Solution Problem Acc for Natural Resources

8/12/2019 Solution Problem Acc for Natural Resources

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CHAPTER 11

DEPRECIATION, IMPAIRMENTS, AND DEPLETION

IFRS questions are available at t e en! o" t is # a$ter%

TR&E'FALSE (Con#e$tualAns)er No% Des#ri$tion

T 1. Nature of depreciation.F 2. Nature of depreciation.T 3. Depreciation, depletion, and amortization.T 4. Definition of depreciation base.F 5. Factors involved in depreciation process.F 6. Definition of inade uac!.T ". #b$ection to strai%&t'line met&od.

F (. )nits'of'production approac&.F *. +ccelerated depreciation met&od.T 1 . Declinin%'balance met&od.T 11. -roup or composite approac&.F 12. )se of t&e composite approac&.T 13. +ccountin% for c&an%es in estimates.F 14. omputation of impairment loss amount.T 15. First step in determinin% an impairment.T 16. /eportin% impaired assets &eld for disposal.F 1". 0et&od used to compute depletion.T 1(. osts included in depletion base.F 1*. omputin% asset turnover ratio.

T 2 rofit mar%in on sales ratio.

M&LTIPLE CHOICE (Con#e$tualAns)er No% Des#ri$tion

d 21. no led%e of depreciation accountin%.b 22. onceptual rationale for depreciation accountin%.c 23. Depreciation and retainin% funds.b 24. Definition of depreciation.a 25. ervice life vs. p&!sical life.a 26. Definition of depreciable cost.d 2". conomic factors affectin% useful service life.d 2(. Factors involved in computin% depreciation.d 2*. trai%&t'line met&od assumption.a 3 . +ctivit! met&od of depreciation.a 31. )nits'of'production met&od of depreciation.d 32. )nits'of'production met&od of depreciation.d 33. no led%e of double'declinin% balance met&od.c 34. omponents of sum'of't&e'!ears 'di%its met&od.c 35. -rap&ic depiction of strai%&t'line and sum'of't&e'!ears 'di%its met&ods.b 36. Disadvanta%e of usin% strai%&t'line met&od.


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Test *an+ "or Inter e!iate A##ountin-, Fourteent E!ition

M&LTIPLE CHOICE (Con#e$tual .#ont%/Ans)er No% Des#ri$tion

b 3". -roup met&od of depreciation.d 3(. 7dentification of composite life.c 3*. -roup met&od of depreciation.c 4 . omposite or %roup depreciation.b 41. artial'!ear depreciation computation.b 42. Depreciation for part !ear.c 43. &an%e in estimated life of depreciable asset.b 44. /eportin% a c&an%e in estimate.b 45. /ecordin% an asset impairment.d 46. Depreciation and cost depletion similarities.d 4". Difference bet een depreciation and cost depletion.d 4(. Depreciation and li uidatin% dividends.a 4*. lassification of depletion e8pense.d 5 . )nits'of'production depletion e8pense.d 51. /eserve reco%nition accountin%.c 52. 7tems part of depletion cost.b 53. /e uired disclosures for depreciation.b 54. Definition of boo9 value.d 55. Disclosure of depreciation polic!.d 56. +sset turnover ratio.d 5". /eturn on total assets ratio.c :5(. #b$ectives of 0+ / met&od.d :5*. Factors to consider in 0+ / ta8 depreciation.c :6 . ffect of accelerated depreciation on t&e income statement.

T&ese uestions also appear in t&e roblem' olvin% urvival -uide. T&ese uestions also appear in t&e tud! -uide.

: T&is topic is dealt it& in an +ppendi8 to t&e c&apter.

M&LTIPLE CHOICE (Co $utationalAns)er No% Des#ri$tion

c 61. Factors involved in depreciation.c 62. alculate depreciation usin% activit! met&od.b 63. alculate double'declinin% balance depreciation.c 64. alculate double'declinin% balance depreciation.b 65. alculate depreciation usin% activit! met&od.c 66. alculate depreciation usin% activit! met&od.b 6". alculate depreciation usin% activit! met&od.c 6(. alculate depreciation usin% double'declinin% balance met&od.b 6*. alculate depreciation usin% activit! met&od.c " . alculate depreciation usin% double'declinin% balance met&od.b "1. alculate depreciation usin% double'declinin% balance.b "2. alculate depreciation usin% double'declinin% balance.b "3. alculate depreciation usin% double'declinin% balance.b "4. alculate depreciation usin% double'declinin% balance.c "5. um'of't&e'!ears 'di%its met&od.

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Depreciation, 7mpairments, and Depletion

M&LTIPLE CHOICE (Co $utational ;cont.


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32. 7f an industrial firm uses t&e units'of'production met&od for computin% depreciation on itsonl! plant asset, factor! mac&iner!, t&e credit to accumulated depreciation from period toperiod durin% t&e life of t&e firm illa. be constant.b. var! it& unit sales.c. var! it& sales revenue.d. var! it& production.

33. )se of t&e double'declinin% balance met&oda. results in a decreasin% c&ar%e to depreciation e8pense.b. means salva%e value is not deducted in computin% t&e depreciation base.c. means t&e boo9 value s&ould not be reduced belo salva%e value.d. all of t&ese.

34. )se of t&e sum'of't&e'!ears 'di%its met&oda. results in salva%e value bein% i%nored.b. means t&e denominator is t&e !ears remainin% at t&e be%innin% of t&e !ear.c. means t&e boo9 value s&ould not be reduced belo salva%e value.

d. all of t&ese.

35. + %rap& is set up it& C!earl! depreciation e8penseC on t&e vertical a8is and CtimeC on t&e&orizontal a8is. +ssumin% linear relations&ips, &o ould t&e %rap&s for strai%&t'line andsum'of't&e'!ears 'di%its depreciation, respectivel!, be dra nBa. erticall! and slopin% do n to t&e ri%&tb. erticall! and slopin% up to t&e ri%&tc. Eorizontall! and slopin% do n to t&e ri%&td. Eorizontall! and slopin% up to t&e ri%&t

36. + principal ob$ection to t&e strai%&t'line met&od of depreciation is t&at ita. provides for t&e declinin% productivit! of an a%in% asset.

b. i%nores variations in t&e rate of asset use.c. tends to result in a constant rate of return on a diminis&in% investment base.d. %ives smaller periodic rite'offs t&an decreasin% c&ar%e met&ods.

3". ac& !ear a compan! &as been investin% an increasin%l! %reater amount in mac&iner!.ince t&ere is a lar%e number of small items it& relativel! similar useful lives, t&ecompan! &as been appl!in% strai%&t'line depreciation at a uniform rate to t&e mac&iner!as a %roup. T&e ratio of t&is %roup s total accumulated depreciation to t&e total cost of t&emac&iner! &as been steadil! increasin% and no stands at ."5 to 1. . T&e most li9el!e8planation for t&is increasin% ratio is t&ea. compan! s&ould &ave been usin% one of t&e accelerated met&ods of depreciation.b. estimated avera%e life of t&e mac&iner! is less t&an t&e actual avera%e useful life.

c. estimated avera%e life of t&e mac&iner! is %reater t&an t&e actual avera%e useful life.d. compan! &as been retirin% full! depreciated mac&iner! t&at s&ould &ave remained inservice.

3(. For t&e composite met&od, t&e compositea. rate is t&e total cost divided b! t&e total annual depreciation.b. rate is t&e total annual depreciation divided b! t&e total depreciable cost.c. life is t&e total cost divided b! t&e total annual depreciation.d. life is t&e total depreciable cost divided b! t&e total annual depreciation.

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45. H!nc& rintin% ompan! determines t&at a printin% press used in its operations &assuffered a permanent impairment in value because of tec&nolo%ical c&an%es. +n entr! torecord t&e impairment s&oulda. reco%nize an e8traordinar! loss for t&e period.b. include a credit to t&e e uipment accumulated depreciation account.c. include a credit to t&e e uipment account.d. not be made if t&e e uipment is still bein% used.

46. A&ic& of follo in% is not a similarit! in t&e accountin% treatment for depreciation and costdepletionBa. T&e estimated life is based on economic or productive life.b. +ssets sub$ect to eit&er are reported in t&e same classification on t&e balance s&eet.c. T&e rates ma! be c&an%ed upon revision of t&e estimated productive life used in t&e

ori%inal rate computations.d. Got& depreciation and depletion are based on time.

4". A&ic& of t&e follo in% is not a difference bet een t&e accountin% treatment for depreciation and cost depletionBa. Depletion applies to natural resources &ile depreciation applies to plant and

e uipment.b. Depletion refers to t&e p&!sical e8&austion or consumption of t&e asset &ile

depreciation refers to t&e ear, tear, and obsolescence of t&e asset.c. 0an! formulas are used in computin% depreciation but onl! one is used to an! e8tent

in computin% depletion.d. T&e cost of t&e asset is t&e startin% point from &ic& computation of t&e amount of t&e

periodic c&ar%e is made to operations for depreciation, but t&e fair value reassessedeac& !ear as t&e startin% point for t&e periodic c&ar%e for depletion.

4(. Dividends representin% a return of capital to stoc9&olders are not uncommon amon%companies &ic&

a. use accelerated depreciation met&ods.b. use strai%&t'line depreciation met&ods.c. reco%nize bot& functional and p&!sical factors in depreciation.d. none of t&ese.

4*. Depletion e8pensea. is usuall! part of cost of %oods sold.b. includes tan%ible e uipment costs in t&e depletion base.c. e8cludes intan%ible development costs from t&e depletion base.d. e8cludes restoration costs from t&e depletion base.

5 . T&e most common met&od of recordin% depletion for accountin% purposes is t&e

a. percenta%e depletion met&od.b. decreasin% c&ar%e met&od.c. strai%&t'line met&od.d. units'of'production met&od.

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51. /eserve reco%nition accountin%a. is presentl! t&e %enerall! accepted accountin% met&od for financial reportin% of oil and

%as reserves.b. is a &istorical cost met&od similar to t&e full cost approac& and t&e successful efforts

approac&.c. is used for reportin% of oil and %as reserves for federal income ta8 purposes.d. re uires estimates of future production costs, t&e appropriate discount rate, and t&e

e8pected sellin% price of oil and %as reserves.

52. #f t&e follo in% costs related to t&e development of natural resources, &ic& one is not apart of depletion costBa. +c uisition cost of t&e natural resource depositb. 8ploration costsc. Tan%ible e uipment costs associated it& mac&iner! used to e8tract t&e natural

resourced. 7ntan%ible development costs suc& as drillin% costs, tunnels, and s&afts

53. A&ic& of t&e follo in% disclosures is not re uired in t&e financial statements re%ardin%depreciationBa. +ccumulated depreciation, eit&er b! ma$or classes of depreciable assets or in total.b. Details demonstratin% &o depreciation as calculated.c. Depreciation e8pense for t&e period.d. Galances of ma$or classes of depreciable assets, b! nature and function.

54. T&e boo9 value of a plant asset isa. t&e fair mar9et value of t&e asset at a balance s&eet date.b. t&e asset s ac uisition cost less t&e total related depreciation recorded to date.c. e ual to t&e balance of t&e related accumulated depreciation account.d. t&e assessed value of t&e asset for propert! ta8 purposes.

55. + %eneral description of t&e depreciation met&ods applicable to ma$or classes of depreciable assetsa. is not a current practice in financial reportin%.b. is not essential to a fair presentation of financial position.c. is needed in financial reportin% &en compan! polic! differs from income ta8 polic!.d. s&ould be included in corporate financial statements or notes t&ereto.

56. T&e asset turnover ratio is computed b! dividin%a. net income b! endin% total assets.b. net income b! avera%e total assets.c. net sales b! endin% total assets.d. net sales b! avera%e total assets.

5". T&e rate of return on total assets is computed b! dividin%a. Net income b! endin% total assets.b. Net sales b! avera%e total assets.c. Net sales b! endin% total assets.d. Net income b! avera%e total assets.

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:5(. + ma$or ob$ective of 0+ / for ta8 depreciation is toa. reduce t&e amount of depreciation deduction on business firms ta8 returns.b. assure t&at t&e amount of depreciation for ta8 and boo9 purposes ill be t&e same.c. &elp companies ac&ieve a faster rite'off of t&eir capital assets.d. re uire companies to use t&e actual economic lives of assets in calculatin% ta8

depreciation.

:5*. )nder 0+ / , &ic& one of t&e follo in% is not considered in determinin% depreciationfor ta8 purposesBa. ost of assetb. ropert! recover! classc. Ealf'!ear conventiond. alva%e value

:6 . 7f income ta8 effects are i%nored, accelerated depreciation met&odsa. provide funds for t&e earlier replacement of fi8ed assets.b. increase funds provided b! operations.c. tend to offset t&e effect of steadil! increasin% repair and maintenance costs on t&e

income statement.d. tend to decrease t&e fi8ed asset turnover ratio.

Multi$le C oi#e Ans)ers (Con#e$tualIte Ans% Ite Ans% Ite Ans% Ite Ans% Ite Ans% Ite Ans% Ite Ans%

21. d 2". d 33. d 3*. c 45. b 51. d 5". d22. b 2(. d 34. c 4 . c 46. d 52. c :5(. c23. c 2*. d 35. c 41. b 4". d 53. b :5*. d24. b 3 . a 36. b 42. b 4(. d 54. b :6 . c25. a 31. a 3". b 43. c 4*. a 55. d26. a 32. d 3(. d 44. b 5 . d 56. d

olutions to t&ose 0ultiple &oice uestions for &ic& t&e ans er is Inone of t&ese.J

4(. do not e8pect to purc&ase additional propert! after depletin% e8istin% propert!.

M&LTIPLE CHOICE (Co $utational

61. Fer%uson ompan! purc&ased a depreciable asset for K12 , . T&e estimated salva%evalue is K1 , , and t&e estimated useful life is 1 !ears. T&e strai%&t'line met&od ill beused for depreciation. A&at is t&e depreciation base of t&is assetBa. K11,b. K12,c. K11 ,d. K12 ,

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62. Eamilton ompan! purc&ased a depreciable asset for K24 , . T&e estimated salva%evalue is K2 , , and t&e estimated useful life is 1 !ears. T&e strai%&t'line met&od ill beused for depreciation. A&at is t&e depreciation base of t&is assetBa. K22,b. K24,c. K22 ,d. K24 ,

63. olar roducts purc&ased a mac&ine for K3*, on ul! 1, 2 12. T&e compan! intendsto depreciate it over 4 !ears usin% t&e double'declinin% balance met&od. alva%e value isK3, . Depreciation for 2 12 isa. K1*,5b. K*,"5c. K14,625d. K*,

64. olar roducts purc&ased a mac&ine for K3*, on ul! 1, 2 12. T&e compan! intendsto depreciate it over 4 !ears usin% t&e double'declinin% balance met&od. alva%e value isK3, . Depreciation for 2 13 isa. K1*,5b. K*,"5c. K14,625d. K*,

65. -ardner orporation purc&ased a truc9 at t&e be%innin% of 2 12 for K* , . T&e truc9 isestimated to &ave a salva%e value of K3,6 and a useful life of 12 , miles. 7t asdriven 1(, miles in 2 12 and 32, miles in 2 13. A&at is t&e depreciation e8pensefor 2 12Ba. K13,5b. K12,*6

c. K21,6d. K36,

66. -ardner orporation purc&ased a truc9 at t&e be%innin% of 2 12 for K* , . T&e truc9 isestimated to &ave a salva%e value of K3,6 and a useful life of 12 , miles. 7t asdriven 1(, miles in 2 12 and 32, miles in 2 13. A&at is t&e depreciation e8pensefor 2 13Ba. K24,b. K36,c. K23, 4d. K3(,4

6". inder ompan! purc&ased a depreciable asset for K2( , . T&e estimated salva%evalue is K14, , and t&e estimated useful life is 1 , &ours. inder used t&e asset for 1,1 &ours in t&e current !ear. T&e activit! met&od ill be used for depreciation. A&at ist&e depreciation e8pense on t&is assetBa. K26,6b. K2*,26c. K3 ,(d. K266,

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6(. amar ompan! purc&ased a depreciable asset for K225, . T&e estimated salva%evalue is K15, , and t&e estimated useful life is ( !ears. T&e double'declinin% balancemet&od ill be used for depreciation. A&at is t&e depreciation e8pense for t&e second!ear on t&is assetBa. K26,25b. K3*,3"5c. K42,1((d. K56,25

6*. n%els ompan! purc&ased a depreciable asset for K( , . T&e estimated salva%evalue is K4 , , and t&e estimated useful life is 1 , &ours. n%els used t&e asset for 1,1 &ours in t&e current !ear. T&e activit! met&od ill be used for depreciation. A&at ist&e depreciation e8pense on t&is assetBa. K"6,b. K(3,6c. K((,d. K"6 ,

" . Eart ompan! purc&ased a depreciable asset for K45 , . T&e estimated salva%e valueis K3 , , and t&e estimated useful life is ( !ears. T&e double'declinin% balance met&odill be used for depreciation. A&at is t&e depreciation e8pense for t&e second !ear on t&isassetBa. K52,5b. K"(,"5c. K(4,3"5d. K112,5

"1. #n ul! 1, 2 12, -onzalez orporation purc&ased factor! e uipment for K225, . alva%evalue as estimated to be K6, . T&e e uipment ill be depreciated over ten !ears usin%t&e double'declinin% balance met&od. ountin% t&e !ear of ac uisition as one'&alf !ear,-onzalez s&ould record depreciation e8pense for 2 13 on t&is e uipment of a. K45, .b. K4 ,5 .c. K3*,42 .d. K36, .

"2. rause orporation purc&ased factor! e uipment t&at as installed and put into serviceanuar! 2, 2 12, at a total cost of K12 , . alva%e value as estimated at K(, . T&ee uipment is bein% depreciated over four !ears usin% t&e double'declinin% balance met&od.For t&e !ear 2 13, rause s&ould record depreciation e8pense on t&is e uipment of a. K2(, .b. K3 , .c. K56, .d. K6 , .

"3. #n +pril 13, 2 12, Neill o. purc&ased mac&iner! for K16(, . alva%e value asestimated to be K", . T&e mac&iner! ill be depreciated over ten !ears usin% t&edouble'declinin% balance met&od. 7f depreciation is computed on t&e basis of t&e nearestfull mont&, Neill s&ould record depreciation e8pense for 2 13 on t&is mac&iner! of a. K2*,12 .b. K2(,56 .c. K2(,"" .d. K2*,3 6.

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"4. 0atile o. purc&ased mac&iner! t&at as installed and read! for use on anuar! 3, 2 12,at a total cost of K115, . alva%e value as estimated at K15, . T&e mac&iner! illbe depreciated over five !ears usin% t&e double'declinin% balance met&od. For t&e !ear 2 13, 0atile s&ould record depreciation e8pense on t&is mac&iner! of a. K24, .b. K2",6 .c. K3 , .d. K46, .

"5. + plant asset &as a cost of K32, and a salva%e value of K(, . T&e asset &as a t&ree'!ear life. 7f depreciation in t&e t&ird !ear amounted to K4, , &ic& depreciation met&odas usedBa. trai%&t'lineb. Declinin%'balancec. um'of't&e'!ears 'di%itsd. annot tell from information %iven

"6. #n anuar! 1, 2 12, -ra&am ompan! purc&ased a ne mac&ine for K2,( , . T&ene mac&ine &as an estimated useful life of nine !ears and t&e salva%e value asestimated to be K1 , . Depreciation as computed on t&e sum'of't&e'!ears 'di%itsmet&od. A&at amount s&ould be s&o n in -ra&am s balance s&eet at December 31,2 13, net of accumulated depreciation, for t&is mac&ineBa. K2,26 ,b. K1,"( ,c. K1,"42,221d. K1,65*,

"". #n anuar! 1, 2 6, Forbes ompan! purc&ased e uipment at a cost of K1 , . T&ee uipment as estimated to &ave a salva%e value of K1 , and it is bein% depreciatedover ei%&t !ears under t&e sum'of't&e'!ears 'di%its met&od. A&at s&ould be t&e c&ar%e for depreciation of t&is e uipment for t&e !ear ended December 31, 2 13Ba. K2,5b. K2,""(c. K5,d. K11,25

"(. #n eptember 1*, 2 12, 0c o! o. purc&ased mac&iner! for K2(5, . alva%e valueas estimated to be K15, . T&e mac&iner! ill be depreciated over ei%&t !ears usin% t&esum'of't&e'!ears 'di%its met&od. 7f depreciation is computed on t&e basis of t&e nearest fullmont&, 0c o! s&ould record depreciation e8pense for 2 13 on t&is mac&iner! of a. K61,354.b. K5(,26".c. K5(,125.d. K52,5 .

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"*. #n anuar! 3, 2 11, 0unoz o. purc&ased mac&iner!. T&e mac&iner! &as an estimateduseful life of ei%&t !ears and an estimated salva%e value of K6 , . T&e depreciationapplicable to t&is mac&iner! as K13 , for 2 13, computed b! t&e sum'of't&e'!ears 'di%its met&od. T&e ac uisition cost of t&e mac&iner! asa. K"2 , .b. K"( , .c. K(4 , .d. K*36, .

( . #n anuar! 2, 2 1 , tac! ompan! ac uired e uipment to be used in its manufacturin%operations. T&e e uipment &as an estimated useful life of 1 !ears and an estimatedsalva%e value of K3 , . T&e depreciation applicable to t&is e uipment as K14 , for 2 13, computed under t&e sum'of't&e'!ears 'di%its met&od. A&at as t&e ac uisition costof t&e e uipmentBa. K1, " ,b. K1,13 ,c. K1,1 ,d. K1, (3,333

(1. #rton orporation, &ic& &as a calendar !ear accountin% period, purc&ased a nemac&ine for K6 , on +pril 1, 2 (. +t t&at time #rton e8pected to use t&e mac&ine for nine !ears and t&en sell it for K6, . T&e mac&ine as sold for K33, on ept. 3 ,2 13. +ssumin% strai%&t'line depreciation, no depreciation in t&e !ear of ac uisition, and afull !ear of depreciation in t&e !ear of retirement, t&e %ain to be reco%nized at t&e time of sale ould bea. K6, .b. K4,5 .c. K3, .d. K .

(2. #n anuar! 1, 2 12, t&e +ccumulated DepreciationL0ac&iner! account of a particular compan! s&o ed a balance of K"4 , . +t t&e end of 2 12, after t&e ad$ustin% entriesere posted, it s&o ed a balance of K"* , . Durin% 2 12, one of t&e mac&ines &ic&cost K25 , as sold for K121, cas&. T&is resulted in a loss of K(, . +ssumin%t&at no ot&er assets ere disposed of durin% t&e !ear, &o muc& as depreciatione8pense for 2 12Ba. K1"1,b. K1(",c. K5 ,d. K121,

(3. Durin% 2 12, Noller o. sold e uipment t&at &ad cost K2*4, for K1"6,4 . T&isresulted in a %ain of K12,* . T&e balance in +ccumulated DepreciationL uipment asK*"5, on anuar! 1, 2 12, and K*3 , on December 31. No ot&er e uipment asdisposed of durin% 2 12. Depreciation e8pense for 2 12 asa. K45, .b. K5",* .c. K(5,5 .d. K1"5,5 .

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&se t e "ollo)inin"or ation "or questions >6 an! >:

+ sc&edule of mac&iner! o ned b! 0allon o. is presented belo >stimated stimated

Total ost alva%e alue Hife in Mears0ac&ine + K26 , K2 , 120ac&ine 3* , 3 , 10ac&ine 0 1*5, 15, 6

0allon computes depreciation b! t&e composite met&od.

(4. T&e composite rate of depreciation ;in percent< for t&ese assets isa. 1 .1(.b. 1 ."".c. 11. 3.d. 11.6".

(5. T&e composite life ;in !ears< for t&ese assets isa. *.1.b. *.3.c. *.(.d. 1 . .

(6. tevenson ompan! purc&ased a depreciable asset for K35 , on +pril 1, 2 1 . T&eestimated salva%e value is K35, , and t&e estimated useful life is 5 !ears. T&e strai%&t'line met&od is used for depreciation. A&at is t&e balance in accumulated depreciation on0a! 1, 2 13 &en t&e asset is soldBa. K126,b. K14",c. K1"3,25d. K1*4,25

(". Ailliamson orporation purc&ased a depreciable asset for K4 , on anuar! 1, 2 1 .T&e estimated salva%e value is K4 , , and t&e estimated useful life is * !ears. T&estrai%&t'line met&od is used for depreciation. 7n 2 13, Ailliamson c&an%ed its estimates toa total useful life of 5 !ears it& a salva%e value of K6 , . A&at is 2 13 depreciatione8penseBa. K4 ,b. K6 ,c. K11 ,d. K12 ,

((. /ollins ompan! purc&ased a depreciable asset for K5 , on +pril 1, 2 1 . T&eestimated salva%e value is K5 , , and t&e estimated total useful life is 5 !ears. T&estrai%&t'line met&od is used for depreciation. A&at is t&e balance in accumulateddepreciation on 0a! 1, 2 13 &en t&e asset is soldBa. K1*6,66"b. K21 ,c. K24",5d. K2"",5

11 ' 1>


19/42


(*. Fanestil orporation purc&ased a depreciable asset for K63 , on anuar! 1, 2 1 . T&eestimated salva%e value is K63, , and t&e estimated total useful life is * !ears. T&estrai%&t'line met&od is used for depreciation. 7n 2 13, Fanestill c&an%ed its estimates to auseful life of 5 !ears it& a salva%e value of K1 5, . A&at is 2 13 depreciatione8penseBa. K63,b. K1 5,c. K16(,d. K1(*,

* . 7f Ha son, 7nc. uses t&e composite met&od and its composite rate is ".5= per !ear, &atentr! s&ould it ma9e &en plant assets t&at ori%inall! cost K( , and &ave been usedfor 1 !ears are sold for K24, Ba. as& 24,

+ccumulated Depreciation ' lant +ssets 56,lant +ssets ( ,

b. as& 24,

Hoss on ale of lant +ssets 56,lant +ssets ( ,c. as& 24,

+ccumulated Depreciation ' lant +ssets 6 ,lant +ssets ( ,-ain on ale of lant +ssets 4,

d. as& 24,lant +ssets 24,

*1. +rc&er ompan! purc&ased e uipment in anuar! of 2 2 for K15 , . T&e e uipmentas bein% depreciated on t&e strai%&t'line met&od over an estimated useful life of 2!ears, it& no salva%e value. +t t&e be%innin% of 2 12, &en t&e e uipment &ad been inuse for 1 !ears, t&e compan! paid K25, to over&aul t&e e uipment. +s a result of t&isimprovement, t&e compan! estimated t&at t&e useful life of t&e e uipment ould bee8tended an additional 5 !ears. A&at s&ould be t&e depreciation e8pense recorded for t&is e uipment in 2 12.a. K5,b. K6,66"c. K",5d. K*,16"

&se t e "ollo)inin"or ation to ans)er questions ?0 an! ? %

bert 7nc. o ns t&e follo in% assets>

+sset ost alva%e stimated )seful Hife + K14 , K14, 1 !earsG "5, ",5 5 !ears

164, (, 12 !ears

*2. A&at is t&e composite depreciation rate of bert s assetsBa. 14. =b. 1 .3=c. 12.*=d. 11.1=

11 ' 1?


20/42


*3. A&at is t&e composite life of bert s assetsBa. 14. !earsb. *." !earsc. (.* !earsd. 1 .3 !ears

*4. Tec&ni ue o. &as e uipment it& a carr!in% amount of K1,6 , . T&e e8pected futurenet cas& flo s from t&e e uipment are K1,63 , , and its fair value is K1,36 , . T&ee uipment is e8pected to be used in operations in t&e future. A&at amount ;if an!< s&ouldTec&ni ue report as an impairment to its e uipmentBa. No impairment s&ould be reported.b. K24 ,c. K3 ,d. K2" ,

*5. /obertson 7nc. bou%&t a mac&ine on anuar! 1, 2 2 for K4 , . T&e mac&ine &ad ane8pected life of 2 !ears and as e8pected to &ave a salva%e value of K4 , . #n ul!1, 2 12, t&e compan! revie ed t&e potential of t&e mac&ine and determined t&at its

undiscounted future net cas& flo s totaled K2 , and its discounted future net cas&flo s totaled K14 , . 7f no active mar9et e8ists for t&e mac&ine and t&e compan! doesnot plan to dispose of it, &at s&ould /obertson record as an impairment loss on ul! 1,2 12Ba. K b. K11,c. K2 ,d. K"1,

*6. Eolcomb orpsssoration o ns mac&iner! it& a boo9 value of K2(5, . 7t is estimatedt&at t&e mac&iner! ill %enerate future cas& flo s of K3 , . T&e mac&iner! &as a fair value of K21 , . Eolcomb s&ould reco%nize a loss on impairment of a. K ' '.b. K15, .c. K"5, .d. K* , .

*". o&lman orporation o ns mac&iner! it& a boo9 value of K3( , . 7t is estimated t&att&e mac&iner! ill %enerate future cas& flo s of K35 , . T&e mac&iner! &as a fair valueof K2( , . o&lman s&ould reco%nize a loss on impairment of a. K ' '.b. K 3 , .c. K1 , .d. K " , .

*(. 0ars& orporation purc&ased a mac&ine on ul! 1, 2 1 , for K1,25 , . T&e mac&ineas estimated to &ave a useful life of 1 !ears it& an estimated salva%e value of K" , . Durin% 2 13, it became apparent t&at t&e mac&ine ould become uneconomicalafter December 31, 2 1", and t&at t&e mac&ine ould &ave no scrap value. +ccumulateddepreciation on t&is mac&ine as of December 31, 2 12, as K2*5, . A&at s&ould bet&e c&ar%e for depreciation in 2 13 under %enerall! accepted accountin% principlesBa. K1"",b. K1*1,c. K2 5,d. K23(,"5

11 ' 0@


21/42


**. /ivera ompan! purc&ased a toolin% mac&ine on anuar! 3, 2 6 for K" , . T&emac&ine as bein% depreciated on t&e strai%&t'line met&od over an estimated useful lifeof 1 !ears, it& no salva%e value. +t t&e be%innin% of 2 13, t&e compan! paid K1"5,to over&aul t&e mac&ine. +s a result of t&is improvement, t&e compan! estimated t&at t&euseful life of t&e mac&ine ould be e8tended an additional 5 !ears ;15 !ears total

Hand K",5 ,stimated restoration costs 1,5 ,

7f erc! maintains no inventories of e8tracted material, &at s&ould be t&e c&ar%e todepletion e8pense per ton of e8tracted materialBa. K3.25b. K3."5c. K4.d. K4.5

11 ' 01


22/42


1 3. 7n anuar!, 2 12, Moder orporation purc&ased a mineral mine for K5,1 , it&removable ore estimated b! %eolo%ical surve!s at 2, , tons. T&e propert! &as anestimated value of K3 , after t&e ore &as been e8tracted. T&e compan! incurredK1,5 , of development costs preparin% t&e mine for production. Durin% 2 12, 5 ,tons ere removed and 4 , tons ere sold. A&at is t&e amount of depletion t&atModer s&ould expense for 2 12Ba. K*6 ,b. K1,2 ,c. K1,26 ,d. K1,6( ,

1 4. Durin% 2 12, ldred orporation ac uired a mineral mine for K3, , of &ic&K4 , as ascribed to land value after t&e mineral &as been removed. -eolo%icalsurve!s &ave indicated t&at 1 million units of t&e mineral could be e8tracted. Durin%2 12, 1,5 , units ere e8tracted and 1,2 , units ere sold. A&at is t&e amountof depletion expensed for 2 12Ba. K26 , .b. K312, .c. K36 , .d. K3* , .

1 5. 7n 0arc&, 2 12, 0ale! 0ines o. purc&ased a coal mine for K(, , . /emovable coalis estimated at 1,5 , tons. 0ale! is re uired to restore t&e land at an estimated costof K*6 , , and t&e land s&ould &ave a value of K(4 , . T&e compan! incurredK2, , of development costs preparin% t&e mine for production. Durin% 2 12, 45 ,tons ere removed and 3 , tons ere sold. T&e total amount of depletion t&at 0ale!s&ould record for 2 12 isa. K1,(32, .b. K2, 24, .c. K2,"4(, .d. K3, 36, .

1 6. 7n 2 4, Eorton ompan! purc&ased a tract of land as a possible future plant site. 7nanuar!, 2 12, valuable sulp&ur deposits ere discovered on ad$oinin% propert! andEorton ompan! immediatel! be%an e8plorations on its propert!. 7n December, 2 12,after incurrin% K( , in e8ploration costs, &ic& ere accumulated in an e8penseaccount, Eorton discovered sulp&ur deposits appraised at K4,5 , more t&an t&e valueof t&e land. To record t&e discover! of t&e deposits, Eorton s&oulda. ma9e no entr!.b. debit K( , to an asset account.c. debit K4,5 , to an asset account.d. debit K5,3 , to an asset account.

1 ". Galcom orporation ac uires a coal mine at a cost of K1,5 , . 7ntan%ible developmentcosts total K36 , . +fter e8traction &as occurred, Galcom must restore t&e propert!;estimated fair value of t&e obli%ation is K1( ,


23/42


1 (. Galcom orporation ac uires a coal mine at a cost of K1,5 , . 7ntan%ible developmentcosts total K36 , . +fter e8traction &as occurred, Galcom must restore t&e propert!;estimated fair value of t&e obli%ation is K1( ,

2 12 2 13ales K3, , K3,* ,Net 7ncome 3 , 4 ,

+ssets at !ear end 1,( , 2,5 ,Hiabilities at !ear end 1,1 , 1,5 ,

A&at is 0ar9o itz@s asset turnover for 2 13Ba. 1.56b. 1.61c. 1.(1d. 2.1"

11 ' 0


24/42


25/42


M&LTIPLE CHOICE (CPA A!a$te!

11". i9e o. purc&ased a mac&ine on ul! 1, 2 12, for K( , . T&e mac&ine &as anestimated useful life of five !ears and a salva%e value of K16 , . T&e mac&ine is bein%depreciated from t&e date of ac uisition b! t&e 15 = declinin%'balance met&od. For t&e

!ear ended December 31, 2 12, i9e s&ould record depreciation e8pense on t&ismac&ine of a. K24 , .b. K16 , .c. K12 , .d. K*6, .

11(. + mac&ine it& a five'!ear estimated useful life and an estimated 1 = salva%e value asac uired on anuar! 1, 2 11. T&e depreciation e8pense for 2 13 usin% t&e double'declinin% balance met&od ould be ori%inal cost multiplied b!a. * = 4 = 4 =.b. 6 = 6 = 4 =.

c. * = 6 = 4 =.d. 4 = 4 =.

11*. #n +pril 1, 2 11, erlin o. purc&ased ne mac&iner! for K3 , . T&e mac&iner! &asan estimated useful life of five !ears, and depreciation is computed b! t&e sum'of't&e'!ears 'di%its met&od. T&e accumulated depreciation on t&is mac&iner! at 0arc& 31, 2 13,s&ould bea. K2 , .b. K1( , .c. K12 , .d. K1 , .

12 . Ea&n o. ta9es a full !ear s depreciation e8pense in t&e !ear of an asset s ac uisition andno depreciation e8pense in t&e !ear of disposition. Data relatin% to one of Ea&n sdepreciable assets at December 31, 2 13 are as follo s>

+c uisition !ear 2 11ost K21 ,/esidual value 3 ,

+ccumulated depreciation 144,stimated useful life 5 !ears

)sin% t&e same depreciation met&od as used in 2 11, 2 12, and 2 13, &o muc&depreciation e8pense s&ould Ea&n record in 2 14 for t&is assetBa. K24,

b. K36,c. K42,d. K4(,

11 ' 0:


26/42


121. + depreciable asset &as an estimated 15= salva%e value. +t t&e end of its estimateduseful life, t&e accumulated depreciation ould e ual t&e ori%inal cost of t&e asset under &ic& of t&e follo in% depreciation met&odsB

trai%&t'line roductive #utputa. Mes No

b. Mes Mesc. No Mesd. No No

122. Net income is understated if, in t&e first !ear, estimated salva%e value is e8cluded fromt&e depreciation computation &en usin% t&e

trai%&t'line roduction or 0et&od )se 0et&od

a. Mes Nob. Mes Mesc. No Nod. No Mes

123. + plant asset it& a five'!ear estimated useful life and no residual value is sold at t&e endof t&e second !ear of its useful life. Eo ould usin% t&e sum'of't&e'!ears 'di%its met&odof depreciation instead of t&e double'declinin% balance met&od of depreciation affect a%ain or loss on t&e sale of t&e plant assetB

-ain Hossa. Decrease Decreaseb. Decrease 7ncreasec. 7ncrease Decreased. 7ncrease 7ncrease

124. -i%er ompan! ac uired a tract of land containin% an e8tractable natural resource. -i%er is re uired b! t&e purc&ase contract to restore t&e land to a condition suitable for recreational use after it &as e8tracted t&e natural resource. -eolo%ical surve!s estimatet&at t&e recoverable reserves ill be 5, , tons, and t&at t&e land ill &ave a value of K( , after restoration. /elevant cost information follo s>

Hand K5,6 ,stimated restoration costs 1,2 ,

7f -i%er maintains no inventories of e8tracted material, &at s&ould be t&e c&ar%e todepletion e8pense per ton of e8tracted materialBa. K1.36b. K1.2c. K1.12d. K .*6

11 ' 0;


27/42


125. 7n anuar! 2 12, Fe&r 0inin% orporation purc&ased a mineral mine for K6,3 , it&removable ore estimated b! %eolo%ical surve!s at 2,5 , tons. T&e propert! &as anestimated value of K6 , after t&e ore &as been e8tracted. Fe&r incurred K1,"25, of development costs preparin% t&e propert! for t&e e8traction of ore. Durin% 2 12, 34 ,tons ere removed and 3 , tons ere sold. For t&e !ear ended December 31, 2 12,Fe&r s&ould include &at amount of depletion in its cost of %oods soldBa. K""5,2b. K6(4,c. K(*1,d. K1, *,(

Multi$le C oi#e Ans)ers( CPA A!a$te!Ite Ans% Ite Ans% Ite Ans% Ite Ans% Ite Ans%

11". c 11*. b 121. d 123. b 125. c11(. b 12 . a 122. b 124. b

DERI5ATIONS ( Co $utationalNo% Ans)er Derivation

61. c K12 , O K1 , ? K11 , .

62. c K24 , O K2 , ? K22 , .

63. b ;K3*, O < .5 6P12 ? K*,"5 .

64. c ;K3*, O < .5 6P12 ? K*,"5 Q;K3*, O K*,"5 < .5 ? K14,625.

65. b ;K* , O K3,6 < R 12 , ? K."2QK."2 1(, ? K12,*6 .

66. c ;K* , O K3,6 < R 12 , ? K."2QK."2 32, ? K23, 4 .

6". b SK2( , O K14, < R 1 , 1,1 ? K2*,26 .

6(. c K225, S;1 R (< 2 ? K56,25;K225, O K56,25 < S;1 R (< 2 ? K42,1((.

6*. b S;K( , O K4 , < R 1 , 1,1 ? K(3,6 .

" . c K45 , S;1 R (< 2 ? K112,5;K45 , O K112,5 < S;1 R (< 2 ? K(4,3"5.

"1. b SK225, O ;K225, .1< .2 ? K4 ,5 .

11 ' 0


28/42


DERI5ATIONS ( Co $utational .#ont%/No% Ans)er Derivation

"2. b SK12 , ;1 O .5< .5 ? K3 , .

"3. b SK16(, O ;K16(, .2 ."5< .2 ? K2(,56 .

"4. b SK115, O ;K115, .4< .4 ? K2",6 .

"5. c ;K32, O K(, < 1P6 ? K4, .

"6. b K2,( , O S;K2,( , O K1 , < ;*P45 U (P45< ? K1,"( , .

"". a ;K1 , O K1 , < 1P36 ? K2,5 .

"(. c ;K2" , (P36 *P12< U ;K2" , "P36 3P12< ? K5(,125.

"*. c ;+ O K6 , < 6P36 ? K13 , + ? K(4 , .

( . b ;+ O K3 , < "P55 ? K14 , + ? K1,13 , .

(1. c K6 , O S;K6 , O K6, < R * 5 ? K3 , ;G LDepreciation met&ods.

ac& of t&e statements appearin% belo is descriptive of one or more of t&e follo in%depreciation met&ods. 7n t&e spaces belo , place t&e letter;s< belon%in% to t&e met&od;s< to&ic& t&e statement best applies.

a. Declinin%'balance e. um'of't&e'!ears 'di%itsb. -roup f. )nits of outputc. omposite %. Aor9in% &oursd. trai%&t'line

[[[[[[ 1. T&e depreciation c&ar%ed b! t&is met&od decreases b! t&e same amount eac& !ear.

[[[[[[ 2. T&ese met&ods are used for depreciatin% multiple'asset accounts.

[[[[[[ 3. T&ese met&ods allocate lar%er s&ares of t&e cost of a plant asset to e8pense durin%t&e !ears in &ic& t&e %reatest use is made of t&e asset.

[[[[[[ 4. T&ese met&ods al a!s allocate lar%er s&ares of t&e cost of a plant asset to e8pensedurin% t&e earlier !ears of its life.

[[[[[[ 5. #nce t&e depreciable base, scrap value, and life of a plant asset are determined, t&eannual c&ar%es to operations under t&is met&od ill be t&e same.

Solution 11'10>

1. e 4. a, e2. b, c 5. d3. f, %

11 ' 0


33/42


EB% 11'10? L alculate depreciation.

+ mac&ine &ic& cost K3 , is ac uired on #ctober 1, 2 12. 7ts estimated salva%e value isK3 , and its e8pected life is ei%&t !ears.

Instru#tions

alculate depreciation e8pense for 2 12 and 2 13 b! eac& of t&e follo in% met&ods, s&o in% t&efi%ures used.

;a< Double'declinin% balance

;b< um'of't&e'!ears 'di%its

Solution 11'10?

;a< 2 12> 25= K3 , \ ? K1(,"5

2 13> 25= K1(",5 ? K" ,313

;b< 2 12> (P36 K2" , \ ? K15,

2 13> (P36 K2" , ] ? K45,"P36 K2" , \ ? 13,125

K5(,125

EB% 11'1 @L alculate depreciation.

+ mac&ine cost K( , on +pril 1, 2 12. 7ts estimated salva%e value is K( , and its

e8pected life is ei%&t !ears.Instru#tionsalculate t&e depreciation e8pense ;to t&e nearest dollar< b! eac& of t&e follo in% met&ods,s&o in% t&e fi%ures used.;a< trai%&t'line for 2 12;b< Double'declinin% balance for 2 13;c< um'of't&e'!ears 'di%its for 2 13

Solution 11'1 @

;a< 1P( K"2 , ] ? K 6",5

;b< 2 13> 25= K65 , : ? K162,5:SK( , ' ;K( , 8 .25 8 *P12

7nitial /esidual Depreciable Depreciation ost alue ost er MearK* , K1 , K( , K( ,

Instru#tions;a< A&at is t&e composite rate of depreciationB ;To nearest tent& of a percent.

impson ompan! applies revaluation accountin% to plant assets it& a carr!in% value of K1,6 , , a useful life of 4 !ears, and no salva%e value. Depreciation is calculated on t&estrai%&t'line basis. +t t&e end of !ear 1, independent appraisers determine t&at t&e asset &as afair value of K1,5 , .

". T&e $ournal entr! to record depreciation for !ear one ill include aa. debit to +ccumulated Depreciation for K4 , .b. debit to Depreciation 8pense for K1 , .c. credit to +ccumulated Depreciation for K1 , .d. debit to Depreciation 8pense for K4 , .

(. T&e $ournal entr! to ad$ust t&e plant assets to fair value and record revaluation surplus in!ear one ill include aa. debit to +ccumulated Depreciation for K1 , .b. credit to Depreciation 8pense for K3 , .c. credit to lant +ssets for K3 , .d. credit to /evaluation urplus for K3 , .

*. T&e financial statements for !ear one ill include t&e follo in% informationa. +ccumulated depreciation K4 , .b. Depreciation e8pense K1 , .c. lant assets K1,5 , .d. /evaluation surplus K1 , .

1 . T&e entr! to record depreciation for t&is same asset in !ear t o ill include aa. debit to +ccumulated Depreciation for K4 , .b. debit to Depreciation 8pense for K5 , .c. credit to +ccumulated Depreciation for K3 , .d. debit to Depreciation 8pense for K4 , .

Ans)ers to ulti$le # oi#e1. b2. d3. c4. a5. c6. c". d(. d*. c1 . b

11 ' 61


42/42


S ort Ans)er

1. Griefl! describe some of t&e similarities and differences bet een ). . -++ and 7F/ it&respect to t&e accountin% for propert!, plant, and e uipment.

1. 7F/ ad&eres to man! of t&e same principles of ). . -++ in t&e accountin% forpropert!, plant, and e uipment. e si ilarities are> ;1< )nder 7F/ , capitalization ofinterest or borro in% costs incurred durin% construction of assets can eit&er be e8pensed orcapitalized. #nce certain criteria are met, interest must be capitalized ;t&is accountin% &asrecentl! conver%ed to ). . -++ Q ;2< 7F/ , li9e ). . -++ , capitalizes all direct costs inself'constructed assets. 7F/ does not address t&e capitalization of fi8ed over&ead, alt&ou%&in practice, t&ese costs are %enerall! capitalizedQ ;3< T&e accountin% for e8c&an%e of non'monetar! assets &as recentl! conver%ed bet een 7F/ and if t&e e8c&an%e &as commercialsubstance. T&is is t&e frame or9 used in 7F/ Q ;4< 7F/ also vie s depreciation as anallocation of cost over an asset@s lifeQ 7F/ permits t&e same depreciation met&ods ;strai%&t'line, accelerated, units'of'production< as ). . -++ . e Di""eren#e 7F/ permits assetrevaluation depreciation procedures must be follo ed. +ccordin% to 7+ 16, if revaluation isused, it must be applied to all assets in a class of assets and assets must be revalued on anannual basis.

2. +t a recent e8ecutive committee meetin%, t&e controller for 0arino ompan! remar9ed, IAit&onl! a sin%le 9e! difference bet een ). . -++ and 7F/ for propert!, plant, ande uipment, it s&ould be smoot& sailin% for t&e F+ G and 7+ G to conver%e t&eir standards int&is area.J repare a response to t&e controller.

2. A&ile t&ere is a sin%le 9e! difference, it is an important oneLt&e issue of revaluations.Ait& respect to frame or9s, t&e 7+ G and t&e F+ G are or9in% on a $oint pro$ect toconver%e t&eir conceptual frame or9s. #ne element of t&at pro$ect ill e8amine t&emeasurement bases used in accountin%. 7t is too earl! to sa! &et&er a conver%edconceptual frame or9 ill recommend fair value measurement ;and revaluation accountin%

Solution Problem Acc for Natural Resources

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