Unit 8 questions Flashcards
Miller Co. discovered that, in the prior year, it failed to report $40,000 of depreciation related to a newly constructed building. The depreciation was computed correctly for tax purposes. The tax rate for the current year was 40%. What was the impact of the error on Miller’s financial statements for the prior year?
A. Understatement of depreciation expense of $24,000.
B. Understatement of accumulated depreciation of $40,000.
C. Understatement of net income of $24,000.
D. Understatement of accumulated depreciation of $24,000.
Answer (B) is correct.
Failing to report depreciation of $40,000 in the prior year understated accumulated depreciation and depreciation expense by $40,000 on the prior year’s financial statements.
Group and composite depreciation methods use the straight-line technique for an aggregate of assets. The composite method is used for ________________. While group method is used for ______________.
The composite method is used for dissimilar assets.
The group method is used for similar assets.
A manufacturing firm purchased used equipment for $135,000. The original owners estimated that the residual value of the equipment was $10,000. The carrying amount of the equipment was $120,000 when ownership transferred. The new owners estimate that the expected remaining useful life of the equipment is 10 years, with a salvage value of $15,000. What amount represents the depreciable base used by the new owners? A. $105,000 B. $120,000 C. $110,000 D. $125,000
Answer (B) is correct.
The depreciable base equals historical cost minus salvage value. The historical cost is the price at which the new owners bought the equipment. The salvage value is the estimated amount the equipment will be worth at the end of its useful life. This amount is determined by the new owners. The depreciable base is therefore $120,000 ($135,000 – $15,000).
UVW Broadcast Co. entered into a contract to exchange unsold advertising time for travel and lodging services with Hotel Co. As of June 30, advertising commercials of $10,000 were used. However, travel and lodging services were not provided. How should UVW account for advertising in its June 30 financial statements?
A. Revenue and expense is recognized when the agreement is complete.
B. Not reported.
C. Both the revenue and expense of $10,000 are recognized.
D. An asset and revenue for $10,000 is recognized.
Answer (D) is correct.
Broadcasters frequently barter unsold advertising time for products or services. Barter revenue is recognized in appropriate amounts when the commercials are broadcast. The amounts are reported at the estimated fair value of the product or service received. Revenue is not earned until the commercials are broadcast. The merchandise or services need not be resold for revenue to be recognized. An asset is recognized if the commercials are broadcast before the merchandise or services are received. A liability is recognized if the merchandise or services are received before the commercials are broadcast. The measurement of the asset and revenue may be based on the fair value ($10,000) of commercials broadcast if that amount is more clearly determinable than the fair value of the services to which the entity has become entitled.
The accounting for a nonmonetary transaction should be based on the carrying amount of the asset(s) given up when the exchange:
lacks commercial substance when an entity’s cash flows are not expected to change significantly.
If a long-lived asset satisfies the criteria for classification as held for sale,
It is not depreciated.
A long-lived asset is not depreciated (amortized) while it is classified as held for sale and measured at the lower of carrying amount or fair value minus cost to sell. The reason is that depreciation (amortization) would reduce the carrying amount below fair value minus cost to sell. Furthermore, fair value minus cost to sell must be evaluated each period, so any future decline will be recognized in the period of decline.
An entity may decide not to sell a long-lived asset (disposal group) classified as held for sale. It should therefore reclassify the long-lived asset (disposal group) as held and used. As a result of reclassification,
Depreciation on individual reclassified long-lived assets is reflected in their measurement.
Changes to a plan of sale may occur because of circumstances previously regarded as unlikely that result in a decision not to sell. In these circumstances, the asset (disposal group) is reclassified as held and used. A reclassified long-lived asset is measured individually at the lower of (1) carrying amount before the asset (disposal group) was classified as held for sale, minus any depreciation (amortization) that would have been recognized if it had always been classified as held and used, or (2) fair value at the date of the decision not to sell
According to IFRS, which asset(s) must not be depreciated?
Investment property that is accounted for in accordance with the cost model.
Investment property that is accounted for in accordance with the fair value model.
A noncurrent asset held for sale.
A. I and III.
B. II and III.
C. Only II.
D. Only III.
Answer (B) is correct.
A noncurrent asset is not depreciated in the period when it is classified as held for sale. Also, investment property that is accounted for in accordance with the fair value model is not depreciated.
For IFRS cost or revaluation models are permitted: what is cost model and is it depreciated and what is the revaluation model and is it depreciated?
Cost model: capitalize at historical cost, depreciate and test for impairment
Revaluation model: PP&E can be revalued at FV each period, if FV can be reliably measured.
Newt Co. sold a warehouse and used the proceeds to acquire a new warehouse. The excess of the proceeds over the carrying amount of the warehouse sold should be reported as a(n):
Part of continuing operations.
Answer (B) is correct.
When property, plant, or equipment is disposed of other than by an exchange, the gain or loss is included in the results of continuing operations unless the disposal is reported in discontinued operations. The operating results of discontinued operations are presented in a separate component of the income statement following continuing operations. However, the facts do not indicate that the warehouse sold is (1) a component of the entity or (2) a business or nonprofit activity. For example, a component of an entity must have operations and cash flows clearly distinguishable for operating and financial reporting purposes. Moreover, disposal of a component of an entity must be a strategic shift (e.g., a major part of the entity). Thus, the gain on the sale is not from a discontinued operation.
During the current year, property owned by Arp Co. was acquired by the city in connection with a condemnation proceeding, resulting in a payment of $100,000 to Arp. The property’s carrying amount was $70,000. Arp paid $45,000 in the current year for replacement property. In Arp’s income statement for the current year ended December 31, what amount of gain should be reported on this involuntary conversion, disregarding income tax considerations? A. $30,000 B. $0 C. $25,000 D. $15,000
Answer (A) is correct.
The forced sale of property was an involuntary conversion of a nonmonetary asset to monetary assets. Gain or loss must be recognized even though an entity reinvests the monetary assets in replacement nonmonetary assets. Arp should therefore recognize a $30,000 gain ($100,000 proceeds – $70,000 carrying amount).
On December 31, Year 1, a building owned by Pine Corp. was totally destroyed by fire. The building had fire insurance coverage up to $500,000. Other pertinent information as of December 31, Year 1, follows: Building, carrying amount $520,000 Building, fair market value 550,000 Removal and clean-up cost 10,000 During January Year 2, before the Year 1 financial statements were issued, Pine received insurance proceeds of $500,000. On what amount should Pine base the determination of its loss on involuntary conversion? A. $520,000 B. $560,000 C. $550,000 D. $530,000
Answer (D) is correct.
Gain or loss must be recognized on an involuntary conversion. For Pine Corp. the determination of the loss on involuntary conversion is based on the $520,000 carrying amount of the building plus the $10,000 of removal and cleanup costs, a total of $530,000. Given $500,000 of insurance proceeds, Pine Corp. should recognize a loss of $30,000 on this involuntary conversion.
Testing for possible impairment of a long-lived asset (asset group) that an entity expects to hold and use is required when?
Whenever events or changes in circumstances indicate that its carrying amount may not be recoverable.
A long-lived asset (asset group) is tested for recoverability whenever events or changes in circumstances indicate that its carrying amount may not be recoverable. The carrying amount is not recoverable when it exceeds the sum of the undiscounted cash flows expected to result from the use and disposition of the asset (asset group). If the carrying amount is not recoverable, an impairment loss is recognized equal to the excess of the carrying amount over the fair value.
To determine whether to recognize the impairment of a depreciable fixed asset, a company must compare the
Carrying amount of the asset and the undiscounted future cash flows expected to be generated by the asset.
According to U.S. GAAP, restorations of carrying value for long-lived assets are permitted if an asset’s fair value increases subsequent to recording an impairment loss for which of the following?
Held for disposal
Under U.S. GAAP, a previously recognized impairment loss on a long-lived asset to be held and used must not be reversed. The carrying amount of the long-lived asset adjusted for an impairment loss is its new cost basis. However, if the long-lived asset is held for sale, a gain is recognized for a subsequent increase in fair value minus cost to sell. But the gain is limited to the extent of prior write-downs. Furthermore, if the long-lived asset is held to be disposed of other than by sale, it is classified as held and used until disposal.
