Chapter 11

Question 1

DEPRECIATION: METHODS

HINT: Shrek: A Scarlet Dragon Scooped up Donkey.

Answer 1

• Activity method
• Straight-line method
• Diminishing-charge methods
  
  • Sum-of-the-year’s-digits method
  • Declining-balance method

Question 2

DEPRECIATION: CONCEPTS BEHIND METHODS

HINT:

Imagine a foot race with three different runners, each with his/her own running styles:

• Marathon runner
• Sprinter
• Finish-line runner

Answer 2

Foot race = the life of an asset

Running = process of depreciating an asset

Three running styles = three major depreciation methods:

• Marathon runner: prefers to run at a steady, controlled pace from beginning to end = Straight-line Method
• Sprinter: prefers to run as fast as possible but continually slows down due to gradual exhaustion = Diminishing-Charge/Accelerated Depreciation Method
• Finish-line runner: may run fast sometimes and slow other times but is only concerned about finishing the race = Activity Method

Question 3

IMPAIRMENT LOSS: RECOGNITION RULES

HINT:

You bought a $5 lottery ticket and won $3 back on it. It has a $2 loss on its value.

You bought a $5 lottery ticket and won $20 back on it. It has a $15 gain on its value.

Answer 3

HINT:

You bought a $5 lottery ticket (carrying amount) and won $3 back on it (recoverable amount). It has a $2 loss on its value.

Rule:

Carrying amount > Recoverable amount = Impairment loss recognized (for $2 in this example)

HINT:

You bought a $5 lottery ticket and won $20 back on it. It has a $15 gain on its value.

Rule:

Carrying amount < Recoverable amount = NO impairment loss recognized