Exam 9: Long-Lived Assets

On October 1, 2014, Welch Auto Rentals purchases a new automobile for $30,000 to add to its fleet of rental cars. The automobiles are rented out on a short-term basis with rental fees calculated based on distance driven by the customer. Welch's policy is to sell and replace a car after the earlier of 3 years, or 75,000 kilometers. The average selling price of the used cars is $8,000. This particular car was driven 8,000 km in 2014, 39,000 in 2015 and 21,000 in 2016. Instructions a. Calculate 2014 and 2015 depreciation expense under each of the following methods: (i) Straight-line (ii) Diminishing-balance using a 40% rate. (iii) Units-of-production b. Which method will best match the estimated pattern in which the asset's economic benefits are expected to be consumed? Explain.

At January 1, 2014, Benner Auto Repairs owned the following assets: Prior to recording depreciation expense for 2014, Benner undertook a review of the assets' remaining life and value and determined that the following changes are warranted based on currently available information: Building: No changes Automotive: No changes Computers: Obsolete Furniture: Remaining life will be 10 years with $5,000 residual value. Instructions Calculate 2014 depreciation on each of these assets, taking the new information into account.

In calculating depreciation, both the long-lived asset's cost and useful life are based on estimates.

The Fizzard Company purchases a new delivery truck for $45,000. The logo of the company is painted on the side of the truck for $600. The truck licence is $60. The truck undergoes safety testing for $110. What does Fizzard record as the cost of the new truck?

Which of the following is NOT a characteristic of property, plant, and equipment?

Annual depreciation expense needs to be revised if

Wu's Copy Shop bought equipment for $16,000 on January 1, 2014. Wu estimated the useful life to be 4 years with no residual value, and the straight-line method of depreciation will be used. On December 31, 2015, prior to recording depreciation for that year, Wu decides that the business will use the equipment for a total of 5 years. What is the depreciation expense for 2015?

CRA does NOT allow taxpayers to estimate the useful lives of assets or depreciation rates.

Natural resources are frequently referred to as wasting assets because

The carrying amount of a long-lived asset is the amount originally paid for the asset less anticipated residual value.

Kelso Word Processing Service uses the straight-line method of depreciation. The company's fiscal year end is December 31. The following transactions and events occurred during the first three years. Instructions Prepare the necessary entries. (Show calculations.)

Research costs

Depreciation is a process of cost allocation.

Pugwash Company has decided to change the estimate of the useful life of an asset that has been in service for 2 years. Which of the following statements describes the proper way to revise a useful life estimate?

The expenditures necessary to bring the asset to the location and condition necessary to make it ready for its intended use would be included in the cost of the asset.

A company purchases a remote site building for computer operations. The building will be suitable for operations after some expenditures. The wiring must be replaced to computer specifications. The roof is leaky and must be replaced. All rooms must be repainted and re-carpeted and there will also be some plumbing work done. Which of the following statements is true?

Units-of-production is an appropriate depreciation method to use when

The units-of-production method of depreciation will result in the highest cash flow for the company.

The Canada Revenue Agency does NOT require the taxpayer to use the same depreciation method on the tax return that is used in preparing financial statements.

In a retirement of an asset, if the carrying amount of the asset is greater than $1, profit will increase.