Fixed assets 05/22/2017 Flashcards
Lawson Corp. uses the revaluation model for intangible assets. On March 1, year 1, Lawson acquired intangible assets with an indefinite life for $100,000. On December 31, year 1, it was determined that the recoverable amount for these intangible assets was $90,000. On December 31, year 2, it was determined that the intangible assets had a recoverable amount of $94,000. What is the impairment gain or loss recognized in year 1 and year 2 on the income statement?
Year 1 Year 2 $10,000 loss $6,000 loss $10,000 loss $4,000 gain $10,000 loss$0 $0 $0
$10,000 loss $4,000 gain
This answer is correct. If either the revaluation model or cost model is used to record intangible assets, the impairment loss is recognized as a loss in the income statement in the current period unless, there is a revaluation surplus in other comprehensive income (revaluation model only). In this situation, for the revaluation model, the revaluation surplus would be reduced to zero before impairment recognition in profit or loss According to IAS 36, a reversal of impairment losses may be recognized in the income statement up to the effects of the impairment loss previously recognized. Therefore, under both models, an impairment loss of $10,000 is recognized in year 1, and a gain is recognized in year 2 of $4,000.
A company has a long-lived asset with a carrying value of $120,000, expected future cash flows of $130,000, present value of expected future cash flows of $100,000, and a market value of $105,000. What amount of impairment loss should be reported? $0 $5,000 $15,000 $20,000
$0
This answer is correct. An impairment occurs when the carrying amount of a long-lived asset exceeds its fair value. However, an impairment loss is only recognized if the carrying amount of the asset is not recoverable. The carrying value is considered not recoverable if it exceeds the sum of the expected value of the undiscounted cash flows of the asset. Since the undiscounted expected future cash flows are $130,000, and the carrying value is $120,000, the company will not report an impairment loss.
A machine with a 4-year estimated useful life and an estimated 15% salvage value was acquired on January 1. Would depreciation expense using the sum-of-the-years’ digits method of depreciation be higher or lower than depreciation expense using the double-declining balance method of depreciation in the first and second years?
First year Second year Higher Higher Higher Lower Lower Higher Lower Lower
Lower Higher
This answer is correct because the equation for calculating sum-of-the-years’ digits (SYD) depreciation is
SYD depr. = Years remaining
SYD × (Cost – Salvage value)
Year 1: 4/10(1.00 – .15) = 34.0%
Year 2: 3/10(1.00 – .15) = 25.5%
DDB = 200%/Useful life × Book value
Year 1: 200%/4(1.00) = 50.0%
Year 2: 200%/4(1.00 − 0.50) = 25.0%
Therefore: Year 1: SYD < DDB (34.0% < 50.0%)
Year 2: SYD > DDB (25.5% > 25.0%)
Recall that salvage value is included in the SYD calculation and not in the DDB calculation.
Frank Corporation has investment property that is held to earn rental income. Frank prepares its financial statements in accordance with IFRS. Frank uses the fair value model for reporting the investment property. Which of the following is true?
Changes in fair value are reported as deferred revenue for the period.
Changes in fair value are reported as other comprehensive income for the period.
Changes in fair value are reported as an extraordinary gain on the income statement.
Changes in fair value are reported as profit or loss in the current period.
Changes in fair value are reported as profit or loss in the current period.
This answer is correct. IFRS provides that the fair value model requires that investment property be measured at fair value, and any changes in fair value are recognized in profit or loss of the period.
Simms Company has been working on creating a new tablet to compete with existing tablets. Simms is confident it has the ability to sell the asset and show a profit. Simms spent $200,000 during the first quarter of 20X1 studying alternatives. During the second quarter of 20X1, Simms spent an additional $25,000 improving one alternative at which point it became technologically and economically feasible. During the third quarter of 20X1, Simms spent another $75,000 on the tablet to make it ready for use and sale by the end of the year. Under IFRS, how much should Simms capitalize as development? $0 $75,000 $100,000 $300,000
$75,000
This answer is correct. Simms may capitalize development costs if the following criteria are met:
(1) technological feasibility of completing the asset for use or sale has been achieved;
(2) the entity intends to complete and use or sell the asset;
(3) the entity has the ability to use or sell the asset;
(4) the entity understands how the asset will generate probable future economic benefits;
(5) technical, financial, and other resources are available to complete development of the asset;
(6) the entity has the ability to reliably measure the expenditures.
Evidence in the problem indicates that the tablet is technologically and economically feasible (criteria 1 and 3), Simms has the ability to sell the product (criteria 2, 3, 5 (implied), and Simms anticipates a profit on tablet sales (criteria 4 and 6). Because technological and economic feasibility were met in quarter two, all costs thereafter, can be capitalized ($75,000). The $200.000 and $25,000 should be expensed as incurred because all criteria had not been met at that point.
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Which of the following accurately describes the appropriate accounting for goodwill acquired through a business combination?
It should be recorded at cost and tested for impairment every three years.
It should be recorded at cost and tested for impairment on an annual basis and more often if certain events occur.
It should be recorded at cost and amortized over a 10-year period.
It should be recorded at cost and amortized over a 40-year period.
It should be recorded at cost and tested for impairment on an annual basis and more often if certain events occur.
This answer is correct. Goodwill should be recorded at cost and tested for impairment on an annual basis and more often if certain events occur.
After an impairment loss is recognized, the adjusted carrying amount of the intangible asset shall be its new accounting basis. Which of the following statements about subsequent reversal of a previously recognized impairment loss is correct?
It is prohibited.
It is required when the reversal is considered permanent.
It must be disclosed in the notes to the financial statements.
It is encouraged, but not required.
This answer is correct. Assets held and used should be tested for impairment, and previously recognized impairment losses should not be recovered in subsequent periods.
The composite depreciation method
Is applied to a group of homogeneous assets.
Is an accelerated method of depreciation.
Does not recognize gain or loss on the retirement of single assets in the group.
Does not subtract salvage value from the base of the depreciation calculation.
Does not recognize gain or loss on the retirement of single assets in the group.
Composite depreciation is the application of a single straight-line depreciation rate and average useful life to the calculation of depreciation for a group of disparate fixed assets. The method is used to calculate depreciation for an entire asset class, such as office equipment or production equipment
This answer is correct because under the composite and group methods, if an individual asset is retired before the average life of the group is reached, the resulting gain or loss is buried in the accumulated depreciation account. The composite and group depreciation are processes of averaging the service lives of a number of assets and taking depreciation on the entire group as if it were an operating unit.
When only a few assets (not a reporting unit) acquired in a business combination accounted for using the acquisition method are being tested for recoverability, all goodwill that arose from that transaction should
Be allocated to all asset groupings using the relative fair values of long-lived tangible and intangible assets.
Be allocated to all asset groupings equally.
Be allocated equally to only those assets being tested.
Not be allocated to only part of a reporting unit..
Not be allocated to only part of a reporting unit..
This answer is correct. According to ASC Topic 360-35-26, if some but not all of the assets acquired in a business combination accounted for using the acquisition method are being tested for recoverability, the goodwill that arose from that transaction shall not be allocated to the assets unless the asset group includes a reporting unit.
A private company that chooses to apply private company guidance must measure goodwill impairment using:
A two-step impairment approach
No approach—goodwill is not examined for impairment.
The same approach required for public companies.
An approach where the private company uses a hypothetical application of the acquisition method.
An approach where the private company uses a hypothetical application of the acquisition method.
This answer is correct. Although private companies may choose to use the same approach required for public companies (two-step approach), if private company guidance is adopted, the private company will examine goodwill for impairment using an approach where the private company uses a hypothetical application of the acquisition method.
The management of Devin Corporation is testing two of its reporting units for impairment of goodwill. Information about results of these tests are shown below.
Reporting Units
Telecommunications Networking
Segment carrying amount (including goodwill)
$2,500,000 $3,000,000
Carrying value of goodwill 500,000 500,000
Estimated fair value of total 2,900,000 2,800,000
Estimated fair value of assets and liabilities other than goodwill 2,100,000 2,500,000
After properly adjusting the goodwill for impairment, which of the following represents the adjusted amount of goodwill for the two reporting units?
Telecommunications Networking
$500,000 $500,000
$800,000 $300,000
$500,000 $300,000 $400,000 $200,000
$500,000 $300,000
This answer is correct. Goodwill for the Telecommunications reporting unit is not impaired and goodwill for the Networking unit has a current estimated value of $300,000, which is the difference between the fair value of the unit and the value of its identifiable assets and liabilities.
A company using the group depreciation method for its delivery trucks retired one of its delivery trucks due to damage before the average service life of the group was reached. An insurance recovery was received. The net book value of these group asset accounts would be decreased by the
Original cost of the truck.
Original cost of the truck less the insurance recovery received.
Original cost of the truck less depreciation on the truck to the date of retirement.
Insurance recovery received.
Insurance recovery received.
This answer is correct. Under the group method, depreciation is recorded until the book value of the group is depreciated to the salvage value of the group. This is done by using an average life of all assets in the group. As assets are retired, the group salvage value is reduced, and no gains or losses are recognized on the retirements. The solutions approach is to recall the necessary journal entry.
Cash, other consideration (Amt received)
Accumulated depreciation (plug)
Asset (Orig. cost)
The insurance proceeds (cash) would equal the reduction in net book value (cost − accumulated depreciation) as the gain or loss on retirement is “buried” in the debit to accumulated depreciation.
n year 3, a company incurred $500,000 of legal costs defending several patents. Included in that amount was $400,000 of legal costs associated with successful outcomes and $100,000 of legal costs associated with unsuccessful outcomes. What amount of legal costs, if any, should the company expense for year 3? $500,000 $400,000 $100,000 $0
$100,000
This answer is correct. Only legal costs associated with successful outcomes may be capitalized. Therefore, of the $500,000 in legal costs, $400,000 may be capitalized and $100,000 must be expensed.
On January 2, year 1, Mogul Company acquired equipment to be used in its manufacturing operations. The equipment has an estimated useful life of 10 years and an estimated salvage value of $5,000. The depreciation applicable to this equipment was $24,000 for year 3, computed under the sum-of-the-years’ digits method. What was the acquisition cost of the equipment? $165,000 $170,000 $240,000 $245,000
$170,000
This answer is correct. The SYD denominator for this equipment is 55 [10(10 + 1)/2 = 55]. In year 3 the SYD fraction is 8/55. Thus, the year 3 SYD depreciation equation is 8/55 (cost − $5,000) = $24,000. Solve the equation as illustrated below to determine the acquisition cost.
Cost – $5,000 = $ 24,000 × 55/8
Cost – $5,000 = $165,000
Cost = $170,000
The required disclosures for the impairment of long-lived assets include all of the following except
The facts and circumstances leading to the impairment.
The amount of the impairment loss and how fair value was determined.
The recommendation of the auditor, signed and dated as of the date of discovery.
The business segment(s) affected, if applicable.
The recommendation of the auditor, signed and dated as of the date of discovery.
This answer is correct. Financial statements and the accompanying footnotes are the responsibility of management. Auditors may offer a recommendation, but it would not be required to be disclosed in the footnotes.
