Chapter 10 - Amortization

Question 1

When does depreciation start?

Answer 1

Depreciation starts when the asset is:
1. In its intended condition and location
2. Is available for use

Question 2

When does depreciation stop?

Answer 2

1. When asset is sold
2. When asset is held for sale

Question 3

When does depreciation start for spare parts and standby equipment depreciated? (Hint: They are depreciated on different terms)

Answer 3

For spare parts:
- Depreciation starts when the part is put into use

For standby equipment:
- Depreciation starts when the asset is READY for use but it does not actually need to be in use

Question 4

How does component depreciation work? If disposing of a part and replacing with a new replacement, how would the disposal be recorded?

Answer 4

Component depreciation involves having different depreciation terms for a component of a big asset than the rest of the asset

If a new part is bought to replace an existing one, then:
1) The disposal of the part being discarded would result in a loss of the carrying amt it had
2) The new part can be depreciated on new terms

Question 5

When are impairment tests needed annually?

Answer 5

• Intangible with indefinite useful life
• Intangible not yet ready for use

ASPE:
- No asset needs annual impairment tests

Question 6

What assets need impairment indicators to test for impairment?

Answer 6

• All assets with definite useful lives ; both tangible and intangible

ASPE:
- All assets need an indicator

Question 7

What amount is the carrying amt compared to for impairment for capital assets? How is this different from inventory writedowns?

Answer 7

For capital assets, the carrying amt is compared to the “recoverable amount” which is the HIGHER OF:
1) NRV (Fv less costs to sell)
2) Value in use (Discounting future cash flows from the asset)

This is different than for inventory which is always valued at the LOWER OF 1) cost
2) FV less costs to sell

ASPE:
- Value in use is not discounted

For assets with definite useful lives, there is a 2 step process when an indicator exists:

1) Compare CV to undiscounted value in use ; if no impairment exists yet then proceed to 2

2) Compare CV to FV less costs to sell

For intangibles with indefinite lives, there is a one step test:

• Compare CV to FV less costs to sell