Test Bank for Financial Reporting and Analysis, 8th Edition, Lawrence Revsine, Daniel Collin

Test Bank for Financial Reporting and Analysis, 8th

Edition, Lawrence Revsine, Daniel Collins, Bruce
Johnson, Fred Mittelstaedt Leonard Soffer

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Student name:__________
TRUE/FALSE - Write 'T' if the statement is true and 'F' if the statement is false.
1) The method of measuring long-lived assets at their estimated value in an output market is
the expected benefit approach.
⊚ true
⊚ false

2) Replacement or current cost is an example of the economic sacrifice approach for valuing
long-lived assets.
⊚ true
⊚ false

3) Because of interest capitalization, an increase in capital expenditures can temporarily

decrease the amount of interest expense shown on the income statement.
⊚ true
⊚ false

4) The balance sheet carrying value for internally generated intangibles is often below the
value of the property rights.
⊚ true
⊚ false

5) Firms are required to disclose total R&D expense recognized in pretax income; thus,
analysts can use these disclosures to reconstruct what asset and amortization amounts would be if
GAAP allowed R&D to be capitalized. Disclosures of marketing and advertising expenditures
are also required and thus permit a similar adjustment approach for trademarks and brands.
⊚ true
⊚ false

6) Accounting for a long-lived asset whose carrying value exceeds its expected future
economic benefits is guided by the concept of verifiability.
⊚ true
⊚ false

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7) For purposes of impairment tests, the fair value of an asset is defined by U.S. GAAP as
the price that would be received to sell an asset in an orderly transaction between market
participants at the measurement date.
⊚ true
⊚ false

8) Depreciation is the apportionment of the cost of a long-lived tangible asset to the future
periods in which it provides benefits.
⊚ true
⊚ false

9) MACRS, a method of accelerated depreciation, is almost universally used for tax

purposes in the U.S.
⊚ true
⊚ false

10) “Accretion expense,” classified as an operating item, reflects the current period’s growth
in an asset retirement obligation.
⊚ true
⊚ false

11) When a firm disposes of a long-lived asset before the end of its useful life, the difference
between the net book value of the asset and the sale proceeds is a gain or loss from a
discontinued item.
⊚ true
⊚ false

12) Gains and losses from sales of assets comprising a clearly distinguishable component of
an entity are shown in the discontinued operations section of the income statement.
⊚ true
⊚ false

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13) GAAP requires that all exchange transactions be recorded at the fair value of the
exchanged assets. Thus, except in the rare case that the book value and the fair value of
exchanged assets are identical, gains (or losses) on exchanges should be expected to be
recognized.
⊚ true
⊚ false

14) When companies following IFRS write up an asset to its current fair value, subsequent
depreciation of the asset should still be based on the original cost of the asset.
⊚ true
⊚ false

15) IFRS requires that research be expensed but does permit capitalization of some
development expenditures.
⊚ true
⊚ false

MULTIPLE CHOICE - Choose the one alternative that best completes the statement or
answers the question.
16) Long-lived assets are:

A) non-operating assets expected to yield their economic benefits (or service potential)
over a period longer than one year.
B) operating assets expected to yield their economic benefits (or service potential) over
a period longer than one year.
C) non-operating assets expected to yield their economic benefits (or service potential)
over a period longer than five years.
D) operating assets expected to yield their economic benefits (or service potential) over
a period longer than two years.

17) Which one of the following is an example of the expected benefit approach for valuing
long-lived assets?

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 A) Historical cost.
B) Current replacement value.
C) Salvage value.
D) Discounted present value.

18) The method of measuring long-lived assets at their estimated value in an input market is
the:

A) expected benefit approach.

B) economic sacrifice approach.
C) discounted present value approach.
D) net realizable value approach.

19) The dominant method under GAAP for measuring long-lived assets is the:

A) expected benefit approach.

B) discounted present value approach.
C) historical cost approach.
D) replacement cost approach.

20) Expected benefit approaches for valuing long-lived assets are not used in current U.S.
GAAP because the numbers generated under these methods are inaccurate and:

A) fictitious.
B) objective.
C) not verifiable.
D) neutral.

21) Expenditures included in the initial balance sheet carrying amount of a long-lived asset
are:

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 A) charge-off costs.
B) expensed costs.
C) intangible costs.
D) capitalized costs.

22) Which one of the following items would be charged to the cost of a building rather than
the cost of land?

A) Architectural fees.
B) Grading of land.
C) Demolition of an existing structure.
D) Cost of hauling material from a demolished structure.

23) Which one of the following items would be charged to the cost of land rather than the
cost of a building?

A) Demolition of an existing structure.

B) Capitalization of interest.
C) Architectural fees.
D) Cost of the foundation.

24) Capitalization of interest for the construction of long-lived assets is limited to interest
arising from actual borrowings from:

A) owners.
B) stockholders.
C) outsiders.
D) the board of directors.

25) Which of the following does not present a challenge to analysts using financial
statements?

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 A) The return-on-asset ratio increases if a firm does not modernize and innovate.
B) U.S. GAAP allows upward adjustments to long-lived assets.
C) The use of historical cost makes comparisons of new and old firms in the same
industry difficult.
D) The expected benefit of a long-lived asset may increase over time.

26) In comparing firms in the same industry, which of the following does not present a
challenge for analysts?

A) Differences in estimates of useful lives.

B) The age of the companies being compared.
C) The use of different depreciation methods.
D) Each of these answer choices presents a challenge for analysts.

27) The Reid Co. acquired a piece of land for a new factory paying $100,000. Reid
demolished the old building at a cost of $20,000, and sold scrapped material salvaged from the
old building for $5,000. The architect’s fees were $25,000, and the title insurance upon
acquisition of the land was $1,000. The construction period interest was $8,000, and the
contractor received $300,000 for the building. A pavement assessment made by the city cost
Reid $2,000 at the purchase date.
The cost of the land recorded by Reid Co. is:

A) $100,000
B) $115,000
C) $116,000
D) $118,000

28) The Reid Co. acquired a piece of land for a new factory paying $100,000. Reid
demolished the old building at a cost of $20,000, and sold scrapped material salvaged from the
old building for $5,000. The architect’s fees were $25,000, and the title insurance upon
acquisition of the land was $1,000. The construction period interest was $8,000, and the
contractor received $300,000 for the building. A pavement assessment made by the city cost
Reid $2,000 at the purchase date.
The cost of the building recorded by Reid Co. is:

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 A) $300,000
B) $326,000
C) $333,000
D) $335,000

29) Staley Enterprises purchased a machine for $260,000. The seller paid $900 freight to
deliver the machine. Staley used $4,600 of staff mechanics’ time to install the machine and
employee training cost $7,000. The state charged a 5% sales tax on the invoice price. What is the
capitalized cost of the machine?

A) $260,000
B) $264,600
C) $271,600
D) $284,600

30) An expenditure that increases a long-lived asset’s useful life should be:

A) capitalized.
B) expensed.
C) ignored.
D) written off immediately.

31) Kitty Co. broke ground on its new building on March 1, 20X1, and completed
construction November 30, 20X1. Kitty made the following expenditures in conjunction with
this project:
Date Expenditure
April 1, 20X1 $ 450,000

June 1, 20X1 200,000

September 1, 20X1 400,000

November 30, 20X1 100,000

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Kitty’s cumulative weighted average expenditures on this project would be

A) $287,500
B) $500,000
C) $508,333
D) $595,833

32) Doggy Co. began construction of a new cutter for the U.S. Coast Guard on January 1,
20X1 and completed construction of the ship on October 31, 20X2. To finance construction,
Doggy took out an $8,000,000, 2-year, 6% construction loan on February 1, 20X1. 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
2/1/20X1 $ 1,050,000

3/31/20X1 900,000

6/1/20X1 750,000

10/1/20X1 1,000,000

12/31/20X1 600,000

3/1/20X2 900,000

9/1/20X2 250,000

What is the amount of Doggy’s cumulative weighted average expenditures during 20X1 related
to the cutter project?

A) $2,150,000

B) $2,325,000
C) $2,536,364
D) $4,300,000

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33) Doggy Co. began construction of a new cutter for the U.S. Coast Guard on January 1,
20X1 and completed construction of the ship on October 31, 20X2. To finance construction,
Doggy took out an $8,000,000, 2-year, 6% construction loan on February 1, 20X1. 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
2/1/20X1 $ 1,050,000

3/31/20X1 900,000

6/1/20X1 750,000

10/1/20X1 1,000,000

12/31/20X1 600,000

3/1/20X2 900,000

9/1/20X2 250,000

How much interest should Doggy capitalize in 20X1 related to the cutter project?

A) $129,000
B) $139,500
C) $440,000
D) $480,000

34) Doggy Co. began construction of a new cutter for the U.S. Coast Guard on January 1,
20X1 and completed construction of the ship on October 31, 20X2. To finance construction,
Doggy took out an $8,000,000, 2-year, 6% construction loan on February 1, 20X1. 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
2/1/20X1 $ 1,050,000

3/31/20X1 900,000

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6/1/20X1 750,000

10/1/20X1 1,000,000

12/31/20X1 600,000

3/1/20X2 900,000

9/1/20X2 250,000

How much interest should Doggy expense in 20X1?

A) $220,000
B) $300,500
C) $340,500
D) $440,000

35) Doggy Co. began construction of a new cutter for the U.S. Coast Guard on January 1,
20X1 and completed construction of the ship on October 31, 20X2. To finance construction,
Doggy took out an $8,000,000, 2-year, 6% construction loan on February 1, 20X1. 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
2/1/20X1 $ 1,050,000

3/31/20X1 900,000

6/1/20X1 750,000

10/1/20X1 1,000,000

12/31/20X1 600,000

3/1/20X2 900,000

9/1/20X2 250,000

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What is the amount of Doggy’s cumulative weighted average expenditures during 20X2 related
to the cutter project?

A) $2,966,667
B) $4,341,250
C) $4,941,667
D) $5,450,000

36) Doggy Co. began construction of a new cutter for the U.S. Coast Guard on January 1,
20X1 and completed construction of the ship on October 31, 20X2. To finance construction,
Doggy took out an $8,000,000, 2-year, 6% construction loan on February 1, 20X1. 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 Expenditure

2/1/20X1 $ 1,050,000

3/31/20X1 900,000

6/1/20X1 750,000

10/1/20X1 1,000,000

12/31/20X1 600,000

3/1/20X2 900,000

9/1/20X2 250,000

What amount would appear in Doggy’s construction in progress (CIP) account at December 31,
20X1?

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 A) $2,325,000
B) $4,300,000
C) $4,439,500
D) $4,740,000

37) U.S. GAAP capitalizes expenditures to upgrade long-lived assets when the expenditure
causes any of the following conditions except:

A) The useful life of the asset is extended.

B) The capacity of the asset is increased.
C) The efficiency of the asset is increased.
D) There is an increase in the non-economic benefits associated with owning the asset
(such as an increase in the appearance of the company’s offices).

38) Which one of the following factors makes it difficult for financial analysts to use trend
analysis?

A) Decreasing costs and prices.

B) Deflation.
C) An aging asset base.
D) A relatively new asset base.

39) U.S. GAAP for long-lived assets significantly impedes rate-of-return comparisons across
companies unless the firms:

A) apply the same depreciation methods and the same useful lives among similar groups
of assets.
B) market their products to the same customers.
C) are of approximately the same size.
D) have similar operating cycles.

40) U.S. GAAP requires that virtually all costs incurred for research and development of an
internally generated patent be:

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 A) capitalized.
B) expensed.
C) amortized over 40 years.
D) ignored.

41) Which of the following statements about research and development costs is not valid?

A) As long as a firm continues to invest in R&D, total assets and total shareholders’
equity will be understated.
B) Asset utilization ratios of R&D-intensive firms will be higher than those of non-
R&D- intensive firms.
C) Decreases in R&D expenditures can be used to boost current period income.
D) Asset utilization ratios of R&D-intensive firms will be lower than those of non-R&D
-intensive firms.

42) Under U. S. GAAP, software development costs are capitalized as intangible assets:

A) from the beginning of development.

B) after a copyright is obtained.
C) once the product is introduced into the marketplace.
D) once the technological feasibility of the product is established.

43) Research findings almost uniformly indicate that existing U.S. GAAP for both R&D and
software development is:

A) satisfactory as written.
B) objective.
C) conservative.
D) liberal.

44) Amortizable intangible assets include all of the following except:

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 A) goodwill.
B) patents.
C) copyrights.
D) employment contracts.

45) Goodwill represents:

A) management’s estimate of the value of the firm’s “unidentified” intangible assets.

B) the difference between the total fair value of an acquired business and the fair value
of its identifiable net assets.
C) the difference between the acquisition value of an acquired business and the book
value of its identifiable net assets.
D) the sum of the acquisition value of an acquired business and the fair value of its
identifiable net assets.

46) According to U.S. GAAP, technological feasibility is established when an entity has
completed all of the following activities necessary to establish that a product can be produced,
except:

A) Coding.
B) Designing.
C) Measuring.
D) Planning.

47) Which of the following is not true with regard to the relationship between R&D expenses
and the value of the company’s stock shares, as perceived by investors and analysts?

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 A) There is no evidence that R&D expenses represent value-relevant information to
investors.
B) There is a causal relationship between R&D expenditures and future financial
benefits.
C) A $1 increase in R&D expenditures leads to a $5 increase in the market value of the
company’s stock shares.
D) Analysts adjust estimates of unrecorded R&D assets which are then used to adjust
reported earnings and book values.

48) Which of the following is an accurate statement regarding testing for impairments of
tangible assets and amortizable intangible assets?

A) Assets may be tested as a group if they are used in combination with other assets in
the group.
B) Assets are to be tested only as individual assets.
C) Assets may be tested as a group only if they were purchased as a group.
D) Assets need not to be tested for impairment annually.

49) Which of the following is used to measure the amount of the write-down that must be
recognized on an impaired asset such as depreciable equipment?

A) Undiscounted total future cash inflows minus future outflows.

B) Undiscounted total future cash inflows minus the current carrying value of the asset.
C) Fair value of the asset minus the current carrying value of the asset.
D) Discounted total future cash inflows minus future outflows.

50) Henry Co. manufactures DVD players. At the end of Year 1, Henry’s management
believes the growing popularity of streaming video content will reduce the demand for Henry’s
DVD players. The DVD players are manufactured using specialized equipment with a historical
cost of $3,000,000 and accumulated depreciation of $1,520,000. The managers estimate the
equipment has a remaining useful life of 4 years and will generate the following undiscounted
cash flows:

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 Year 2 $ 540,000

Year 3 420,000

Year 4 190,000

Year 5 125,000

Salvage value 50,000

If the equipment were sold today, the sales price would be $1,600,000. Is the equipment
considered impaired? Why, or why not?

A) Yes, the equipment is impaired. The undiscounted cash flows are lower than the
carrying amount of the asset by $155,000.
B) No, the equipment is not impaired. The fair value of the equipment is greater than the
carrying value of the asset by $120,000.
C) Yes, the equipment is impaired. The undiscounted cash flows are less than the fair
value of the equipment by $275,000.
D) Cannot determine impairment without discounted cash flows.

51) If a long-lived amortizable intangible asset’s future undiscounted net cash flows fall
below the asset’s net book value, the asset is considered to be a/an:

A) discontinued asset.
B) discontinued operation.
C) valuable asset.
D) impaired asset.

52) An impairment loss is the difference between the carrying value of the asset and the:

A) historical cost of the asset.

B) fair value of an asset.
C) future value of the asset.
D) price-level adjusted value of the asset.

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53) An impairment loss is reported on the income statement as:

A) part of income from continuing operations.

B) an extraordinary item.
C) part of income from discontinued operations.
D) an accounting change.

54) The FASB has been able to guard against management manipulation of earnings as a
result of asset impairments by:

A) fining any managers found guilty of such manipulation.

B) requiring restoration of previously recognized impairment losses.
C) prohibiting restoration of previously recognized impairment losses.
D) relying on State Boards of Public Accountancy to police the transactions.

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

A) DR Retained earnings 25,000 CR Accumulated depreciation 25,000

B) DR Impairment loss 25,000 CR Equipment 25,000
C) DR Equipment 25,000 CR Impairment loss 25,000
D) DR Retained earnings 25,000 CR Equipment 25,000

56) Evaluation of indefinite-lived intangible assets for impairment occurs under all of the
following scenarios except:

A) annually.
B) no less than every three (3) years.
C) when there is a deterioration in the business climate.
D) when there is a significant decrease in the asset’s fair value.

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57) Evaluation and testing for impairment assessments of indefinite-lived intangible assets:

A) follows the same process as required for impairment evaluation and testing for
tangible assets.
B) requires only assessment of qualitative factors.
C) requires a quantitative impairment test if, after a qualitative assessment, it is more
likely than not that the asset is impaired.
D) requires a two-step process to be completed for all impairment assessments.

58) Which of the following is not an accurate statement regarding asset retirement obligations
(AROs)?

A) A liability is recorded at its present value and the liability increases over time.
B) A liability is computed using a credit-adjusted risk-free rate.
C) A liability is recorded with a credit entry in a contra-asset account.
D) An annual expense is recorded as accretion expense.

59) Which of the following does not represent guidance for assets held for sale?

A) They are reported in the discontinued section of the income statement.

B) They are reported at the lower of book value or fair value.
C) They are expected to be sold within one year.
D) They are reported at the lower of book value or fair value less costs to sell.

60) The allocation of the cost of equipment to future periods of benefit is termed as:

A) depletion.
B) amortization.
C) depreciation.
D) allocation.

61) The allocation of the cost of a copyright to future periods of benefit is termed as:

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 A) depletion.
B) amortization.
C) depreciation.
D) allocation.

62) The allocation of the cost of a wasting asset to future periods of benefit is termed as:

A) depletion.
B) amortization.
C) depreciation.
D) allocation.

63) Deuce Company purchased a truck for $50,000 on January 2, 20X1. The asset has an
expected salvage value of $5,000 at the end of its five-year useful life.

What depreciation method is used if depreciation expense is $6,000 in 20X4?

A) Straight-line.
B) Sum of years’ digits.
C) Double-declining balance.
D) Composite.

64) Deuce Company purchased a truck for $50,000 on January 2, 20X1. The asset has an
expected salvage value of $5,000 at the end of its five-year useful life.

How much is the depreciation expense in 20X2 if double-declining balance depreciation is

used?

A) $6,000
B) $9,000
C) $12,000
D) $15,000

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65) Deuce Company purchased a truck for $50,000 on January 2, 20X1. The asset has an
expected salvage value of $5,000 at the end of its five-year useful life.

How much is the depreciation expense in 20X2 if sum-of-years digits depreciation is used?

A) $6,000
B) $9,000
C) $12,000
D) $15,000

66) Deuce Company purchased a truck for $50,000 on January 2, 20X1. The asset has an
expected salvage value of $5,000 at the end of its five-year useful life.

How much is the depreciation expense in 20X5 if double-declining balance depreciation is

used for 20X1-20X2 and there is a switch to straight-line in year 20X3?

A) $4,333.33
B) $3,000
C) $9,000
D) $12,000

67) According to the 2012 AICPA survey of 2011 annual reports, the most favored method of
depreciation for financial reporting purposes is:

A) declining-balance.
B) sum-of-the-years’ digits.
C) straight-line.
D) units-of-production.

68) The most widely-used depreciation method for U.S. income tax purposes is:

A) sum-of-the-years’ digits.
B) MACRS.
C) straight-line.
D) units-of-production.

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69) A major problem facing financial analysts who compare long-lived assets on balance
sheets of various companies is that different companies often use different:

A) formats of balance sheet.

B) estimated lives.
C) salvage values.
D) tax methods of depreciation.

70) When the differences in useful lives of long-lived assets reflect real economic
differences, the attempt on the part of financial analysts to undo these differences may:

A) impede profit and loss comparisons.

B) enhance profit comparisons.
C) enhance profit comparisons, but impede loss comparisons.
D) enhance profit and loss comparisons.

71) Financial analysts can make comparisons between the long-lived assets of two
companies, both of which use straight-line depreciation, by computing the average useful life of
assets with which one of the following formulas?

A) Net depreciable property, plant, and equipment/average useful life.

B) Gross depreciable property, plant, and equipment/average useful life.
C) Gross depreciable property, plant, and equipment/straight-line depreciation expense.
D) Straight-line depreciation expense/net depreciable property, plant, and equipment.

72) When a financial analyst adjusts a company’s reported depreciation expense to improve
comparisons of profitability with another firm that uses the same depreciation method, the
analyst assumes all of the following to be true except that:

A) the useful lives differences are “real”.

B) the dollar breakdown within asset categories is similar for both firms (i.e., both have
similar amounts of buildings vs. leasehold improvements, etc.).
C) salvage value proportions are roughly equivalent for both firms.
D) the useful life differences are artificial.

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73) When firms dispose of a long-lived asset by selling it before the end of its useful life, the
difference between the net book value of the asset and the disposition proceeds is a/an:

A) cost of goods gain or loss.

B) gain or loss from continuing operations.
C) gain or loss from a discontinued item.
D) gain or loss from a prior period.

74) Devine Company sold a machine for $6,000 that originally cost $34,000 and had
accumulated depreciation of $27,000. Devine had a/an:

A) gain of $1,000.
B) sales revenue of $6,000.
C) loss of $1,000.
D) cost of goods sold of $1,000.

75) In assessing whether an exchange transaction has commercial substance, the firm’s future
cash flows are expected to change significantly as a result of the exchange. Which item below
does not describe whether a significant change in cash flow is expected?

A) The risk, timing and amount of the future cash flows differs significantly from the
future cash flows of the asset transferred.
B) The entity-specific value of the asset differs from that of the asset transferred.
C) The difference between the entity-specific value of the asset(s) received and the
entity-specific value of the asset(s) transferred is significant in relation to the fair values of the
assets.
D) Only the timing and amount of future cash flows is required to be significant – risk
and entity-specific value are optional.

76) When two companies exchange products to facilitate sales to customers and the exchange
also includes a cash payment, which of the following is the proper treatment of the transaction by
the recipient of the cash?

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 A) No gain or loss is recorded.
B) A portion of any gain is recorded.
C) The inventory received is recorded at the same value as the inventory relinquished.
D) All the cash received is recognized as a gain.

77) The Key Company sold a machine. The machine had accumulated depreciation of
$50,000 and a salvage value of $6,000. If the machine sold for $16,000 and a gain of $4,000 is
recognized, the original cost of the asset is:

A) $54,000
B) $62,000
C) $66,000
D) $70,000

78) When certain kinds of assets are built that require public welfare and safety expenditures
at the end of the asset’s life,

A) these estimated future expenditures are subtracted from the carrying value of the
asset.
B) these “asset retirement” costs are expensed when asset retirement occurs.
C) this fact is only reported in the notes to the financial statements.
D) a liability simultaneously arises for those future expenditures.

79) To preclude firms from generating artificial gains on exchange transactions being
recorded at fair value, U.S. GAAP requires that the transaction:

A) must possess commercial substance.

B) have future cash flows that remain substantially the same.
C) be reviewed and approved by the SEC.
D) All of these answer choice criteria must be met to book an exchange transaction at
the fair value of the exchanged assets.

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80) Presume that an asset exchange transaction does not culminate an earning process and
that the transaction does not involve cash. In such a case:

A) a gain will be recognized only when the fair value of the acquired assets exceeds the
book value of the relinquished assets.
B) a loss will be recognized only when the fair value of the acquired assets exceeds the
book value of the relinquished assets.
C) the assets acquired are recorded at the book value of the assets relinquished.
D) a gain will be recognized only when the fair value of the acquired assets exceeds the
fair value of the relinquished assets.

81) Under IFRS, when an asset is revalued upward, subsequent depreciation is based on:

A) the asset’s original cost.

B) the method used for determining depreciation on the company’s tax returns.
C) the asset’s revaluation net book value which is the fair value at the time of
revaluation.
D) the amount of future cash flows the asset is expected to generate.

82) Which of the following is not part of the IFRS revaluation rules for tangible long-lived
assets?

A) A company can elect to revalue individual assets.

B) If a company elects to revalue any assets, all assets of a similar class must be
revalued.
C) Once assets are revalued, they must be kept up to date through regular reassessments.
D) If an asset is written up, the revaluation surplus account must be reclassified each
year to retained earnings.

83) When an asset’s fair value has increased and a firm elects the revaluation method,

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 A) the amount of the necessary write-up is credited to a contra-asset account called
revaluation surplus.
B) subsequent depreciation is based on the asset’s original cost.
C) under U.S. GAAP, the accumulated depreciation account is removed and the
revalued amount becomes the new book value.
D) under IFRS, the accumulated depreciation account is removed and the revalued
amount becomes the new book value.

84) Which of the following is not a difference between U.S. GAAP and IFRS treatment of
impaired assets?

A) The use of discounted cash flow.

B) Due to differences, U.S. GAAP may trigger an impairment loss that would not be
triggered by IFRS.
C) The right to reverse prior impairment losses when there is a change in the estimates
used to measure the loss.
D) In determining the valuation, costs to sell are deducted from fair value.

85) Under IFRS, research must be expensed but some development expenditures may be
capitalized. To capitalize development expenditures, firms must demonstrate several factors that
include all of the following except:

A) technical feasibility.
B) length of time the intangible asset is expected to provide benefits.
C) ability to use or sell the asset.
D) how the intangible asset will generate probable future economic benefits.

86) Erickson Company currently holds crypto currency. On its classified balance sheet,
Erickson should report the crypto currency as

A) cash and equivalents.

B) current receivable.
C) current investment.
D) intangible asset.

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87) Subsequent to acquisition, crypto currency should be

A) amortized over time.

B) tested for impairment.
C) expensed as incurred.
D) depreciation over time.

88) Gwen Inc. operates in a regulated industry. Recently passed regulation will require an
additional expenditure of $54,000 to dispose of one of Gwen Inc.’s operational assets, which is
expected to be retired in four years. The asset was acquired five years ago, with a nine-year
estimated service life. A liability related to the newly legislated disposal cost should be
recognized

A) retrospective to the date of acquisition.

B) at the date new regulation was passed.
C) over the service life of the asset.
D) at the end of the asset’s service life.

ESSAY. Write your answer in the space provided or on a separate sheet of paper.
89) On June 30, 20X1 Howard Company acquired a 5-acre tract of land. On the tract was a
warehouse that Howard intended to use as a distribution center. At the time of the purchase, the
land had an assessed tax valuation of $2,250,000 and the building had an assessed tax value of
$7,750,000. Howard paid $16,750,000 for the land and building. After the purchase the company
paid $750,000 to have various modifications made to the building.
Required:
a.At what amount should Howard record the land and building?
b.For financial reporting purposes, why might the managers of Howard prefer to assign a
larger portion of the $16,750,000 to the land rather than the building?

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90) Denver Co. acquired a large rotary forge to be used in its manufacturing process from a
competitor that was going out of business. The following costs were incurred by Denver in
connection with the acquisition:

List price $ 375,000

Finder’s fee 1,500

Transportation to Denver’s plant 13,000

Cleaning and repainting the forge 1,800

Installation costs 21,000

Costs to repair a control panel damaged during installation 900

Required:
How much should Denver Co. capitalize to the machinery account?

91) Bonzo Co. owns a building in Pennsylvania. The historical cost of the building is
$1,050,000 and $540,000 of accumulated depreciation has been recorded to date. During 20X1,
Bonzo incurred the following expenses related to the building:

Repaired a broken water main $ 81,500

Major improvement to the HVAC system 75,000

Added a 6,000 square foot employees’ lounge 197,500

Replaced the carpet in the purchasing department offices 21,300

Repainted the building 25,000

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Required:
a.Which of the building related costs incurred by Bonzo Co. should be capitalized in 20X1?
b.What is the subsequent carrying amount of the building?

92) Delilah Manufacturing Company, a calendar year reporting company, purchased a

machine for $80,000 on January 1, 20X1. 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 20X3, 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 20X3?

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93) Brick Company started construction on a new office building on January 1, 20X1, and
moved into the finished building on July 1, 20X2. Of the building’s $3,000,000 total cost,
$2,000,000 was incurred in 20X1 evenly throughout the year. The remaining $1,000,000 was
paid in installments of $500,000 each on February 1, 20X2 and June 30, 20X2. Brick’s
incremental borrowing rate was 12% throughout the construction period and the total amount of
interest incurred by Brick during 20X1 and 20X2 was $200,000 and $210,000 respectively.
Required:
a.What amount of capitalized interest should Brick report as part of its building account at
December 31, 20X1?
b.What amount of capitalized interest should Brick report as part of its building account at
December 31, 20X2?

94) King Company began constructing a building for its own use in January 20X1. During
20X1 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 20X1 as $50,000.
Required:
a.What amount of interest should King capitalize?
b.Prepare the journal entry to record payment of the interest.

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95) Jade, Inc. develops and markets computer software. During 20X1, one of Jade’s
engineers began developing a new and very innovative software product. On April 1, 20X2, a
team of Jade’s engineers determined that the software product was technologically feasible. Jade
engineers continued to ready the software for general release and in January 20X3 the first
product sales were made. Total costs incurred were as follows:

20X1 $4,750,000 (evenly throughout the year)

20X2 $2,800,000 (evenly throughout the year)

Required:
a.How should Jade account for the costs incurred during 20X1 and what is the rationale for
your answer?
b.How should Jade account for the costs incurred during 20X2? If your answer differs from
your answer in requirement a, explain why.

96) On January 2, 20X1 Lamp, Inc. purchased a patent for a new consumer product for
$120,000. At the time of purchase, the patent was valid for 14 years; however, the patent’s useful
life was estimated to be only 10 years due to the competitive nature of the product. On December
31, 20X4 the product was permanently withdrawn from sale under governmental order because
of a potential health hazard in the product.

Required:
a.Record any loss on impairment that Lamp should record in 20X4 related to this patent.
b.What should the total charge against income be in 20X4 on this patent?

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97) 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?

98) Rick Company uses straight-line depreciation for its property, plant, and equipment
which—stated at cost—consisted of the following:
20X1 20X2

Land $ 25,000 $ 25,000

Buildings 195,000 195,000

Machinery and equipment 795,000 750,000

1,015,000 970,000

− Accumulated depreciation (420,000 ) (400,000 )

Net book value $ 595,000 $ 570,000

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Rick’s depreciation expense for 20X2 and 20X1 was $115,000 and $110,000 respectively.
Required:
What amount was debited to accumulated depreciation during 20X2 because of property, plant,
and equipment retirements?

99) In January 20X1, Rock Company purchased a copper mine for $8,500,000, with
removable ore estimated at 2,400,000 tons. After it has extracted all the ore, Rock will be
required by law to restore the land to its original condition at an estimated cost of $500,000.
Rock believes it will be able to then sell the property for $200,000. During 20X1, Rock incurred
$750,000 of development costs to prepare the mine for production, and it removed and sold
80,000 tons of ore.
Required: a.What amount should Rock capitalize as the cost of the mine?
b.What amount should Rock report as depletion expense in its 20X1 income statement?

100) Mackerel Company purchased equipment on January 2, 20X1 for $100,000. The
equipment had an estimated eight-year service life and $5,000 salvage value. Mackerel’s policy
for “eight-year assets” is to use double-declining balance depreciation for the first five years of
the asset’s life and then switch to the straight-line depreciation method.
Required:
In its December 31, 20X3 balance sheet, what amount should Mackerel report as net book
value for this equipment?

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101) Nadir Company purchased a milling machine on January 3, Year 1 for $55,000. The
machine was being depreciated on the straight-line method over an estimated useful life of 10
years, with $5,000 salvage value. At the beginning of Year 9, the company paid $15,000 to
overhaul the machine. As a result of this expenditure, the company estimated that the remaining
useful life of the machine was now 8 years with no salvage value.
Required:
What should be the depreciation expense recorded for this machine in Year 9 and what is the
asset’s December 31, Year 9 book value?

102) Roadrunner Co. is building a waste landfill in the desert near Phoenix, AZ. Roadrunner
estimates that this landfill will be in operation for 4 years, will cost $175,000,000 to build, and
will generate $600 million in revenues during its useful life. Federal law requires that
Roadrunner decommission and decontaminate the site at the end of its useful life. A team of
engineers has studied the decontamination procedure and has estimated that Roadrunner will
have to spend $20,000,000 on the decommissioning process when the landfill is shut down four
years from now. Roadrunner’s credit-adjusted risk-free rate of interest is 10%; the PV factor for
4 periods at 10% equals 0.683013.
Required:
a.In accordance with U.S. GAAP, how should Roadrunner Co. account for the costs associated
with the decommissioning process? Prepare the journal entry required and prepare an
amortization table for the asset retirement obligation.
b.How are the costs associated with the decommissioning process reflected on the income
statement? Explain how this accounting treatment improves the matching process.

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103) Harrison Company owns a manufacturing plant with a fair value of $3,500,000, a
recorded cost of $6,200,000, and accumulated depreciation of $2,400,000. Pablo Company owns
a warehouse with a fair value of $3,000,000, a recorded cost of $5,500,000, and accumulated
depreciation of $2,800,000. Harrison and Pablo exchange assets with Harrison also receiving
cash of $500,000 from Pablo. The exchange is considered to have commercial substance.
Required:
Record the exchange on the books of:
1.Harrison.
2.Pablo.

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Answer Key

Test name: Basics 11

1) TRUE
2) TRUE
3) TRUE
4) TRUE
5) FALSE
6) FALSE
7) TRUE
8) TRUE
9) TRUE
10) TRUE
11) FALSE
12) TRUE
13) FALSE
14) FALSE
15) TRUE
16) B
17) D
18) B
19) C
20) C
21) D
22) A
23) A
24) C
25) B
26) D

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27) D

Land $ 100,000

Demolition 20,000

Scrap value (5,000 )

Title insurance 1,000

Paving assessment 2,000

Total land cost $ 118,000

28) C

Architect fees $ 25,000

Construction interest 8,000

Building cost 300,000

Total building cost $ 333,000

29) D

Purchase cost $ 260,000

Installation 4,600

Training 7,000

Tax 13,000

Total machine cost $ 284,600

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30) A
31) B
Date Expenditure Portion of Weighted Average
Year Accumulated
Expenditure
April 1, 20X1 $ 450,000 × 8/12 = $ 300,000

June 1, 20X1 200,000 × 6/12 = 100,000

September 1, 20X1 400,000 × 3/12 = 100,000

November 30, 20X1 100,000 × 0/12 = 0

$ 500,000

The “portion of year” equals the time between the date an expenditure is
made and the date of the project’s completion.
32) B
Date Amount Portion of Cumulative Weighted
Year Average Expenditures
2/1/20X1 $ 1,050,000 11/12 $ 962,500

3/31/20X1 900,000 9/12 675,000

6/1/20X1 750,000 7/12 437,500

10/1/20X1 1,000,000 3/12 250,000

12/31/20X1 600,000 0/12 0

$ 2,325,000

33) B
Date Amount Portion of Cumulative Weighted Average
Year Expenditures
2/1/20X1 $ 1,050,000 11/12 $ 962,500

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3/31/20X1 900,000 9/12 675,000

6/1/20X1 750,000 7/12 437,500

10/1/20X1 1,000,000 3/12 250,000

12/31/20X1 600,000 0/12 0

$ 2,325,000

Capitalized interest = cumulative weighted average expenditure ×

interest rate on construction loan = $2,325,000 × 6% = $139,500
34) B
Date Amount Portion of Cumulative Weighted Average
Year Expenditures
2/1/20X1 $ 1,050,000 11/12 $ 962,500

3/31/20X1 900,000 9/12 675,000

6/1/20X1 750,000 7/12 437,500

10/1/20X1 1,000,000 3/12 250,000

12/31/20X1 600,000 0/12 0

$ 2,325,000

Capitalized interest = cumulative weighted average expenditure ×

interest rate on construction loan = $2,325,000 × 6% = $139,500

Interest expense = Incurred interest − Capitalized interest = ($8,000,000

× 6% × 11/12) − $139,500 = $440,000 − $139,500 = $300,500
35) B
Date Amount Portion of Year Cumulative Weighted
Average Expenditures

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2/1/20X1 $ 1,050,000 11/12 $ 962,500

3/31/20X1 900,000 9/12 675,000

6/1/20X1 750,000 7/12 437,500

10/1/20X1 1,000,000 3/12 250,000

12/31/20X1 600,000 0/12 0

12/31/20X1 139,500 Capitalized interest in

20X1
1/1/20X2 4,439,500 10/12 3,699,583

3/1/20X2 900,000 8/12 600,000

9/1/20X2 250,000 2/12 41,667

$ 4,341,250

36) C
Date CIP Amount Portion of Year Cumulative Weighted
Average Expenditures
2/1/20X1 $ 1,050,000 11/12 $ 962,500

3/31/20X1 900,000 9/12 675,000

6/1/20X1 750,000 7/12 437,500

10/1/20X1 1,000,000 3/12 250,000

12/31/20X1 600,000 0/12 0

12/31/20X1 139,500 Capitalized interest in 2,325,000

20X1
12/31/20X1 4,439,500

Capitalized interest = cumulative weighted average expenditures × 6%

= $139,500

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37) D
38) C
39) A
40) B
41) D
42) D
43) C
44) A
45) B
46) C
47) A
48) A
49) C
50) A
Carrying value = $3,000,000 − $1,520,000 = $1,480,000. Undiscounted
future cash flow = Sum of year 1 − 5 and salvage value = $1,325,000.
Undiscounted future cash flow $1,325,000 is less than the carrying value
of $1,480,000 (in the amount of $155,000) and thus the asset is
impaired.
51) D
52) B
53) A
54) C
55) B
Carrying value $50,000 − fair value $25,000 = impairment loss $25,000
56) B
57) C
58) C
59) B
60) C

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61) B
62) A
63) B
DDB SYD SL

20X1 $ 20,000 $ 15,000 $ 9,000

20X2 12,000 12,000 9,000

20X3 7,200 9,000 9,000

20X4 4,320 6,000 9,000

20X5 1,480 3,000 9,000

Total $ 45,000 $ 45,000 $ 45,000

64) C
DDB SYD SL

20X1 $ 20,000 $ 15,000 $ 9,000

20X2 12,000 12,000 9,000

20X3 7,200 9,000 9,000

20X4 4,320 6,000 9,000

20X5 1,480 3,000 9,000

Total $ 45,000 $ 45,000 $ 45,000

65) C
DDB SYD SL

20X1 $ 20,000 $ 15,000 $ 9,000

20X2 12,000 12,000 9,000

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 20X3 7,200 9,000 9,000

20X4 4,320 6,000 9,000

20X5 1,480 3,000 9,000

Total $ 45,000 $ 45,000 $ 45,000

66) A
DDB SYD SL

20X1 $ 20,000 $ 15,000 $ 9,000

20X2 12,000 12,000 9,000

20X3 4,333.33 9,000 9,000

20X4 4,333.33 6,000 9,000

20X5 4,333.33 3,000 9,000

Total $ 45,000 $ 45,000 $ 45,000

67) C
68) B
69) B
70) A
71) C
72) A
73) B
74) C
Sales price $6,000 − net book value ($34,000 − $27,000) = loss $1,000
75) D
76) B
77) B

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Sales price $16,000 − net book value ($? − $50,000) = ordinary gain
$4,000
Sales price $16,000 − ordinary gain $4,000 = 12,000 net book value
Accumulated depreciation $50,000 + $12,000 net book value = original
cost $62,000
78) D
79) A
80) C
81) C
82) A
83) D
84) B
85) B
86) D
87) B
88) B

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89) a.
Allocate the lump-sum cost to the land and building and then add the
modification cost to the building.

Land: FV of land ÷ (FV of land + building) × lump-sum purchase price

= $2,250,000 ÷ ($2,250,000 + $7,750,000) × $16,750,000 = $3,768,750

Building: FV of building ÷ (FV of land + building) × lump-sum

purchase price = $7,750,000 ÷ ($2,250,000 + $7,750,000) × $16,750,000
= $12,981,250 + $750,000 = $13,731,250

Note that tax assessed values may not be the same as fair values;
however, the allocation methodology only requires values that are “fair”
relative to each other thus the tax assessments can be used.

b.
Depreciation is not recorded on land. Thus, the higher the amount
assigned to the land, the lower will be future years’ depreciation
expense, and the higher will be the net income of such years.
90)

List price $ 375,000

Finder’s fee 1,500

Transportation to Denver’s plant 13,000

Cleaning and repainting the forge 1,800

Installation costs 21,000

Total capitalized costs $ 412,300

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 The list price, finder’s fee, transportation costs, cleaning and repainting
costs, and installation costs are all necessary to get the asset (machinery)
into place and ready for its intended use and are therefore capitalized
costs. The damage repair is expensed as incurred since it is not an
ordinary and necessary cost to acquire and make the machinery ready for
use.
91) a. Capitalize the following costs:

Major improvement to the HVAC system $ 75,000

Added a 6,000 square foot employees’ lounge 197,500

Total $ 272,500

b. The new carrying value of the building:

Historical cost $ 1,050,000

+ Improvements 272,500

− Accumulated depreciation (540,000 )

New carrying value $ 782,500

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 U.S. GAAP requires a company to capitalize expenditures that extend
an asset’s useful life, increase its capacity or efficiency, or cause any
other increase in its economic benefits. A major improvement to the
HVAC system and a building addition meet these criteria and are
capitalized costs. The painting, carpet, and repair costs are expensed
since they do not improve efficiency or extend the productive life of the
building.
92)

Purchase price $ 80,000

Freight-in 800

Installation cost 2,300

Sales tax paid on new machine 500

Testing costs prior to regular operation 300

Total cost of machine $ 83,900

− Salvage value (5,000 )

Depreciation base $ 78,900

Depreciation expense for 20X1 and 20X2 = $78,900 ÷ 15 years =

$5,260/year

Depreciation base January 1, 20X1 $ 78,900

20X1 Depreciation (5,260 )

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 20X2 Depreciation (5,260 )

Depreciation base January 1, 20X3 68,380

+ Cost of accessories 5,200

Adjusted depreciation base January 1, 20X3 $ 73,580

÷ Remaining useful life (15 years − 2 years) 13 years

Depreciation expense for 20X3 and remaining years of $ 5,660

asset’s life

The cost of accessories improved the asset’s efficiency and therefore is

added to the capitalized base, and depreciation is recomputed using the
new base and remaining years of life.
93) a. The avoidable interest during 20X1 is:

Cost incurred evenly over the year $ 2,000,000

× 0.50

Average cost during the year $ 1,000,000

Incremental borrowing rate × 0.12

Avoidable interest during 20X1 $ 120,000

Since the actual interest incurred ($200,000) was higher than avoidable
interest, Brick should capitalize $120,000 interest at December 31,
20X1.

b. The avoidable interest during 20X2 is:

Date Expenditure Portion of Weighted Average
Year Accumulated
Expenditure

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 Expenditures in $ 2,120,000 × 6/12 = $ 1,060,000
prior year
February 1, 20X2 500,000 × 5/12 = 208,333

June 30, 20X2 500,000 × 0/12 = 0

Weighted average accumulated expenditure during $ 1,268,333

20X2

Weighted average accumulated expenditure during 20X2 $ 1,268,333

Incremental borrowing rate × 0.12

Avoidable interest during 20X2 $ 152,200

Since the actual interest incurred ($210,000) was higher than avoidable
interest, Brick should capitalize $152,200 interest at December 31,
20X2.

Interest in building account at December 31, 20X2 = interest capitalized

in 20X1 + interest capitalized in 20X2 = $120,000 + $152,200 =
$272,200.
94) a.The interest on weighted average accumulated expenditures is the
amount of avoidable interest. Since the avoidable interest ($50,000) is
less than the interest actually incurred $60,000 only the avoidable
interest is capitalized.
b.Total interest expense will include the difference in incurred vs.
capitalized for the building (60,000 − 50,000) plus the 12,000 interest on
other borrowings

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DRBuilding (capitalized interest) 50,000

DRInterest expense 22,000

CRCash (or interest payable) 72,000

95) a. All costs incurred during 20X1 ($4,750,000) are expensed as part
of research and development (R&D) expense in 20X1. Until
technological feasibility is achieved, all costs associated with software
development are expensed as incurred.

b. During 20X2, Jade should expense 1/4 of the costs ($700,000) as

R&D and should capitalize the remaining 3/4 of the costs ($2,100,000)
as “Capitalized Computer Software Costs” in accordance with U.S.
GAAP. The difference in method vs. 20X1 is because on April 1, 20X2,
Jade engineers determined that the product was technologically feasible.
GAAP requires companies to capitalize computer software costs once
this milestone has been reached.
96) a.
Find the book value of the patent at 12/31/21. The patent is amortized
over its useful life (10 yrs.) instead of its valid legal life (14 yrs.)
because the useful life is shorter.
December 31 20X1 20X2 20X3 20X4
Amortization amount ($120,000 ÷ $ 12,000 $ 12,000 $ 12,000 $ 12,000
10 years)
Book value of patent $ 108,000 $ 96,000 $ 84,000 $ 72,000

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 On December 31, 20X4 the patent has a book value of $72,000. If the
product is permanently withdrawn from the market, then the patent
becomes worthless. Lamp would incur a loss on impairment for the
entire book value of the patent, $72,000. The journal entry to record this
impairment is:

DR Loss on impairment of patent 72,000

CR Patent 72,000

b.
The total charge to income in 20X4 is $84,000, i.e., $72,000
impairment loss + $12,000 amortization expense.
97) a. Book value = $5,000,000 − [($5,000,000 ÷ 8) × 5] = $5,000,000
− $3,125,000 = $1,875,000
b. Yes, the asset is impaired because the book value of $1,875,000 is
greater than the undiscounted future cash flows of $1,500,000. The
impairment loss to be reported on the income statement = book value −
fair value of the asset = $1,875,000 − $1,200,000 = $675,000
c. The balance sheet amount at the end of year 5 is $1,200,000, the
asset’s fair market value. Alpha would depreciate this amount over the
asset’s remaining useful life.
d. Had Alpha’s estimate of the undiscounted future cash flows been
$2,000,000 (instead of $1,500,000), the asset would not be deemed
impaired because the book value would then be less than the cash flow
estimate.

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98) To determine the amount debited in 20X2, reconstruct the
accumulated depreciation T-account:

Accumulated Depreciation
$400,000 Beginning balance (1/1/X2)

Accumulated depreciation X 115,000 Depreciation expense

from retirement of PP&E
$420,000 Ending balance (12/31/X2)

$400,000 + $115,000 − X = $420,000

X = $95,000

Rick Company must have debited accumulated depreciation $95,000

during 20X2 because of property, plant, and equipment retirements.
99) a. To determine the depletion base, we need to add together the
costs associated with the mine and subtract any salvage value:

Purchase price of mine $ 8,500,000

Development costs 750,000

Restoration costs 500,000

− salvage value (200,000 )

Depletion base $ 9,550,000

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b. Depletion cost per unit = depletion base ÷ total estimated recoverable
units = $9,550,000 ÷ 2,400,000 tons = $3.98/ton (rounded).

Depletion expense in 20X1 = tons removed × depletion/ton = 80,000 ×

$3.98 = $318,400 (rounded).
100)
December 31 Depreciation Accumulated Net Book Value
Expense Depreciation
20X1 $ 25,000 $ 25,000 $ 75,000

20X2 18,750 43,750 56,250

20X3 14,063 57,813 42,187

The straight-line depreciation rate is 1/8, or 12.5%. Double this rate is

25% which is multiplied by the book value of the asset of the beginning
of each period to arrive at the annual depreciation expense.
101) Depreciation schedule for the machine prior to the overhaul:
Depreciation Accumulated Book Value of
Expense Depreciation Machine
January 3, Year 1 --- --- $ 55,000

Full year Year 1 $ 5,000 $ 5,000 50,000

Year 2 $ 5,000 10,000 45,000

Year 3 $ 5,000 15,000 40,000

Year 4 $ 5,000 20,000 35,000

Year 5 $ 5,000 25,000 30,000

Year 6 $ 5,000 30,000 25,000

Year 7 $ 5,000 35,000 20,000

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 Year 8 $ 5,000 40,000 15,000

The italicized number is the book value of the machine at January 1,

Year 9.

The $15,000 overhaul increases the value of the machine by $15,000, so

the new book value is $30,000 ($15,000 + $15,000). After the overhaul,
the remaining useful life of the machine at January, Year 9 is 8 years. To
find the depreciation expense for Year 9, take the new book value
($30,000) divided by the remaining useful life of the machine (8 years).
$30,000 ÷ 8 years = $3,750 = Depreciation expense for Year 9

After the overhaul expenditure, the cost of the machine stands at

$70,000 ($55,000 + $15,000). Accumulated depreciation at the end of
Year 9 = $43,750 ($40,000 + $3,750). Book value = cost − accumulated
depreciation = $70,000 − $43,750 = $26,250
102) a. GAAP requires companies to recognize an asset retirement
obligation (ARO) when a reasonable estimate of its fair value can be
made. These legal obligations arise when a company builds or buys an
asset that requires mandatory expenditures at the end of the asset’s
useful life to protect public welfare or improve safety. Roadrunner Co.
can estimate the fair value of this obligation as the present value of the
estimated future cash outflows.

Decommissioning $ 20,000,000
payment
× PV factor, 4 0.683013
periods, at 10%
= Present value of $ 13,660,260
the ARO

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 DR Asset retirement $13,660,260
cost—landfill
CR Asset $13,660,260
retirement
obligation

(a) (b) (c)

Present Value of Accretion Present

Value of
Year ARO at 1/1 Expense ARO at 12/31
1 $ 13,660,260 $ 1,366,026 $ 15,026,286

2 $ 15,026,286 $ 1,502,629 $ 16,528,915

3 $ 16,528,915 $ 1,652,892 $ 18,181,807

4 $ 18,181,807 $ 1,818,193 $ 20,000,000

b. The costs associated with the decommissioning of the landfill will be

shown on the income statement as both: (1) increased depreciation
expense each period as a result of recording and depreciating the asset
retirement cost asset of $13,660,260, and (2) accretion expense each
period as shown in column (b) of the amortization table in requirement
a. The entry to record the accretion (for example) in year 1 is:

DR Accretion expense $1,366,026

CR Asset retirement obligation $1,366,026

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Test Bank for Financial Reporting and Analysis, 8th Edition, Lawrence Revsine, Daniel Collin

The $20,000,000 total decontamination cost is shown as part of the

expense of operating the landfill and is matched with the revenue
generated by the landfill over its productive life.
103) Requirement 1:

Harrison’s entry to record the exchange:

DR Warehouse (fair value) $ 3,000,000

DR Cash 500,000

DR Loss on exchange 300,000

DR Accumulated depreciation 2,400,000

CR Manufacturing plant $ 6,200,000

Requirement 2:

Pablo’s entry to record the exchange:

DR Manufacturing plant (fair value) $ 3,500,000

DR Accumulated depreciation 2,800,000

CR Warehouse $ 5,500,000

CR Cash 500,000

CR Gain 300,000

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