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Financial Accounting Tools for Business Decision Making 6th Canadian Edition by Paul D. Kimmel – Test Bank

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Financial Accounting Tools for Business Decision Making 6th Canadian Edition by Paul D. Kimmel – Test Bank

CHAPTER 9

REPORTING AND ANALYZING LONG-LIVED ASSETS

SUMMARY OF QUESTION TYPES BY STUDY OBJECTIVE AND LEVEL OF DIFFICULTY

Item SO LOD Item SO LOD Item SO LOD Item SO LOD Item SO LOD

True-False Statements 1. 1 E 11. 2 E 21. 2 M 31. 4 M 41. 5 E 2. 1 M 12. 2 E 22. 2 M 32. 4 E 42. 5 E 3. 1 E 13. 2 E 23. 2 H 33. 4 E 43. 6 M 4. 1 E 14. 2 E 24. 2 M 34. 4 E 44. 6 M 5. 1 M 15. 2 E 25. 2 E 35. 4 E 45. 6 M 6. 1 M 16. 2 E 26. 3 E 36. 4 M 7. 1 E 17. 2 M 27. 3 E 37. 4 M 8. 1 E 18. 2 E 28. 3 M 38. 4 M 9. 1 H 19. 2 M 29. 3 E 39. 4 M 10. 2 E 20. 2 M 30. 3 E 40. 5 M Multiple Choice Questions 46. 1 E 67. 2 M 88. 2 H 109. 3 E 130. 4 E 47. 1 E 68. 2 E 89. 2 H 110. 3 E 131. 4 E 48. 1 M 69. 2 E 90. 2 H 111. 3 E 132. 4 M 49. 1 E 70. 2 E 91. 2 H 112. 3 E 133. 4 E 50. 1 E 71. 2 E 92. 2 H 113. 3 E 134. 4 M 51. 1 E 72. 2 E 93. 2 H 114. 3 E 135. 4 M 52. 1 E 73. 2 E 94. 2 H 115. 3 E 136. 4 H 53. 1 M 74. 2 M 95. 2 M 116. 3 E 137. 5 E 54. 1 M 75. 2 E 96. 2 M 117. 3 M 138. 5 M 55. 1 M 76. 2 M 97. 2 H 118. 3 H 139. 5 E 56. 1 H 77. 2 M 98. 2 M 119. 3 E 140. 5 M 57. 1 M 78. 2 H 99. 2 E 120. 4 E 141. 5 E 58. 1 E 79. 2 E 100. 2 E 121. 4 E 142. 5 E 59. 1 E 80. 2 E 101. 2 M 122. 4 E 143. 5 E 60. 1 M 81. 2 E 102. 2 M 123. 4 E 144. 6 M 61. 1 E 82. 2 M 103. 2 M 124. 4 E 145. 6 M 62. 1 M 83. 2 H 104. 2 E 125. 4 E 146. 6 M 63. 1 M 84. 2 E 105. 2 E 126. 4 E 147. 6 H 64. 1 M 85. 2 M 106. 2 M 127. 4 E 148. 6 M 65. 2 E 86. 2 M 107. 2 E 128. 4 H 149. 6 M 66. 2 E 87. 2 M 108. 2 H 129. 4 E Note: E = Easy M = Medium H = Hard SUMMARY OF QUESTION TYPES BY STUDY OBJECTIVE AND LEVEL OF DIFFICULTY (CONTINUED) Item SO LOD Item SO LOD Item SO LOD Item SO LOD Item SO LOD Exercises 150. 1 E 158. 2 E 166. 2 H 174. 3 M 182. 4 M 151. 1 E 159. 2 E 167. 2 E 175. 3 E 183. 4 H 152. 1 E 160. 2 E 168. 2 H 176. 3 E 184. 5 E 153. 1 E 161. 2 E 169. 2 H 177. 3 E 185. 5 E 154. 1 M 162. 2 E 170. 2,3 H 178. 3 M 186. 6 E 155. 1 E 163. 2 E 171. 2,3 H 179. 4 E 187. 6 H 156. 1,2 E 164. 2 E 172. 2,3,5 E 180. 4 E 188. 6 H 157. 2 M 165. 2 M 173. 2,4 E 181. 4 E Matching 189. 1,2 E 190. 2–4,6 M,H Short-Answer Essay 191. 1 E 194. 2 E 197. 2 M 200. 4 H 192. 1 E 195. 2 M 198. 3 M 201. 5 H 193. 2 M 196. 2 M 199. 4 E 202. 6 M Note: E = Easy M = Medium H = Hard SUMMARY OF STUDY OBJECTIVES BY QUESTION TYPE Item Type Item Type Item Type Item Type Item Type Item Type Item Type Study Objective 1 1. TF 7. TF 49. MC 55. MC 61. MC 152. Ex 191. SAE 2. TF 8. TF 50. MC 56. MC 62. MC 153. Ex 192. SAE 3. TF 9. TF 51. MC 57. MC 63. MC 154. Ex 4. TF 46. MC 52. MC 58. MC 64. MC 155. Ex 5. TF 47. MC 53. MC 59. MC 150. Ex 156. Ex 6. TF 48. MC 54. MC 60. MC 151. Ex 189. Ma Study Objective 2 10. TF 23. TF 75. MC 88. MC 101. MC 161. Ex 189. Ma 11. TF 24. TF 76. MC 89. MC 102. MC 162. Ex 190. Ma 12. TF 25. TF 77. MC 90. MC 103. MC 163. Ex 193. SAE 13. TF 65. MC 78. MC 91. MC 104. MC 164. Ex 194. SAE 14. TF 66. MC 79. MC 92. MC 105. MC 165. Ex 195. SAE 15. TF 67. MC 80. MC 93. MC 106. MC 166. Ex 196. SAE 16. TF 68. MC 81. MC 94. MC 107. MC 167. Ex 197. SAE 17. TF 69. MC 82. MC 95. MC 108. MC 168. Ex 18. TF 70. MC 83. MC 96. MC 156. Ex 169. Ex 19. TF 71. MC 84. MC 97. MC 157. Ex 170. Ex 20. TF 72. MC 85. MC 98. MC 158. Ex 171. Ex 21. TF 73. MC 86. MC 99. MC 159. Ex 172. Ex 22. TF 74. MC 87. MC 100. MC 160. Ex 173. Ex Study Objective 3 26. TF 30. TF 112. MC 116. MC 170. Ex 175. Ex 190. Ma 27. TF 109. MC 113. MC 117. MC 171. Ex 176. Ex 198. SAE 28. TF 110. MC 114. MC 118. MC 172. Ex 177. Ex 29. TF 111. MC 115. MC 119. MC 174. Ex 178. Ex Study Objective 4 31. TF 36. TF 121. MC 126. MC 131. MC 136. MC 182. Ex 32. TF 37. TF 122. MC 127. MC 132. MC 173. Ex 183. Ex 33. TF 38. TF 123. MC 128. MC 133. MC 179. Ex 190. Ma 34. TF 39. TF 124. MC 129. MC 134. MC 180. Ex 199. SAE 35. TF 120. MC 125. MC 130. MC 135. MC 181. Ex 200. SAE Study Objective 5 40. TF 42. TF 138. MC 140. MC 142. MC 172. Ex 185. Ex 41. TF 137. MC 139. MC 141. MC 143. MC 184. Ex 201. SAE Study Objective 6 43. TF 45. TF 145. MC 147. MC 149. MC 187. Ex 190. Ma 44. TF 144. MC 146. MC 148. MC 186. Ex 188. Ex 202. SAE Note: TF = True-False Ma = Matching MC = Multiple Choice Ex = Exercise SAE = Short-Answer Essay CHAPTER STUDY OBJECTIVES 1. Determine the cost of property, plant, and equipment. The cost of land, land improvements, buildings, and equipment includes all expenditures that are necessary to acquire these assets and make them ready for their intended use. After acquisition, costs incurred that benefit future periods (capital expenditures) are also included in the cost of the asset. When applicable, cost also includes asset retirement costs. If a company leases an asset, depending on whether the risks and rewards of ownership are transferred, it may be accounted for as an operating lease or a finance lease. An operating lease results in rent expense on the income statement. A finance lease results in an asset on the statement of financial position, similar to a purchased asset. 2. Explain and calculate depreciation. Depreciation is the process of allocating the cost of a long-lived asset over the asset’s useful (service) life in a systematic way. There are three commonly used depreciation methods: straight-line, diminishing-balance, and units-of-production. Annual Depreciation Method Pattern Calculation Straight-line Constant (Cost – residual value) ÷ estimated amount useful life (in years) Diminishing Diminishing Carrying amount at beginning of balance amount year X depreciation-rate (straight- line rate × multiplier) Units-of- Varying (Cost – residual value) ÷ estimated production amount total units of activity X actual activity during the year Other accounting issues related to depreciation include (1) identifying significant components of a long lived asset for which different depreciation methods or rates may be appropriate; (2) capital cost allowance (CCA) used for income tax purposes; (3) testing long-lived assets for impairment; (4) accounting for property, plant, and equipment using the cost or revaluation model; and (5) circumstances under which a revision of depreciation is required. 3. Account for the derecognition of property, plant, and equipment. The procedure for accounting for the disposal of property, plant, and equipment through sale or retirement is: Step 1: Update unrecorded depreciation for any partial period. Step 2: Calculate the carrying amount. Step 3: Calculate any gain (proceeds less carrying amount) or loss (carrying amount less proceeds) on disposal. Step 4: Derecognize (remove) the asset and accumulated depreciation accounts related to the sold or retired asset. Record the proceeds received and the gain or loss (if any). 4. Identify the basic accounting issues for intangible assets and goodwill. Intangible assets are reported at cost (if the cost model is used), which includes all expenditures that are necessary to prepare the asset for its intended use. An intangible asset with a finite life is amortized over the shorter of its useful life or legal life, usually on a straight-line basis. Like property, plant, and equipment, intangible assets with finite lives are tested for impairment only if indicators of impairment are present. Intangible assets with indefinite lives are not amortized and must be tested for impairment annually under IFRS but only when indicators of impairment are present under ASPE. Impairment losses can be reversed under IFRS but not under ASPE. Goodwill, which is the difference between the price paid for a business and the fair value of the identifiable assets less liabilities of the business, is not considered an intangible asset because it is not separately “identifiable.” Goodwill has an indefinite life and is not amortized. It is tested for impairment annually under IFRS but under ASPE it is only tested if indicators of impairment are present. Goodwill impairment losses are never reversed. 5. Illustrate how long-lived assets are reported in the financial statements. In the statement of financial position, land, land improvements, buildings, and equipment are usually combined and shown under the heading “Property, Plant, and Equipment.” Intangible assets with finite and indefinite lives are sometimes combined under the heading “Intangible Assets” or are listed separately. Goodwill must be presented separately. Either on the statement of financial position or in the notes to the financial statements, the cost of the major classes of long-lived assets is presented. The depreciation and amortization methods and rates must also be described in the notes to the statements. The accumulated depreciation and amortization of depreciable/amortizable assets and carrying amount by major classes is also disclosed, including a reconciliation of the carrying amount at the beginning and end of each period for companies reporting under IFRS. The company’s impairment policy and any impairment losses should be described and reported. The company must disclose whether it is using the cost or revaluation model. Depreciation expense, any gain or loss on disposal, and any impairment losses are reported as operating expenses in the income statement. In the statement of cash flows, any cash flows from the purchase or sale of long-lived assets are reported as investing activities. 6. Describe the methods for evaluating the use of assets. The use of assets may be analyzed using the return on assets and asset turnover ratios. Return on assets (profit ÷ average total assets) indicates how well assets are used to generate profit. This is really a function of the following two ratios: asset turnover (net sales ÷ average total assets), which indicates how efficiently assets are used to generate revenue, and profit margin (profit ÷ net sales), which measures the profit made on each sale. TRUE-FALSE STATEMENTS 1. All property, plant, and equipment must be depreciated for accounting purposes. 2. When purchasing land, the costs for clearing, draining, filling, and grading should be charged to a Land Improvements account. 3. When purchasing a delivery truck, the cost of painting the company logo on the side should be debited to the Vehicles account. 4. Land improvements are generally debited to the Land account. 5. If land is purchased with a building on it that is to be demolished, proceeds from any salvaged materials are reported in the Other Revenues and Expenses section of the income statement. 6. Asset retirement costs are added to the cost of a depreciable asset. 7. Under an operating lease, both the leased asset and the related lease obligation are shown on the statement of financial position. 8. Under a finance lease, both the leased asset and the related lease obligation are shown on the statement of financial position. 9. Leasehold improvements are depreciated over the remaining life of the lease or the useful life of the improvements, whichever is longer. 10. The carrying amount of property, plant, and equipment is always equal to its fair value. 11. Recording depreciation on equipment affects both the statement of financial position and the income statement. 12. The depreciable amount of property, plant, and equipment is its original cost minus the depreciation for the current year. 13. The Accumulated Depreciation account represents a cash fund available to replace property, plant, and equipment. 14. In calculating depreciation, cost, useful life, and residual value are all based on estimates. 15. Carrying amount is used in determining the amount that the diminishing-balance rate is applied to. 16. Using the units-of-production method of depreciation for equipment will generally result in more depreciation expense being recorded over the life of the asset than if the straight-line method had been used. 17. Using the diminishing-balance method results in higher expense in the early years, and therefore lower profit. 18. Canada Revenue Agency requires a company to use the same depreciation method on its income tax return that is used in preparing financial statements. 19. Under IFRS, companies must account for their property, plant, and equipment using the revaluation model, where depreciable assets are re-valued upward to their fair values. 20. The carrying amount of an asset is the original cost less anticipated residual value. 21. When an impairment loss is recorded for a depreciable asset, the offsetting credit is recorded in accumulated depreciation. 22. An item of property, plant, and equipment is considered to be impaired if its carrying amount exceeds its recoverable amount. 23. When a company has a piece of property, plant, or equipment which has different components that depreciate at different rates, the total cost should be allocated to each component and each component should be depreciated separately. 24. A change in the estimated residual value of property, plant, and equipment requires a restatement of prior years’ depreciation. 25. When a change in estimate is made, there is no correction of previously recorded depreciation expense. 26. Normally, businesses only dispose of property, plant, and equipment by either sale or exchange. 27. If the proceeds from the sale of equipment exceed its carrying amount, a gain on disposal is reported. 28. When an asset is retired, a gain or loss must be recorded. 29. A tangible asset must be fully depreciated before it can be removed from the books. 30. A loss on disposal results if the cash proceeds received from the asset sale are less than the asset’s carrying amount. 31. Intangible assets involve rights, privileges, and/or competitive advantages that result from ownership of identifiable assets that do not possess physical substance. 32. The cost of a finite intangible asset is not amortized, but the asset is tested periodically for impairment. 33. The cost of a patent should be amortized over its legal life or useful life, whichever is shorter. 34. If an acquired franchise or licence is for an indefinite time period, then the cost of the asset should not be amortized. 35. An intangible asset must be identifiable. 36. If a trademark is developed internally, it cannot be recognized as an intangible asset on the statement of financial position. 37. When an entire business is purchased, goodwill is the excess of the purchase price over the carrying amount of the net identifiable assets acquired. 38. All research costs should be capitalized when incurred. 39. Impairment losses on goodwill are never reversed. 40. If a building is sold at a gain, the gain on disposal should be reported in the non-operating section of the income statement. 41. Depreciation expense and impairment losses are presented in the operating section of the income statement. 42. The cash flows from the purchase and sale of long-lived assets are reported in the operating activities section of the cash flow statement. 43. The asset turnover ratio is calculated as net sales divided by ending total assets. 44. Profit margin can be determined by multiplying the asset turnover by the return on assets. 45. The asset turnover indicates how efficiently a company uses its assets.   ANSWERS TO TRUE-FALSE STATEMENTS Item Ans. Item Ans. Item Ans. Item Ans. Item Ans. Item Ans. Item Ans. 1. F 8. T 15. T 22. T 29. F 36. T 43. F 2. F 9. F 16. F 23. T 30. T 37. F 44. F 3. T 10. F 17. T 24. F 31. T 38. F 45. T 4. F 11. T 18. F 25. T 32. F 39. T 5. F 12. F 19. F 26. F 33. T 40. F 6. T 13. F 20. F 27. T 34. T 41. T 7. F 14. F 21. T 28. F 35. T 42. F MULTIPLE CHOICE QUESTIONS 46. A company purchased land for $120,000 cash; $7,000 was spent to demolish an old building on the land before construction of a new building could start; and $1,500 was received for material salvaged from the old building. The cost of the land would be recorded at (a) $120,000. (b) $125,500. (c) $127,000. (d) $128,500. 47. Which of the following should not be classified as property, plant and equipment? (a) building used as a factory (b) land used in ordinary business operations (c) a truck held for resale by an automobile dealership (d) land improvements, such as parking lots and fences 48. A characteristic of property, plant, and equipment is that it is (a) intangible. (b) used in the operations of a business. (c) held for sale in the ordinary course of the business. (d) not currently used in the business but held for future use. 49. Which one of the following items is not considered to be a part of the cost of a truck purchased for business use? (a) insurance during transit (b) motor vehicle licence (c) freight charges incurred when acquiring the truck (d) cost of lettering on the side of the truck 50. Which of the following would not be included in the Equipment account? (a) installation costs (b) freight costs (c) cost of trial runs (d) electricity used by the machine 51. Which of the following assets does not decline in service potential over the course of its useful life? (a) office equipment (b) furnishings (c) land (d) computers 52. The cost of land does not include (a) closing costs. (b) annual property taxes. (c) removal costs of an old building. (d) title fees. 53. The Land account would include all of the following costs except (a) drainage costs. (b) the cost of building a parking lot. (c) title fees. (d) the cost of tearing down a building. 54. Pippen Clinic Ltd. purchases land for $287,500 cash. The title and legal fees totalled $1,200. The clinic has the land graded for $30,000. What amount does Pippen Clinic record as the cost for the land? (a) $287,500 (b) $288,700 (c) $317,500 (d) $318,700 55. Which of the following is not true for an operating expenditure? (a) It is recorded with a debit to a statement of financial position account. (b) It benefits the current period only. (c) It is incurred to maintain an asset in its normal operating condition. (d) It often recurs. 56. Cordelia Corp. acquires land for $120,000 cash. Additional costs are as follows: Removal of shed $ 1,000 Filling and grading 3,000 Residual value of lumber from shed 240 Paving of parking lot 16,000 Closing costs 1,120 Cordelia will record the cost of the land as (a) $120,000. (b) $124,120. (c) $124,880. (d) $140,880. 57. Mercy General Hospital installs a new parking lot. The paving cost $25,000 and the lights to illuminate the new parking lot cost $13,000. Which of the following statements is true with respect to these expenditures? (a) $25,000 should be debited to Land. (b) $13,000 should be debited to Lighting Expense. (c) $38,000 should be debited to Land. (d) $38,000 should be debited to Land Improvements. 58. Land improvements should be depreciated over the useful life of the (a) land. (b) buildings on the land. (c) land or land improvements, whichever is longer. (d) land improvements. 59. The expected costs to retire an asset are called (a) off-balance sheet financing. (b) expected retirement costs. (c) disposal costs. (d) asset retirement costs. 60. Aye Corp. purchases a remote-site building for computer operations. The building will be suitable for operations after some necessary expenditures. The wiring must be replaced to handle the computer specifications. The roof is leaking and must be replaced. All rooms must be repainted and re-carpeted and there will also be some updating of the plumbing needed. Which of the following statements is true? (a) The cost of the building will include the repainting and re-carpeting costs. (b) The cost of the building will include the cost of replacing the roof. (c) The cost of the building is the purchase price of the building, while the additional expenditures are all capitalized as Building Improvements. (d) The wiring replacement will be part of the computer costs, not the building cost. 61. Dallas Corporation purchases a new delivery truck for $35,000. The company logo is painted on the side of the truck for $1,800. The motor vehicle licence is $160. Annual insurance is $1,700. At what amount does Dallas record the cost of the new truck? (a) $35,000 (b) $35,160 (c) $36,800 (d) $36,860 62. Which of the following is not an advantage of an operating lease? (a) reduced risk of obsolescence (b) 100 percent financing (c) income tax advantages (d) accelerated depreciation 63. Interest incurred on the construction of a building can be included in the cost of the building (a) during the construction period of a building. (b) for as long as the interest is payable. (c) if the building is financed by a mortgage. (d) under no circumstances. 64. Which of the following is included in the cost of constructing a building? (a) cost of paving a parking lot (b) cost of grading the land on which the building is to be constructed (c) interest incurred during construction (d) cost of removing the demolished building that existed on the land when it was purchased 65. Assuming there are no impairment losses, the balance in the Accumulated Depreciation account represents the (a) cash fund to be used to replace assets. (b) amount to be deducted from the cost of the asset to arrive at its fair value. (c) amount charged to depreciation expense in the current period. (d) amount charged to depreciation expense since the acquisition of the asset. 66. Which of the following is not an acceptable method of depreciation? (a) straight-line (b) increasing-balance (c) diminishing-balance (d) units-of-production 67. Which statement is correct regarding the use of the cost model and the revaluation model? (a) The cost model is not allowed under IFRS. (b) The revaluation model is the only model allowed under IFRS. (c) The cost model is the only model allowed under ASPE. (d) Either the cost model or the revaluation model can be under ASPE. 68. Depreciation is a process of (a) determining the asset’s fair value. (b) asset valuation. (c) cost allocation. (d) determining the asset’s residual value. 69. The cost of a depreciable long-lived asset is expensed (a) when it is paid for. (b) as the asset benefits the company. (c) in the period in which it is acquired. (d) in the period in which it is disposed of. 70. The carrying amount of an asset is equal to the (a) asset’s fair value less its original cost. (b) “blue-book” amount relied on by secondary markets. (c) replacement cost of the asset. (d) asset’s cost less accumulated depreciation. 71. Which of the following is not a consideration when calculating depreciation? (a) the method of payment for the asset (b) the cost of the asset (c) the useful life of the asset (d) the residual value of the asset 72. The difference between a depreciable asset’s cost and its residual value is called (a) the annual depreciation. (b) accumulated depreciation. (c) the depreciable amount. (d) the revaluation amount. 73. In calculating depreciation, residual value is (a) the fair value of the asset on the date of acquisition. (b) subtracted from accumulated depreciation to determine the asset’s depreciable cost. (c) an estimate of the asset’s value at the end of its useful life. (d) ignored in all the depreciation methods. 74. When estimating the useful life of an asset, accountants do not consider (a) the cost to replace the asset at the end of its useful life. (b) vulnerability to obsolescence. (c) expected repairs and maintenance. (d) the intended use of the asset. 75. Equipment was purchased for $20,000. It is estimated that the equipment will have a $3,000 residual value at the end of its 5-year useful life. Using the straight-line method, annual depreciation expense will be (a) $3,400. (b) $4,000. (c) $4,600. (d) $5,000. 76. Equipment was purchased for $25,000. Freight charges amounted to $700 and there was a cost of $3,000 for building a foundation and installing the equipment. It is estimated that the equipment will have a $1,600 residual value at the end of its 5-year useful life. Using the straight-line method, annual depreciation expense will be (a) $4,540. (b) $4,680. (c) $5,420. (d) $5,740. 77. Equipment with a cost of $160,000, an estimated residual value of $10,000, and an estimated life of 4 years, was purchased on April 1, 2015. If the straight-line method is used, the depreciation expense for calendar 2015 is (a) $40,000. (b) $37,500. (c) $30,000. (d) $28,125. 78. A truck was purchased for $40,000 and it was estimated to have a $4,000 residual value. Using the straight-line method, monthly depreciation expense of $600 was recorded. Therefore, the annual depreciation rate expressed as a percentage is (a) 2%. (b) 17%. (c) 18%. (d) 20%. 79. A company purchased factory equipment on May 1, 2015 for $30,000. It is estimated that the equipment will have a $4,200 residual value at the end of its 8-year useful life. Using straight-line depreciation, the depreciation expense for the years ended December 31, 2015 and 2016 is (a) $2,500 in 2015 and $3,750 in 2016. (b) $3,225 in 2015 and $3,225 in 2016. (c) $2,150 in 2015 and $3,225 in 2016. (d) None of the above. 80. The diminishing-balance method of depreciation produces a(n) (a) decreasing depreciation expense each period. (b) increasing depreciation expense each period. (c) diminishing percentage rate each period. (d) constant amount of depreciation expense each period. Use the following information for questions 81–83. On January 1, 2015, Sundry Corp. purchased equipment for $55,000. It was expected to last 8 years, after which it will be sold for $3,000. It is expected to be used for a total of 8,000 machine hours, and was used for 900 hours during the year ended December 31, 2015. 81. The depreciation expense for 2015 using the straight-line method will be (a) $5,850. (b) $6,500. (c) $6,875. (d) $7,250. 82. The depreciation expense for 2015 using the units-of-production method will be (a) $5,850. (b) $6,188. (c) $6,500. (d) $13,750. 83. The depreciation expense for 2015 using the double diminishing-balance method will be (a) $ 6,875. (b) $12,375. (c) $13,000. (d) $13,750. 84. Management should select the depreciation method that (a) is easiest to apply. (b) best measures the asset’s fair value each period over its useful life. (c) best reflects the pattern in which the asset’s future economic benefits are to be consumed. (d) is required by the government. 85. The depreciation method that applies a constant percentage to the carrying amount at the beginning of the period in calculating depreciation is called (a) straight-line. (b) units-of-production. (c) diminishing-balance. (d) component depreciation. 86. On October 1, 2015, Ming Wo Ltd. places a new asset into service. The cost of the asset is $16,000 with an estimated 5-year life and $4,000 residual value. If Ming Wo uses straight-line depreciation, the depreciation expense for the year ended January 31, 2016 is (a) $ 600. (b) $ 800. (c) $1,067. (d) $2,400. 87. On July 1, 2015, a machine with a useful life of five years and a residual value of $4,000 was purchased for $20,000. Under straight-line depreciation, what is the depreciation expense for calendar 2016? (a) $4,000 (b) $3,556 (c) $3,200 (d) $1,600 88. Equipment was purchased on January 1 for $39,000 with an estimated residual value of $3,000. The current year’s Depreciation Expense is $4,000, calculated on the straight-line basis, and the balance of the Accumulated Depreciation account at the end of the year is $12,000. The remaining useful life of the equipment is (a) 3 years. (b) 5 years. (c) 6 years. (d) 9 years. 89. Beynon Corp. purchased office equipment for $20,000, with an estimated residual value of $4,000 at the end of its 8-year useful life. Assuming the double diminishing-balance method is used, the constant percentage to be applied against the carrying amount each year is (a) 10%. (b) 12.5%. (c) 25%. (d) not determinable. 90. Jemima Ltd. purchased factory equipment for $200,000, and estimated that the equipment will have a $20,000 residual value at the end of its estimated 5-year useful life. If Jemima uses the double diminishing-balance method of depreciation, the depreciation expense for the second year after purchase would be (a) $43,200. (b) $48,000. (c) $72,000. (d) $80,000. 91. Tran Inc. purchased equipment for $48,000, and estimated that the equipment will have a $4,000 residual value at the end of its 8-year useful life. Using the double diminishing-balance method, the depreciation expense for the third year would be (a) $9,000. (b) $6,750. (c) $6,188. (d) $5,500. 92. On January 1, 2015, a machine with a useful life of five years and a residual value of $2,500 was purchased for $25,000. Using the double diminishing-balance method, the depreciation expense for the year ending December 31, 2016 would be (a) $10,000. (b) $ 9,000. (c) $ 6,000. (d) $ 5,400. 93. On April 1, 2015, a machine was purchased for $33,600. It was estimated that it would have a $3,200 residual value at the end of its 5-year useful life. It was also estimated that the machine would be used for a total of 80,000 hours over the 5 years. If the actual number of machine hours used in 2015 was 12,000 hours and the company uses the units-of-production method of depreciation, the depreciation expense for 2015 would be (a) $5,040. (b) $4,560. (c) $3,780. (d) $3,420. 94. A machine that cost $72,000 has an estimated residual value of $6,000 and an estimated useful life of 5 years or 30,000 hours. Using the units-of-production method, the depreciation expense for the second year, during which the machine was used 5,000 hours, would be (a) $14,400. (b) $13,200. (c) $12,000. (d) $11,000. 95. Equipment that cost of $180,000 has an estimated residual value of $15,000 and an estimated useful life of 4 years or 25,000 hours. Using the units-of-production method, the depreciation expense for the first year, during which the machine was used 3,300 hours, would be (a) $45,000. (b) $41,500. (c) $23,760. (d) $21,780. 96. On October 1, 2015, Ming Wo Ltd. places a new asset into service. The cost of the asset is $9,000 with an estimated 5-year life and $1,500 residual value. Assuming that Ming Wo uses the double diminishing-balance method of depreciation, what is the carrying amount of the asset at December 31, 2015? (a) $8,100 (b) $6,750 (c) $6,000 (d) $5,400 97. Vickers Ltd. uses the units-of-production depreciation method. A new asset is purchased for $27,000 that will produce an estimated 125,000 units over its useful life. Estimated residual value is $2,000. What is the depreciable cost per unit? (a) $2.20 (b) $2.16 (c) $0.22 (d) $0.20 98. Units-of-production is an appropriate depreciation method to use when (a) it is impossible to determine the productivity of the asset. (b) the asset’s use will be constant over its useful life. (c) the company is a manufacturing company. (d) the asset’s use varies significantly from one period to another. 99. The calculation of depreciation using the diminishing-balance method (a) ignores residual value in determining the amount to which a constant rate is applied. (b) multiplies a constant percentage times the previous year’s depreciation expense. (c) yields an increasing depreciation expense each period. (d) multiplies a diminishing percentage times a constant carrying amount. Use the following information for questions 100–101. On January 1, 2014, Flowers Unlimited purchased a new delivery van. The van cost $35,000 with an estimated life of 5 years and $5,000 residual value. Double diminishing-balance depreciation will be used. 100. What is the depreciation expense for calendar 2014? (a) $ 3,000 (b) $ 6,000 (c) $12,000 (d) $14,000 101. What is the balance in the Accumulated Depreciation account at the end of 2015? (a) $22,400 (b) $19,200 (c) $12,600 (d) $10,800 102. With regard to depreciation and income taxes, which of the following statements is not true? (a) When calculating taxable income, the taxpayer must choose the method that best reflects the pattern in which the asset’s future economic benefits are consumed. (b) When calculating taxable income, the taxpayer must use the rate set by Canada Revenue Agency. (c) When calculating taxable income, the taxpayer must use the diminishing-balance method for most assets. (d) When calculating taxable income, the amount of depreciation calculated for income tax purposes must be deducted, rather than the amount of depreciation calculated for financial reporting purposes. 103. Which of the following statements is not true? (a) CCA will be the same whether a company uses the straight-line, diminishing-balance, or units-of-production method. (b) Cash flow will be affected by the use of different depreciation methods. (c) Over the life of the asset, total depreciation expense will be the same whether a company uses the straight-line, diminishing-balance, or units-of-production method. (d) The diminishing-balance depreciation method will result in lower profit compared to the straight-line depreciation method in the early years. 104. A change in the estimated useful life of equipment requires (a) a retroactive change in the amount of depreciation recognized in previous years. (b) that no change be made to depreciation calculations, so that depreciation expense amounts are comparable over the life of the asset. (c) that the amount of depreciation expense be changed in the current and future years. (d) that profit for the current year be increased. 105. Mandeep Ltd. has decided to change the estimate of the useful life of an asset that has been in service for two years. Which of the following statements describes the proper way to revise a useful life estimate? (a) Revisions in useful life are permitted if approved by Canada Revenue Agency. (b) Both the current and future years will be affected by the revision. (c) Retroactive changes must be made to correct previously recorded depreciation. (d) Only future years will be affected by the revision. 106. Which of the following statements is incorrect? (a) Under the revaluation model, the carrying amount of property, plant and equipment is adjusted to reflect its fair value. (b) With the revaluation model, revaluation gains are recorded in Other Comprehensive Income. (c) Companies can choose to use the cost model or the revaluation model for property, plant and equipment. (d) Reversals of revaluation gains or write-ups are prohibited. 107. Anali Corporation has determined that its drilling equipment is impaired. The cost of the equipment is $210,000. Accumulated depreciation recorded to date is $140,000. Anali has determined, that based on market data, the recoverable amount will be $45,000. Determine the amount of the impairment loss that Anali will be required to record. (a) $25,000 (b) $70,000 (c) $45,000 (d) $210,000 108. When an impairment loss is recorded what is the effect (if any) on Depreciation? (a) no effect (b) credit Accumulated Depreciation (c) debit Accumulated Depreciation (d) Credit Depreciation Expense

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