Acct 351 Chapter 11

Question 1

accelerated amortization

Answer 1

Also called diminishing-balance method, this method creates a higher depreciation expense in the earlier years and lower charges in the later periods

Question 2

activity method

Answer 2

Where depreciation is determined as a function of use or productivity of the asset

Question 3

amortization

Answer 3

The process of allocating the cost of an asset to expense over its useful life in a rational and systematic manner. (Synonym: depreciation, depletion

Question 4

asset group

Answer 4

The smallest identifiable group of assets that generates cash inflows that are largely independent of the cash flows from other assets or groups of assets

Question 5

asset turnover ratio

Answer 5

A measurement of how efficiently an entity uses its total assets to generate revenue. It is calculated by dividing net sales by average total assets

Question 6

capital cost allowance (CCA)

Answer 6

Instead of being labeled amortization or depreciation expense, it is called capital cost allowance (CCA) in tax returns

Question 7

capital cost allowance method

Answer 7

The method used in calculating taxable income and the tax value of an asset by Canadian businesses regardless of the method used for reporting purposes.

Question 8

capital gain

Answer 8

When the proceeds on disposal are greater than the original cost of an asset

Question 9

cash-generating unit (CGU)

Answer 9

The smallest identifiable group of assets that generates cash inflows that are largely independent of the cash flows from other assets or groups of assets

Question 10

componentization

Answer 10

Deciding on which fixed asset components to recognize separately

Question 11

cost recovery impairment model

Answer 11

According to this approach a long-lived asset is impaired only if an entity cannot recover the asset’s carrying amount from using the asset and eventually disposing of it

Question 12

declining-balance method

Answer 12

A depreciation method that uses a depreciation rate that remains constant throughout the asset’s useful life and reduces the book value each year to determine depreciation expense.

Question 13

decreasing charge method

Answer 13

A depreciation method that provides for a higher depreciation expense in the earlier years and lower charges in the later periods on the basis that more depreciation should be charged in earlier years when the asset offers the greatest benefits

Question 14

depletion

Answer 14

The amortization of natural resources. (Synonym: amortization)

Question 15

depreciable amount

Answer 15

the difference between the asset’s cost (or revalued amount, if the revaluation model is being used) and its residual value

Question 16

depreciation

Answer 16

The process of allocating the cost of tangible capital assets to the accounting periods benefiting their use. (Synonym: amortization

Question 17

derecognized

Answer 17

The time when all accounts related to an asset are removed from the accounts of an organization

Question 18

diminishing balance methods

Answer 18

A depreciation method that applies a constant rate. This method produces a decreasing annual depreciation expense over the useful life of the asset

Question 19

double-declining balance method

Answer 19

A depreciation method that uses a rate (which is the straight-line rate divided by two), which is applied to the net book value every year resulting in a declining depreciation expense year after year.

Question 20

fair value

Answer 20

An estimate of the price an enterprise would have received if it had sold the asset or would have paid, if it had been relieved of the liability, on the measurement date in an arm’s length exchange motivated by normal business considerations

Question 21

half-year rule

Answer 21

A requirement of the Income Tax regulation that in the year a capital asset is acquired, only half the usual capital cost allowance can be claimed for tax purposes

Question 22

impaired

Answer 22

When the carrying amount of a long-lived asset is higher than its future economic benefits to the company

Question 23

impairment loss

Answer 23

It is the amount by which the asset’s carrying amount exceeds its fair value

Question 24

impairments

Answer 24

A decrease in the value of a long term asset to an amount that is less than the amount shown under the cost principle

Question 25

liquidating dividend

Answer 25

Where dividends are a return of a shareholder’s investment rather than profits of the company

Question 26

profit margin ratio

Answer 26

A ratio that indicates how much is left over from each sales dollar after all expenses are covered

Question 27

rate of return on assets (ROA)

Answer 27

Net income expressed as a percentage of total assets

Question 28

rational entity impairment model

Answer 28

approach assumes that an entity makes rational decisions in managing its long-term assets and therefore it compares the asset’s book value with a recoverable amount that differs depending on the circumstances

Question 29

recapture

Answer 29

When capital cost allowance is recovered because after deducting the appropriate amount from the class on disposition of the last asset, a negative amount is left as the UCC balance

Question 30

recoverability test

Answer 30

A trial to determine whether an impairment loss needs to be recognized for a long-lived asset

Question 31

recoverable amount

Answer 31

The higher of an asset’s value in use and its fair value less costs to sell

Question 32

residual value

Answer 32

An estimate of the amount that a company would obtain from the disposal of an asset at the end of its useful life

Question 33

salvage value

Answer 33

The asset’s estimated net realizable value at the end of its life

Question 34

straight-line method

Answer 34

The amount of the bond discount or premium is amortized on a constant basis over the life of the bond

Question 35

sum-of-the-years’-digits method

Answer 35

A decreasing charge depreciation method where the depreciatiable amount is multiplied each year by the sum of the assets useful life

Question 36

tax basis

Answer 36

The class of asset’s cost less total CCA

Question 37

tax value

Answer 37

The UCC of a capital asset at any point in time

Question 38

terminal loss

Answer 38

When the disposition of the last asset in its class results in a positive balance remaining in the class

Question 39

undepreciated capital cost (UCC)

Answer 39

The class of asset’s cost less total CCA

Question 40

units of production method

Answer 40

Where depreciation is determined as a function of use or productivity of the asset

Question 41

useful life

Answer 41

The term of service that an asset is expected to provide.

Question 42

value in use

Answer 42

The present value of the future cash flows expected to be derived from an asset’s use and subsequent disposal

Question 43

Explain the concept of depreciation

Answer 43

Depreciation is the process of allocating the cost of property, plant, and equipment assets in a systematic and rational manner to the periods that are expected to benefit from their use. The allocation of the cost of intangible capital assets is termed “amortization,” and the allocation of the costs of mineral resource assets is termed “depletion.” “Amortization” is also the generic term that applies to depreciation and depletion as well

Question 44

Identify and explain the factors to consider when determining depreciation charges

Answer 44

Four factors involved in determining depreciation expense are (1) the recognition of the appropriate asset components, (2) the amount to be depreciated (depreciable amount), (3) the estimated useful life, and (4) the pattern and method of depreciation

Question 45

Identify how depreciation methods are selected

Answer 45

The depreciation method chosen should amortize an asset in a pattern and at a rate that correspond to the benefits received from that asset. The choice often involves the use of professional judgement. Tax reporting, simplicity, perceived economic consequences, and impact on ratios are examples of factors that influence such judgements in practice

Question 46

Calculate depreciation using the straight-line, decreasing charge, and activity methods and recognize the effects of using each

Answer 46

The straight-line method assumes that an asset provides its benefits as a function of time. As such, cost less residual value is divided by the useful life to determine the depreciation expense per period. The decreasing charge method provides for a higher depreciation charge in the early years and lower charges in later periods. For this method, a constant rate (e.g., double the straight-line rate) is multiplied by the net book value (cost less accumulated depreciation and accumulated impairment losses) at the start of the period to determine each period’s expense. The main justification for this approach is that the asset provides more benefits in the earlier periods. The activity method assumes that the benefits provided by the asset are a function of use instead of the passage of time. The asset’s life is considered in terms of either the output that it provides or an input measure, such as the number of hours it works. The depreciation charge per unit of activity (depreciable amount divided by estimated total units of output or input) is calculated and multiplied by the units of activity produced or consumed in a period to determine the depreciation expense

Question 47

Explain the accounting issues for depletion of mineral resources

Answer 47

After the depletion base has been established through accounting decisions related to the acquisition, exploration and evaluation, development, and restoration obligations associated with mineral resources, these costs are allocated to the natural resources that are removed. Depletion is normally calculated using the units-of-production method. In this approach, the resource’s cost less residual value, if any, is divided by the number of units that are estimated to be in the resource deposit, to obtain a cost per unit of product. The cost per unit is then multiplied by the number of units withdrawn in the period to calculate the depletion expense

Question 48

Explain and apply the accounting procedures for a change in depreciation rate

Answer 48

Because all the variables in determining depreciation are estimates—with the exception, perhaps, of an asset’s original cost—it is common for a change in those estimates to result in a change in the depreciation amount. When this occurs, there is no retroactive change and no catch-up adjustment. The change is accounted for in the current and future periods

Question 49

Explain the issues and apply the accounting standards for capital asset impairment under both IFRS and accounting standards for private enterprises (private entity GAAP

Answer 49

A capital asset is impaired when its carrying amount is not recoverable. The cost recovery method (private entity GAAP) defines recoverable as the undiscounted cash flows from the asset’s use and later disposal. If impaired, the asset is written down to its fair value, and this loss cannot be reversed later if the asset’s value recovers. The rational entity model (IFRS) defines recoverable amount as the higher of the asset’s value in use and fair value less costs to sell. Both these values are discounted cash flow amounts. If the recoverable amount subsequently improves, the impairment losses recognized are reversed.

Question 50

Explain and apply the accounting standards for long-lived assets that are held for sale

Answer 50

Assets held for sale are no longer depreciated. They are remeasured to their fair value less costs to sell at each balance sheet date. Recoveries in value may be recognized to the extent of previous losses. Held-for-sale items of property, plant, and equipment are separately reported as non-current assets unless they meet the definition of current assets. Under private entity GAAP, assets held for sale are only permitted to be reported in current assets if sold before the financial statements are completed and the proceeds on sale are expected within 12 months from the balance sheet date (or operating cycle, if longer).

Question 51

Account for the derecognition of property, plant, and equipment

Answer 51

Depreciation continues for PP&E assets until they are classified as held for sale or derecognized. At the date of disposal, all accounts related to the retired asset are removed from the books. Gains and losses from the disposal of plant assets are shown on the income statement in income before discontinued operations, unless the conditions for reporting as a discontinued operation are met. For property, plant, and equipment donated to an organization outside the reporting entity, the donation is reported at its fair value with a gain or loss on disposal recognized

Question 52

Describe the types of disclosures required for property, plant, and equipment

Answer 52

The type of information required to be disclosed for property, plant, and equipment is governed by the information needs of users. Because users of private entities’ financial information are often able to seek further specific information from a company, there are fewer required disclosures than for public companies reporting under IFRS. The required disclosures include those relating to measurement, changes in account balances and the reasons for the changes, information about how fair values are determined, and many others

Question 53

Analyze a company’s investment in assets

Answer 53

The efficiency of use of a company’s investment in assets may be evaluated by calculating and interpreting the asset turnover rate, the profit margin, and the rate of return on assets

Question 54

Identify differences in accounting between accounting standards for private enterprises (private entity GAAP) and IFRS, and what changes are expected in the near future

Answer 54

In most major ways, international and Canadian accounting standards for the depreciation of property, plant, and equipment are similar. Significant differences do exist, however, in the extent of componentization for depreciation, the impairment models applied, and the extent of disclosure. The impairment differences relate to how it is determined whether an asset is impaired, how the impairment is measured, and the ability to recognize recoveries in value.

Question 55

Calculate capital cost allowance in straightforward situations.

Answer 55

“Capital cost allowance” (CCA) is the term used for depreciation when calculating taxable income in income tax returns. The CCA method is similar to the declining-balance method except that rates are specified for asset classes and the amount claimed is based on year-end balances. The half-year rule is applied to net additions in the year, which means that only 50% of the normal rate is permitted. For an asset class, retirements are accounted for under specific rules that govern the calculation of taxable income. Capital gains occur if the proceeds on disposal are more than the asset’s original cost. When an asset class is eliminated, a terminal loss or recapture of capital cost allowance can occur. When a CCA class ends in a negative balance, a recapture of CCA occurs.