11-137—Impairment.
Dolphin Company uses special strapping equipment in its packaging business. The equipment was purchased in January 2016 for $6,000,000 and had an estimated useful life of 8 years with no salvage value. At December 31, 2017, new technology was introduced that would accelerate the obsolescence of Dolphin’s equipment. Dolphin’s controller estimates that expected future net cash flows on the equipment will be $3,750,000 and that the fair value of the equipment is $3,300,000. Dolphin intends to continue using the equipment, but it is estimated that the remaining useful life is 4 years. Dolphin uses straight-line depreciation.
Instructions
(a) What is the carrying value of the asset?
(b) Prepare the journal entry (if any) to record the impairment at December 31, 2017.
(c) Prepare any journal entries for the equipment at December 31, 2018. The fair value of the equipment at December 31, 2018, is estimated to be $3,450,000.
(d) Repeat the requirements for (a) and (b), assuming that Dolphin intends to dispose of the equipment and that it has not been disposed of as of December 31, 2018.
IFRS QUESTIONS
True / False
1. Under both IFRS and GAAP, interest costs incurred during construction must be capitalized.
2. Under IFRS, component depreciation is permitted but is rarely used.
3. IFRS, like GAAP, capitalizes interest costs incurred during construction.
4. Even though IFRS does not employ the first-stage recoverability test used under GAAP comparing the undiscounted cash flows to the carrying amount, the fact that IFRS uses a fair value test to measure impairment loss makes IFRS stricter than GAAP
5. GAAP, like IFRS, permits write-up for subsequent recoveries of impairment, back up to the original amount before the impairment in all circumstances.
6. Unlike GAAP, interest costs incurred during construction are not capitalized under IFRS.
7. Asset revaluations are permitted under IFRS and GAAP.
8. In general, IFRS adheres to very different principles than GAAP.
9. GAAP now requires that gains on exchanges of nonmonetary assets be recognized if the exchange lacks commercial substance.
10. IFRS permits the same depreciation methods as GAAP, with the exception of the units-of-production method, which is not allowed under IFRS.
Multiple-Choice Questions
1. IFRS uses a fair value test to measure impairment loss. However, IFRS does not use the first-stage recoverability test under GAAP comparing the undiscounted cash flow to the carrying amount. As a result, the IFRS test is
a. not as strict as GAAP.
b. more strict than GAAP.
c. essentially the same strictness as GAAP.
d. None of these answers are correct.
2. Acceptable depreciation methods under IFRS include
a. Straight-line.
b. Accelerated.
c. Units-of-production.
d. All of these answers are correct.
3. Which of the following statements is correct?
a. Component depreciation is required under both IFRS and GAAP.
b. Component depreciation is required under GAAP and permitted under IFRS.
c. Component depreciation is required under IFRS and permitted under GAAP.
d. Component depreciation is permitted, but not required under both IFRS and GAAP.
4. The accounting exchanges of nonmonetary assets has recently converged between IFRS and GAAP, now requires
a. that gains on exchanges of nonmonetary assets be recognized if the exchange has commercial substance.
b. that gains on exchanges of nonmonetary assets be recognized if the exchange does not have commercial substance.
c. that gains on exchanges of nonmonetary assets be recognized if the exchange does not have commercial substance, and has never been impaired.
d. All of these choices are correct.
5. In measuring an impairment loss, IFRS uses
a. undiscounted cash flows.
b. discounted cash flows.
c. a fair value test.
d. a replacement value test.
6. IFRS permits companies to carry assets at historical cost or use a revaluation model for fixed assets. According to IAS 16, if revaluation is used:
1. it must be applied to all assets in a class of assets.
2. assets must be revalued on an annual basis.
3. assets must be depreciated on the straight-line basis.
4. salvage values must be zero.
a. 1 is correct
b. 2 is correct
c. 1 and 2 are correct
d. All of these answers are correct
Tongas Company applies revaluation accounting to plant assets with a carrying value of $1,600,000, a useful life of 4 years, and no salvage value. Depreciation is calculated on the straight-line basis. At the end of year 1, independent appraisers determine that the asset has a fair value of $1,500,000.
7. The journal entry to record depreciation for year one will include a
a. debit to Accumulated Depreciation for $400,000.
b. debit to Depreciation Expense for $100,000.
c. credit to Accumulated Depreciation for $100,000.
d. debit to Depreciation Expense for $400,000.
Tongas Company applies revaluation accounting to plant assets with a carrying value of $1,600,000, a useful life of 4 years, and no salvage value. Depreciation is calculated on the straight-line basis. At the end of year 1, independent appraisers determine that the asset has a fair value of $1,500,000.
8. The journal entry to adjust the plant assets to fair value in year one will include a
a. debit to Accumulated Depreciation for $100,000.
b. credit to Depreciation Expense for $300,000.
c. credit to Plant Assets for $300,000.
d. credit to Unrealized Gain on Revaluation for $300,000.
Tongas Company applies revaluation accounting to plant assets with a carrying value of $1,600,000, a useful life of 4 years, and no salvage value. Depreciation is calculated on the straight-line basis. At the end of year 1, independent appraisers determine that the asset has a fair value of $1,500,000.
9. The financial statements for year one will include the following information
a. Accumulated depreciation $400,000.
b. Depreciation expense $100,000.
c. Plant assets $1,500,000.
d. Revaluation surplus $100,000.
Tongas Company applies revaluation accounting to plant assets with a carrying value of $1,600,000, a useful life of 4 years, and no salvage value. Depreciation is calculated on the straight-line basis. At the end of year 1, independent appraisers determine that the asset has a fair value of $1,500,000.
10. The entry to record depreciation for this same asset in year two will include a
a. debit to Accumulated Depreciation for $400,000.
b. debit to Depreciation Expense for $500,000.
c. credit to Accumulated Depreciation for $300,000.
d. debit to Depreciation Expense for $400,000.
