Exam 10: Long-Lived Assets

Capitalization of interest for the construction of long-lived assets is limited to the lesser of avoidable interest or interest incurred on actual borrowings from third parties.

Although most companies use straight-line depreciation for their financial statements,making valid comparisons across firms is often hindered due to differences in estimated useful lives.

Deuce Company purchased a truck for $50,000 on January 2, 2013. The asset has an expected salvage value of $5,000 at the end of its five-year useful life. (DDB switches to straight-line in year 2015.) -How much is the depreciation expense in 2014 if double-declining balance depreciation is used?

To qualify as avoidable interest,the interest must arise from borrowing that is directly linked to a construction loan.

The Simon Company acquired a long-lived asset three years ago at a cost of $125,000.Two years later the asset sustained impairment in value.At the time of the impairment the fair value of the asset was $25,000 and the carrying value was $50,000.The entry to record the impairment would be

Firms facing asset retirement obligations must estimate the expected present value of the outflows that will occur when the assets are eventually retired.

Deuce Company purchased a truck for $50,000 on January 2, 2013. The asset has an expected salvage value of $5,000 at the end of its five-year useful life. (DDB switches to straight-line in year 2015.) -What depreciation method is used if depreciation expense is $6,000 in 2016?

IFRS rules do not permit reversals of previously recognized impairment losses when there has been a change in the estimates that were previously used to measure the loss.

Doggy Co. began construction of a new cutter for the U.S. Coast Guard on January 1, 2014 and completed construction of the ship on October 31, 2015. To finance construction, Doggy took out an $8,000,000, 2-year, 6% construction loan on February 1, 2014. Interest on the loan was to be paid annually on the anniversary date of the loan. Doggy has no other outstanding interest-bearing debt. Doggy made the following expenditures in conjunction with this construction project: Date Amount 2/1/2014 \ 1,050,000 3/31/2014 900,000 6/1/2014 750,000 10/1/2014 1,000,000 12/31/2014 600,000 3/1/2015 900,000 9/1/2015 250,000 -What would be the amount of Doggy's cumulative weighted average expenditure during 2015 related to the cutter project?

Four years ago Alpha Products,Inc.acquired a computer-controlled milling machine to use in its medical device manufacturing operations at a cost of $5,000,000.The firm expected the machine to have an eight-year useful life and zero salvage value.The company has been using straight-line depreciation for the asset.Due to the rapid rate of technological change in the industry,at the end of Year 5,Alpha estimates that the machine is capable of generating (undiscounted)future cash flows of $1,500,000.Based on the quoted market prices of similar assets,Alpha estimates the machine to have a fair value of $1,200,000. Required: a.What is the book value of the machine at the end of Year 5? b.Should Alpha recognize an impairment of this asset? Why or why not? If yes,what is the amount of the impairment loss that should be recognized? c.At the end of Year 5,at what amount should the machine appear in Alpha's balance sheet? d.What would your answer to requirement (b.)have been if Alpha's estimate of the machine's (undiscounted)future cash flows was $2,000,000?

All costs necessary to acquire an asset and make it ready for use are included in the asset account.

King Company began constructing a building for its own use in January 2015.During 2015,King incurred interest of $60,000 on specific construction debt and $12,000 on other borrowings.Interest computed on the weighted-average amount of accumulated expenditures for the building during 2015 as $50,000. Required: a.What amount of interest should King capitalize? b.Prepare the journal entry to record payment of the interest.

Depreciation is not intended to track the asset's declining market value.

Doggy Co. began construction of a new cutter for the U.S. Coast Guard on January 1, 2014 and completed construction of the ship on October 31, 2015. To finance construction, Doggy took out an $8,000,000, 2-year, 6% construction loan on February 1, 2014. Interest on the loan was to be paid annually on the anniversary date of the loan. Doggy has no other outstanding interest-bearing debt. Doggy made the following expenditures in conjunction with this construction project: Date Amount 2/1/2014 \ 1,050,000 3/31/2014 900,000 6/1/2014 750,000 10/1/2014 1,000,000 12/31/2014 600,000 3/1/2015 900,000 9/1/2015 250,000 -What would be the amount of Doggy's cumulative weighted average expenditure during 2014 related to the cutter project?

Firms facing asset retirement obligations must report these obligations only in the notes to their financial statements.

GAAP prohibits adjustment for upward revisions in the replacement cost of the asset,but mandates write-downs when asset values are impaired.

Delilah Manufacturing Company,a calendar year reporting company,purchased a machine for $80,000 on January 1,2013.At the date of purchase,Delilah incurred the following additional costs: Loss on sale of old machinery \ 1,500 Freight-in 800 Installation cost 2,300 Sales tax paid on new machine 500 Testing costs prior to regular operation 300 The estimated salvage value of the machine was $5,000,and Delilah estimated the machine would have a useful life of 15 years,with depreciation being computed using the straight-line method.In January 2015,accessories costing $5,200 were added to the machine in order to reduce operating costs and improve the machine's output.These accessories neither prolonged the machine's life nor provided any additional salvage value. Required: What should Delilah record as depreciation expense for 2015?

Goodwill represents

When companies following IFRS write-up an asset to its current fair value,subsequent depreciation of the asset remains based on the original cost of the asset.

Because equity funds are not really "free," GAAP allows capitalization of an imputed interest charge when equity is used to finance a construction project.