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Which of the following is untrue regarding asset retirement obligations?
Companies do not need to discount cash flows when estimated asset retirement obligations.
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Which of the following would be included in the journal entry to retire a fixed asset?
When an asset is retired, the asset value and its related accumulated depreciation are reverse. This means a debit will be booked to accumulated depreciation to clear the account.
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Which of the following is not a common method of asset disposal?
The most common methods of asset disposal are sale, scrap, and exchange.
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Of the following assets, which is an intangible that is subject to a recoverability test when testing for impairment?
The recoverability test is only performed on intangible assets with a limited life. A patent generally has a limited life.
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Goodwill should be tested for value impairment at which of the following levels under US GAAP?
US GAAP requires that goodwill be tested for impairment at the reporting unit level.
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Which situation would likely dictate use of units of production depreciation?
Land is not depreciated, and a machine which produces products would incur damage, wear and tear, and usage only as it produces goods. Buildings and trucks would be depreciated throughout their lives.
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On January 2, Year 1, a company borrows $1.2 million on a note due in 10 years. Each year interest of 9% of the principal must be paid. Proceeds from the loan are used to finance the construction of a building. All proceeds are spent evenly throughout the year and the building is complete at the end of Year 1. At what amount is the building capitalized?
The capitalized cost of the building will include the principled borrowed as well as the average interest cost for the year. Total interest paid for the year is equal to $1.2M x 9% = $108K. Because the funds were spent evenly throughout the year, interest is averaged to best capture the cost of the building ($0 interest at the start of the year + $108K interest at the end of the year divided by 2 = $54K.) Therefore, the total capitalized cost is equal to $1.2M + $54K.
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On January 1, Year 1, the Morgan Corporation borrowed $3 million at an interest rate of 8% per year. The company immediately began construction on a warehouse using the borrowed money. Work was performed evenly throughout the year and the warehouse was completed at the end of Year 1 at a total cost of $2.5 million. What amount of interest should Morgan recognize as interest expense in Year 1?
All of the interest on the portion of the loan not used for construction will be expensed in the current year ($500K x 8%). In addition, the portion of interest on the construction funds that is not capitalized should also be expensed. This is calculated by taking the average interest paid (because costs were incurred evenly throughout the year) and expensing the uncapitalized portion. Average interest is equal to $100K ($2.5M x 8% divided by 2). Therefore, total interest expense is $40K + $100K.
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Nico, Inc purchased equipment by making a down payment of $3,000 and issuing a note payable for $20,000. A payment of $5,000 is to be made at the end of each year for 4 years. The applicable rate of interest is 7%. The present value of an ordinary annuity factor for 4 years at 7% is 4.18, and the present value for the future amount of a single sum of 1 dollar for 4 years at 7% is 0.645. Installation charges were $1,500. What is the capitalized cost of the equipment?
The capitalized cost of the equipment will include the down payment of $3K, the installment charges of $1,500, and the PV of the note payable. The note payable will be paid annually in 4 installments so the PV factor for an annuity should be used. The PV will be calculated as $5K annual payment x 4.18 = $20,900. Therefore, the capitalized cost of the equipment will be $3K + $1,500 + $20,900.
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Of the following statements regarding the IFRS revaluation model is incorrect?
Under IFRS, if an individual fixed asset is revalued, then the entire class of fixed assets to which that asset belongs must be revalued.
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Which of the following two costs of purchasing a machine would be capitalized?
Any cost incurred to acquire and make ready for use is capitalized.
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Proceeds received on the sale of a facility used to purchase a new facility should be reported as a gain from:
A net gain from selling one asset to acquire another is part of continuing operations as other revenues and gains.
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A company buys 200 doors for $75 each at the beginning of Year 1. On the same day, the company buys an other 300 doors for $85 each. None of the doors are expected to have any salvage value. The cheaper doors have a useful life of 7 years and the more expensive doors have a useful life of 9 years. In Year 2, the company sells one of the cheaper doors for $90 and one of the more expensive doors for $120. All doors were put into a single group for depreciation purposes. How much gain will the company recognize on the sale of the doors in Year 2?
The doors will use the group/composite method of depreciation. Therefore, no gain or loss will be recognized until all items in the group have been sold.
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The Great Dane Bus company buys a new bus on February 14, Year 1. The bus costs $100,000 and has a salvage value of $8,000. The company expects the bus to be used for 200,000 miles and will depreciate it using the units of production method. The bus is driven 35,000 miles during Year 1 and another 40,000 miles during Year 2. What is the book value of the bus at the end of Year 2?
Since the bus is being depreciated using the units-of-production method, $.46 in depreciation will be recorded for every mile driven ($100K cost - $8K salvage value divided by 200K estimated miles). At the end of Year 2, 75K miles have been driven, for a total of $34,500 in depreciation (75K miles x $.46 per mile). Therefore, the book value of the bus is $65,500 ($100K - $34,500).
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A mining company uses the depletion method to allocate the cost of removing natural resources from its mine. Which of the following statements is correct?
The depletion base will be equal to the cost to purchase the mine minus the mine's estimated residual value.
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Of the following assets, which would be typically reported on a balance sheet as an intangible?
Patents are intangible assets and their fees are capitalized.
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A firm should recognize goodwill on the balance sheet at which of the following points?
Goodwill is recognized in the balance sheet when it has been created from a business acquisition.
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Of the following, which cost would be included in a "land" account?
Clearing trees would be a part of getting the land ready for its intended use, where as a facility on the land is its own asset, engineer fees are separate, and loan interest has its own recognition rules.
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