Exam 10: Depreciation, Amortization, and Impairment

(a) While studying a firm's income statement, you notice the line item: Amortization expense = $400,000 Write a short report to a client of yours who is interested in providing a loan to this firm. In other words, what does the $400,000 amount mean, and perhaps more importantly, what does it not imply? (b) Also, you come across the following line item: Impairment loss, property = $600,000 What does this amount represent, when is it recognized, what may have caused it, and how does it affect subsequent amortization, assuming that the property is not a total loss?

The assets of the Aerospace Inc. (a separately incorporated entity fully owned subsidiary of ABC Transport Inc.) showed the following asset carrying values on December 31st, 2013 (in millions): Cash \ 100 Accounts Receivable \ 20 Inventories \ 10 Property. Plant \& Equipment (net) \ 200 Patents (net) \ 20 Goodwill \ 75 Total \ 425 On December 31st, 2013, the fair values of the assets listed above were as follows: Cash \ 100 Accounts Receivable \ 15 Inventories \ 25 Property. Plant \& Equipment (net) \ 120 Patents (net) \ 60 Total \ 320 Both ABC and Aerospace Inc. adhere to IFRS. -Given the information provided above, what would be the carrying value of Aerospace Inc's Patents on January 1^st, 2014?

Which amortization method is particularly appropriate where: (a) obsolescence is not the primary factor, (b) actual use can be accounted for, and (c) the service life in units of use can be estimated reliably?

A publicly traded enterprise purchases a truck for $150,000. The major components of the truck and their respective values and useful lives have been identified as follows: Body $100,000. 25 Years (No scrap value) Tires $20,000 5 Years (No scrap value) Engine $30,000 20 Years (Scrap value $5,000) Straight-line amortization applies to all components. Compute the annual depreciation.

Long-lived assets with finite lives are generally tested for impairment annually under IFRS, while under ASPE; impairment testing is only performed when events or circumstances indicate that impairment(s) may have occurred.

On January 1, 2014, CK purchased a machine that had a list price of $22,980. CK paid cash of $10,000 and executed a one-year non-interest-bearing note for the $12,980 balance. The going rate of interest was 18 percent. Assume straight-line amortization with an estimated useful life of six years and a $1,200 estimated residual value. Amortization expense for the accounting year ending December 31, 2014, would be $___________________.

A general description of the amortization methods applicable to major classes of depreciable assets is needed in financial reporting only when company policy differs from income tax policy.

An asset that cost $49,577 ($1,850 estimated residual value) is being depreciated on the SYD basis over an estimated useful life of 20 years. What is the amount of amortization expense for year 10?

Goodwill impairment losses are reversible under IFRS but not under ASPE.

Accumulated amortization represents the cash set aside for the replacement of assets.

ABC adheres to IFRS and applies the revaluation model to account for its Patents. Prior to 2009, there was no balance in the company's Revaluation Surplus (OCI) accounts relating to its long-lived assets. The following year-end data refers to the company's patents: (the table values are in 000's): Carrying Value Fair Value 2009 \ 170 \ 120 2010 \ 160 \ 125 2011 \ 150 \ 130 -The 2011 revaluation journal entry would include

Conceptually, the cost of a capital asset (i.e., property, plant and equipment, but not land) represents a long-term prepayment of expense.

One flaw in the inventory system of amortization is that current market fluctuations, rather than the effect of wear and tear, may be dominant.

On April 1, 2013, the first day of the fiscal year, Traverse Co. purchased new machinery for $300,000. The machinery has an estimated useful life of five years, and amortization is computed by the double-declining balance method. Calculate the balance in the accumulated amortization account for this machinery at March 31, 2015.

RJB acquired an asset, which cost $12,000 on January 1, 2001, the estimated useful life was 6 years and residual value was $1,500. RJB has a December 31 year-end and adjusting entries are only made at year-end. (a) Assume the retirement system is used and that shortly before the end of an asset's expected life, a replacement was purchased at a cost of $13,000. The $1,500 residual value proved to be correct. Under these conditions the amount of amortization expense recorded would have been: (1) for the first year of the original life, $________________; 2) for the last year of the original life, $____________________. (b) Assume the same facts as in (a), except that the replacement system was used. Under these conditions, the amount of amortization expense recorded would have been: (1) for the first year of the original life, $________________; 2) for the last year of the original life, $____________________. (c) Assume instead that the SYD method was used; amortization expense for the second year on the asset would be: $__________________. (d) Assume instead that the DDB method was used; amortization expense for the second year on the asset would be: $_______________________.

When the revaluation model is applied, impairment testing must be performed annually.

For each succeeding period, the declining balance (DB) method of amortization recognizes an amount of amortization expense that is:

On January 1, 2013, JK purchased a depreciable asset that cost $30,000. It has an estimated useful life of 100,000 units of output and an estimated 15 percent residual value. It will be depreciated using the productive output method. The asset produced units of output as follows: 2013:20,000 units, 2014: 15,000 units. The accounting year ends December 31. The amortization expense and accumulated amortization account balances (before closing) at the end of 2014 will be: Amortization Expense Accumulated Amortization 1 \ 3,825 \ 8,925 2 3,825 10,500 3 4,500 10,500 4 6,000 8,925

The exact usage pattern of an asset can always be determined with reasonable certainty.

On January 1, 2013, Rubin Company purchased a new machine for $3,525,000. The new machine has an estimated useful life of nine years and the residual value was estimated to be $150,000. Amortization expense was computed on the double-declining balance method. What amount should be shown in Rubin's balance sheet at December 31, 2014, net of accumulated amortization, for this machine?