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Exam 11: Property, Plant, and Equipment and Intangible Assets: Utilization and Impairment

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Question 41

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The depreciable base for an asset is:

A) Its service life.
B) The excess of its cost over residual value.
C) The difference between its replacement value and cost.
D) The amount allowable under MACRS

E) B) and C)
F) C) and D)

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Question 42

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On September 30, 2013, Sternberg Company sold office equipment for $12,000. The equipment was purchased on March 31, 2010, for $24,000. The asset was being depreciated over a five-year life using the straight-line method, with depreciation based on months in service. No residual value was anticipated. Required: Prepare the journal entries to record 2013 depreciation and the sale of the equipment.

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Question 43

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Comet Cleaning Co. reported the following on its December 31, 2013, balance sheet: Equipment (at cost)…..$3,000,000 In a disclosure note, Comet indicates that it uses straight-line depreciation over six years and estimates salvage value as 10% of cost. Comet's equipment averages 4.5 years at December 31, 2013. Required: What is the book value of Comet's equipment at December 31, 2013?

Fellingham Corporation purchased equipment on January 1, 2011, for $200,000. The company estimated the equipment would have a useful life of 10 years with a $20,000 residual value. Fellingham uses the straight-line depreciation method. Early in 2013, Fellingham reassessed the equipment's condition and determined that its total useful life would be only six years in total and that it would have no salvage value. How much would Fellingham report as depreciation on this equipment for 2013?

Ellen's Antiques reported the following in its December 31, 2013, balance sheet: In a disclosure note, Ellen's indicates that it uses straight-line depreciation over eight years and estimates salvage value at 10% of cost. Required: Compute the average age of Ellen's equipment at 12/31/2012.

Atlas Trucking incurred the following costs during 2013: 1. Spent $15,000 on a major overhaul for a tractor-trailer rig. The overhaul is expected to increase the service life of the rig by three years. 2. Repaired the air-conditioning system for $3,000. 3. Rearranged and reconfigured the maintenance, loading, and unloading facilities at a cost of $75,000. The rearrangement is expected to result in substantial cost savings and increased efficiency over the next several years. Required: Prepare journal entries to record the above costs.

Required: Compute depreciation for 2013 and 2014 and the book value of the drill press at December 31, 2013 and 2014, assuming the sum-of-the-years'-digits method is used.

Statutory depletion is the maximum amount of depletion that may be reported in financial statements prepared according to GAAP.

The overriding principle for all depreciation methods is that the method must be:

Gains on the cash sales of fixed assets:

Using the sum-of-the-years'-digits method, depreciation for 2014 and book value at December 31, 2014, would be:

A change in the estimated useful life and residual value of machinery in the current year is handled as:

Briefly discuss why straight-line is the most common depreciation method used in practice.

Notsofast Inc. acquired land for $500,000 on July 1, 2012. It erroneously recorded the full amount as an expense. Explain what Notsofast must do when it discovers the error in 2013.

Assume the same facts as above, except that the fair value of Oxford (the reporting unit) is $225 million. Required: Determine the amount, if any, of the goodwill impairment loss that Dooling must recognize on these assets.

Compute depreciation for 2013 and 2014 and the book value of the machinery at December 31, 2013 and 2014, assuming the sum-of-the-years'-digits method is used.

Required: Determine the amount, if any, of the impairment loss that El Dorado must recognize on these assets.

According to International Financial Reporting Standards, the impairment loss for an indefinite-life intangible asset other than goodwill is the difference between book value and the recoverable amount.

Jung Inc. owns a patent for which it paid $66 million. At the end of 2013, it had accumulated amortization on the patent of $16 million. Due to adverse economic conditions, Jung's management determined that it should assess whether an impairment loss should be recognized for the patent. The estimated undiscounted future cash flows to be provided by the patent total $43 million, and the patent's fair value at that point is $35 million. Under these circumstances, Lester:

Eckland Manufacturing Co. purchased equipment on January 1, 2011, at a cost of $90,000. Straight-line depreciation for 2011 and 2012 was based on an estimated eight-year life and $2,000 estimated residual value. In 2013, Eckland revised its estimate and now believes the equipment will have a total service life of only six years, while the residual value remains the same. Required: Compute depreciation for 2013 and 2014.