3.4 Property, Plant, and Equipment Flashcards
The board of directors of a corporation authorized the president of the corporation to pay as much as $90,000 to purchase a tract of land adjacent to the main factory. The president negotiated a price of $75,800 for the land, and legal fees for closing costs amounted to $820. A contract cleared, filled, and graded the land for $6,800, and dug the foundation for a new building for $4,300. A prefabricated building was erected at a cost of $181,000. The building has an estimated useful life of 20 years with no residual value. The contractor’s bill indicated that the cost of the parking lot and the driveways will need to be replaced in 15 years. The proper amount to be recorded in the corporation’s land account is
$83,420
The cost of acquiring and preparing land for its intended use is capitalized. The amount to be recorded in the land account is $83,420, consisting of the $75,800 purchase price, the $820 closing costs, and the $6,800 site preparation costs.
A corporation purchased manufacturing equipment for $100,000, with an estimated useful life of 10 years and a salvage value of $15,000. The second year’s depreciation for this equipment using the double-declining balance method is
$16,000
Under the double declining balance method, the full cost of the asset is depreciated but not below salvage value. Because the straight line rate for 10 year asset is 10%, the double declining balance rate is 20%. The first year’s depreciation is $20,000, leaving a carrying amount for the second year of $80,000. The second year’s depreciation is thus $16,000.
Under IFRS, when an entity chooses the revaluation model as its accounting policy for measuring property, plant, and equipment, which of the following statements is correct?
A. When an asset is revalued, the entire class of property, plant, and equipment to which that asset belongs must be revalued.
B. Increase in an asset’s carrying amount as a result of the first revaluation must be recognized as a component of profit or loss.
C. When an asset is revalued, individual assets within a class of property, plant, and equipment to which that asset belongs can be revalued.
D. Revaluation of property, plant, and equipment must be made at least every 3 years.
A. When an asset is revalued, the entire class of property, plant, and equipment to which that asset belongs must be revalued.
Under IFRS, measurement of PPE subsequent to initial recognition may be at fair value at the revaluation date (minus subsequent depreciation and impairment losses). The assumption is that the PPE can be reliably measured. If an item of PPE is revalued, every item in its class also should be revalued.
Under IFRS, according to the revaluation model, an item of property, plant, and equipment must be carried at
A. Fair value minus any subsequent accumulated depreciation and impairment loss
B. The lower of cost or net realizable value
C. Cost minus any accumulated depreciation
D. Cost minus residual value
A. Fair value minus any subsequent accumulated depreciation and impairment loss
Freer Co. purchased a piece of machinery for $50,000. Freer will use the machinery in the production of its product line for five years, at which time the machinery will have a residual value of $5,000. Freer anticipates that it will produce 90,000 units the first year with total units of 450,000. Which of the following methods will allow Freer to claim the greatest amount of depreciation in the first year?
A. Straight-line
B. Units of production
C. Double declining balance
D. Sum-of-the-year’s digits
C. Double declining balance
According to IFRS, which accounting policy may an entity apply to measure investment property in periods subsequent to initial recognition?
A. Fair value model only
B. Fair value model or revaluation model
C. Cost model or revaluation model
D. Cost model or fair value model
D. Cost model or fair value model
Under the cost model, investment property is carried at
its cost minus any accumulated depreciation and impairment losses.
An entity purchased a truck for $38,600 to transport equipment to various job sites. For this purpose, storage bins were welded to the truck bed at a cost of $1,700. The controller of the entity estimates the useful life of the truck to be 5 years and the residual value to be $1,000. Using the double-declining balance method, the depreciation expense on the truck for its second year of use is
A. $9,432
B. $9,264
C. $9,024
D. $9,672
D. $9,672
Under the double-declining balance method, the full cost of the asset, or $40,300 ($38,600 + $1,700), is depreciated, but not below salvage value. Because the straight-line rate for a 5-year asset is 20% (100% ÷ 5), the double-declining balance rate is 40% (20% × 2). The first year’s depreciation is $16,120 ($40,300 × 40%), leaving a carrying amount for the second year of $24,180 ($40,300 – $16,120). The second year’s depreciation is thus $9,672 ($24,180 × 40%).
A new machine has an initial cost of $300,000, an estimated useful life of 2,000 hours of use over a 3-year period, and an estimated residual value of $70,000. Usage rates are estimated as 500 hours in the first year, 700 hours in the second year, and 800 hours in the third year. Depreciation expense in Year 2 under the units-of-production method of depreciation will be
A. $80,500
B. $75,000
C. $105,000
D. $57,500
A. $80,500
Depreciation expense equals cost minus residual value, times the estimated hours of use in Year 2, divided by the total estimated hours of use.
(300,000 - 70,000) x (700 hours / 2,000 hours)
Sydney Co. purchased a machine that was installed and placed in service on January 1, Year 1, at a cost of $480,000. Salvage value was estimated at $80,000. The machine is being depreciated over 10 years by the double-declining-balance method. For the year ended December 31, Year 2, what amount should Sydney report as depreciation expense?
A. $61,440
B. $64,000
C. $76,800
D. $96,000
C. $76,800
Salvage value is ignored in determining the carrying amount except as a minimum below which the assets may not be depreciated.
