Exam 11: Depreciation, Impairments, and Depletion

A plant asset with a five-year estimated useful life and no residual value is sold at the end of the second year of its useful life. How would using the sum-of-the-years'-digits method of depreciation instead of the double-declining balance method of depreciation affect a gain or loss on the sale of the plant asset?

In 2014, Bargain shop reported net income of $5.7 billion, net sales of $175 billion, and average total assets of $70 billion. What is Bargain shop's asset turnover ratio?

Intangible development costs and restoration costs are part of the depletion base.

Depreciation is a means of cost allocation, not a matter of valuation.

Impairment. Dolphin Company uses special strapping equipment in its packaging business. The equipment was purchased in January 2013 for $8,000,000 and had an estimated useful life of 8 years with no salvage value. At December 31, 2014, new technology was introduced that would accelerate the obsolescence of Dolphin's equipment. Dolphin's controller estimates that expected future net cash flows on the equipment will be $5,000,000 and that the fair value of the equipment is $4,400,000. Dolphin intends to continue using the equipment, but it is estimated that the remaining useful life is 4 years. Dolphin uses straight-line depreciation. Instructions (a) What is the carrying value of the asset? (b) Prepare the journal entry (if any) to record the impairment at December 31, 2014. (c) Prepare any journal entries for the equipment at December 31, 2015. The fair value of the equipment at December 31, 2015, is estimated to be $4,600,000. (d) Repeat the requirements for (a) and (b), assuming that Dolphin intends to dispose of the equipment and that it has not been disposed of as of December 31, 2015.

Impaired assets held for disposal should be reported at the lower of cost or net realizable value.

On January 1, 2014, Garden Company purchased a new machine for $2,800,000. The new machine has an estimated useful life of nine years and the salvage value was estimated to be $100,000. Depreciation was computed on the sum-of-the-years'-digits method. What amount should be shown in Garden's balance sheet at December 31, 2015, net of accumulated depreciation, for this machine?

Changes in estimates are handled prospectively by dividing the asset's book value less any salvage value by the remaining estimated life.

Halltown Company purchased a depreciable asset for $450,000. The estimated salvage value is $30,000, and the estimated useful life is 8 years. The double-declining balance method will be used for depreciation. What is the depreciation expense for the second year on this asset?

A change in estimate should

The activity method of depreciation

Rogers Company purchased a tooling machine on January 3, 2008 for $700,000. The machine was being depreciated on the straight-line method over an estimated useful life of 10 years, with no salvage value. At the beginning of 2015, the company paid $175,000 to overhaul the machine. As a result of this improvement, the company estimated that the useful life of the machine would be extended an additional 5 years (15 years total). What should be the depreciation expense recorded for the machine in 2015?

Lamar Printing Company determines that a printing press used in its operations has suffered a permanent impairment in value because of technological changes. An entry to record the impairment should

Which of the following disclosures is not required in the financial statements regarding depreciation?

On January 2, 2012, Wang 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 $30,000. The depreciation applicable to this equipment was $140,000 for 2015, computed under the sum-of-the-years'-digits method. What was the acquisition cost of the equipment?

The book value of a plant asset is

Norton, Inc. purchased equipment in 2013 at a cost of $800,000. Two years later it became apparent to Norton, Inc. that this equipment had suffered an impairment of value. In early 2015, the book value of the asset is $520,000 and it is estimated that the fair value is now only $320,000. The entry to record the impairment is

Calculate depreciation. A machine which cost $300,000 is acquired on October 1, 2014. Its estimated salvage value is $30,000 and its expected life is eight years. Instructions (1) Calculate depreciation expense for 2014 and 2015 by each of the following methods, showing the figures used. (a) Double-declining balance (b) Sum-of-the-years'-digits (2) At the end of 2015, which method results in the larger accumulated depreciation amount?

Galt Company acquired a tract of land containing an extractable natural resource. Galt is required by the purchase contract to restore the land to a condition suitable for recreational use after it has extracted the natural resource. Geological surveys estimate that the recoverable reserves will be 4,000,000 tons, and that the land will have a value of $600,000 after restoration. Relevant cost information follows: If Galt maintains no inventories of extracted material, what should be the charge to depletion expense per ton of extracted material?

Use the following information for questions 111 and 112: For 2014, Hammer Company reports beginning of the year total assets of $900,000, end of the year total assets of $1,100,000, net sales of $750,000, and net income of $150,000. -Hammer's 2014 asset turnover ratio is