Straight Line depreciation

Units of Activity Deprectiaon

Double Declining

1. Straight-Line Depreciation Percent = 100% / 10 years = 10% / year

2. Depreciation Rate = 2 x 10% = 20% / year

Annual depreciation varies considerably among the methods, but total depreciation expense is the
same (€12,000) for the five-year period under all three methods

Revaluation of Plant Assets

IFRS allows companies to revalue plant assets to fair value at the reporting date. Companies that
choose to use the revaluation framework must follow revaluation procedures. If revaluation is
used, it must be applied to all assets in a class of assets. Assets that are experiencing rapid price
changes must be revalued on an annual basis. Otherwise, less frequent revaluation is acceptable.

GAIN SITUATION
To illustrate asset revaluation accounting, assume that Pernice Ltd. applies revaluation to
equipment purchased on January 1, 2017, for HK$1,000,000. The equipment has a useful life of
five years and no residual value. On December 31, 2017, Pernice makes the following journal
entry to record depreciation expense, assuming straight-line depreciation.
Dec. 31 Depreciation Expense 200,000
Accumulated Depreciation—Equipment 200,000
(To record depreciation expense in 2017)
After this entry, Pernice's equipment has a carrying amount
of HK$800,000 (HK$1,000,000−HK$200,000). At the end of 2017, independent appraisers
determine that the asset has a fair value of HK$850,000. To report the equipment at its fair value
of HK$850,000 on December 31, 2017, Pernice eliminates the Accumulated Depreciation—
Equipment account, reduces Equipment to its fair value of HK$850,000, and records Revaluation
Surplus of HK$50,000. The entry to record the revaluation is as follows.
Dec. 31 Accumulated Depreciation—Equipment 200,000
Equipment 150,000
Revaluation Surplus 50,000
(To adjust the equipment to its fair value)
Thus, Pernice follows a two-step process. First, Pernice records depreciation based on the cost
basis of HK$1,000,000. As a result, it reports depreciation expense of HK$200,000 on the
income statement. Second, it records the revaluation. It does this by eliminating any accumulated
depreciation, adjusting the recorded value of the equipment to its fair value, and debiting or
crediting the revaluation surplus account. In this example, the revaluation surplus is HK$50,000,
which is the difference between the fair value of HK$850,000 and the book value of
HK$800,000. Revaluation surplus is an example of an item reported as other comprehensive
income, as discussed in Chapter 5. Pernice now reports the following information in its statement
of financial position at the end of 2017.
Equipment (HK$1,000,000−HK$150,000) HK$850,000
Accumulated depreciation—equipment 0
HK$850,000
Revaluation surplus (equity) HK$ 50,000
Illustration 9-18 Statement presentation of plant assets (equipment) and revaluation surplus
Pernice reports depreciation expense of HK$200,000 in the income statement and HK$50,000 in
other comprehensive income. As indicated, HK$850,000 is the new basis of the asset. Assuming
no change in the total useful life, depreciation in 2018 will be HK$212,500 (HK$850,000÷4).
LOSS SITUATION
Assume again that Pernice's equipment has a carrying amount
of HK$800,000 (HK$1,000,000−HK$200,000). However, at the end of 2017, independent
appraisers determine that the asset has a fair value of HK$775,000, which results in an
impairment loss of HK$25,000 (HK$800,000−HK$775,000). To record the equipment at fair
value and to record this loss, Pernice first eliminates the balance in the Accumulated
Depreciation—Equipment account of HK$200,000. Next, it reduces the Equipment account by
HK$225,000 to report the equipment at HK$775,000 (HK$1,000,000−HK$225,000). The
entry to record the equipment and report the impairment loss is as follows
Dec. 31 Accumulated Depreciation—Equipment 200,000
Impairment Loss 25,000
Equipment 225,000
(To record impairment loss of equipment)
The impairment loss of HK$25,000 reduces net income.
Comparison of this loss situation with the previous gain situation illustrates an important point.
Losses are reported in net income, whereas gains are reported in other comprehensive income.
The accounting for gains and losses continues this practice in subsequent periods with additional
complications. As a result, the treatment of accounting for revaluation gains and losses in
subsequent periods is addressed in advanced accounting classes.
Depletion of Natural Resources:

Companies generally use the units-of-activity method (discussed earlier in the chapter) to compute
depletion. The reason is that depletion generally is a function of the units extracted during the year.

Accumulated Depletion is a contra asset similar to Accumulated Depreciation.

Accounting for Intangible Assets

Companies record intangible assets at cost. This cost consists of all expenditures necessary for
the company to acquire the right, privilege, or competitive advantage. Intangibles are categorized
as having either a limited life or an indefinite life.

Amortization is to intangibles what depreciation is to plant assets and depletion is to extractable

natural resources.

To record amortization of an intangible asset, a company increases (debits) Amortization

Expense and decreases (credits) the specific intangible asset. (Unlike depreciation, no contra
account, such as Accumulated Amortization, is usually used.)
Intangible assets are typically amortized on a straight-line basis.

If National estimates the useful life of the patent to be eight years, the annual amortization
expense is NT$90,000 (NT$720,000÷8). National records the annual amortization as follows.
Dec. 31 Amortization Expense 90,000
Patents 90,000
(To record patent amortization)

Reporting

Usually, companies combine plant assets and natural resources under “Property, plant, and equipment”
in the statement of financial position. They show intangibles separately.
Net Sales ÷ Average Total Assets = Asset Turnover

Loss Treatment
To illustrate an exchange that results in a loss, assume that Roland NV exchanged a set of used
trucks plus cash for a new semi-truck. The used trucks have a combined book value of €42,000
(cost €64,000 less €22,000 accumulated depreciation). Roland's purchasing agent, experienced in
the secondhand market, indicates that the used trucks have a fair value of €26,000. In addition to
the trucks, Roland must pay €17,000 for the semi-truck. Roland computes the cost of the semi-
truck as follows.
Fair value of used trucks €26,000
Cash paid 17,000
Cost of semi-truck €43,000
Illustration 9A-1 Cost of semi-truck
Roland incurs a loss on disposal of plant assets of €16,000 on this exchange. The reason is that
the book value of the used trucks is greater than the fair value of these trucks. The computation is
as follows.
Book value of used trucks (€64,000−€22,000) € 42,000
Fair value of used trucks 26,000
Loss on disposal of plant assets €16,000
Illustration 9A-2 Computation of loss on disposalIn recording an exchange at a loss, three
steps are required: (1) eliminate the book value of the asset given up, (2) record the cost of the
asset acquired, and (3) recognize the loss on disposal of plant assets. Roland thus records the
exchange on the loss as follows.
Equipment (new) 43,000
Accumulated Depreciation—Equipment 22,000
Loss on Disposal of Plant Assets 16,000
Equipment (old) 64,000
Cash

Gain Treatment
To illustrate a gain situation, assume that Mark Express decides to exchange its old delivery
equipment plus cash of €3,000 for new delivery equipment. The book value of the old delivery
equipment is €12,000 (cost €40,000 less accumulated depreciation €28,000). The fair value of
the old delivery equipment is €19,000.
The cost of the new asset is the fair value of the old asset exchanged plus any cash paid (or other
consideration given up). The cost of the new delivery equipment is €22,000, computed as
follows.
Fair value of old delivery equipment € 19,000
Cash paid 3,000
Cost of new delivery equipment €22,000
Illustration 9A-3 Cost of new delivery equipment
A gain results when the fair value of the old delivery equipment is greater than its book value.
For Mark Express, there is a gain of €7,000 on disposal of plant assets, computed as follows.
Fair value of old delivery equipment €19,000
Book value of old delivery equipment (€40,000−€28,000) 12,000
Gain on disposal of plant assets € 7,000
Illustration 9A-4 Computation of gain on disposalMark Express records the exchange as
follows.
Equipment (new) 22,000
Accumulated Depreciation—Equipment (old) 28,000
Equipment (old) 40,000
Gain on Disposal of Plant Assets 7,000
Cash 3,000

Which of the following is disclosed in the statement of financial position or the notes to the financial
statements?

Depreciation method used.

Depreciation expense for the period.

The year the asset was purchased.

Accumulated depreciation by class of asset.

The units-of-activity method is generally not suitable for

buildings.

airplanes.

delivery equipment.

factory machinery

Natural resources are generally shown on the statement of financial position under

Investments.

Equity.
 Property, Plant, and Equipment.

Intangibles.

The balance in the Accumulated Depreciation account represents the

amount charged to expense in the current period.

amount charged to expense since the acquisition of the plant asset.

cash fund to be used to replace plant assets.

amount to be deducted from the cost of the plant asset to arrive at its fair value.

As a recent graduate of State University you're aware that IFRS requires component depreciation for
plant assets. A friend has asked you to succinctly explain what component depreciation means. Which
of the following correctly describes component depreciation?

The method that requires that significant parts of a plant asset with different useful
lives be depreciated separately.

The method of depreciation recommended for an asset that is expected to be significantly more
productive in the first half of its useful life.

The method used to prorate annual depreciation on a time basis.

The method used to ensure that the depreciation rate remains constant from year to year.

______________-
Wesley Hospital installs a new parking lot. The paving cost ₤40,000 and the lights to illuminate the
new parking area cost ₤20,000. Which of the following statements is true with respect to these
additions?

₤60,000 should be debited to Land Improvements.

₤40,000 should be debited to the Land account.

₤20,000 should be debited to Land Improvements.

 ₤60,000 should be debited to the Land account.

Engler Company purchases a new delivery truck for $56,000. The sales taxes are $3,000. The logo of
the company is painted on the side of the truck for $1,200. The truck license is $120. The truck
undergoes safety testing for $220. What does Engler record as the cost of the new truck?

$58,420

$60,540

$60,420

$59,000

________--
The book value of a plant asset is the difference between the

proceeds received from the sale of the asset and its original cost.

replacement cost of the asset and its historical cost.

cost of the asset and the amount of depreciation expense for the year.

cost of the asset and the accumulated depreciation to date.

Farr Company purchased a new van for floral deliveries on January 1, 2017. The van cost €56,000
with an estimated life of 5 years and €14,000 residual value at the end of its useful life. The double-
declining-balance method of depreciation will be used. What is the balance of the Accumulated
Depreciation account at the end of 2018?

Straight line depreciation per month = (56000-14000)/5

Straight line depreciation rate = 8400/42000 = 20%
So douple depreciation rate = 40%

Apply this to carry over asset value each year

€13,440

€26,880
 €8,960

€35,840

_________________-
The cost of a new asset acquired in an exchange that has commercial substance is the cash paid plus
the

fair value of the new asset.

book value of the old asset.

fair value of the old asset.

book value of the asset acquired.

On January 1, 2016, Chicago Furniture purchased a new delivery truck. The company paid $80,000 for
the truck, $16,000 for an annual insurance policy and $1,700 for a motor vehicle license. The truck
has an estimated residual value of $7,000 at the end of its 4 year useful life and Chicago Furniture
uses the double-declining-balance method for other similar assets. At what net amount will Chicago
Furniture record the truck on its statement of financial position at December 31, 2016?

$36,500

$48,850

$40,000

$80,000

IFRS allows companies to revalue plant assets to fair value. Which of the following statements is true
regarding revaluation?

At the time a company purchases an asset it must decide whether to follow revaluation
procedures for the asset; once the election is made, it must be followed for the remainder of
the asset's useful life.
 Assets that are experiencing rapid price changes must be revalued quarterly, other assets can
be revalued on an annual basis.

The journal entry to record a revaluation when the asset's price has increased
includes a credit to the account revaluation surplus.

All of these answer choices are correct.

The factor that is not relevant in computing depreciation is

replacement value.

useful life.

cost.

residual value.

Presto Company purchased equipment and these costs were incurred:

Cash price $27,500

Sales taxes 1,800
Insurance during transit 320
Installation and testing 430
Total costs $30,050

Presto will record the acquisition cost of the equipment as

$27,500.

$30,050.

$29,300.

$29,620.

Gagner Clinic purchases land for $125,000 cash. The clinic assumes $1,500 in property taxes due on
the land. The title and attorney fees totaled $1,000. The clinic has the land graded for $2,200. What
amount does Gagner Clinic record as the cost for the land?
 $127,200

$127,500

$129,700

$125,000

A company exchanges its old office equipment and $100,000 for new office equipment. The old office
equipment has a book value of $70,000 and a fair value of $50,000 on the date of the exchange. The
cost of the new office equipment would be recorded at

$150,000.

cannot be determined.

$170,000.

$120,000.

On January 1, 2017, Cooper Tree Company (CTC) purchases a copper mine for €17,500,000. The
mine is estimated to have 20 million tons of copper and no residual value. CTC estimates that it will
take 10 years to extract all the copper contained in the mine. CTC spends an additional €3,500,000
during the early part of 2017 preparing the mine. During 2017, CTC extracts and sells 3 million tons of
copper. On CTC’s December 31, 2017 statement of financial position, at what net amount is the
copper mine reported?

€18,900,000

€17,850,000

€15,750,000

€14,875,000

A truck was purchased for ¥300,000 and it was estimated to have a ¥60,000 residual value at the end
of its useful life. Monthly depreciation expense of ¥5,000 was recorded using the straight-line method.
The annual depreciation rate is
x % of 240000 = 60000

8%.

25%.

20%.

2%.

Which of the following statements is not true when a fully depreciated plant asset is retired?

The asset account is credited.

The plant asset's original cost equals its book value.

The accumulated depreciation account is debited.

The plant asset's book value is equal to its estimated residual value

Don's Copy Shop bought equipment for $150,000 on January 1, 2016. Don estimated the useful life to
be 3 years with no residual value, and the straight-line method of depreciation will be used. On
January 1, 2017, Don decides that the business will use the equipment for a total of 5 years. What is
the revised depreciation expense for 2017?
100,000/4

$25,000

$20,000

$37,500

$50,000

Mehring Company reported net sales of $390,000, net income of $90,000, beginning total assets of
$240,000, and ending total assets of $360,000. What was the company's asset turnover?

NetSales/Average Assets = Asset Ratio

 1.30

1.63

1.08

0.30

IFRS allows companies to revalue plant assets to fair value. When an asset has increased in value,
where is the account "Revaluation Surplus" reported?

On the income statement as part of income from continuing operations (other revenues and
gains).

On the income statement as part of discontinued operations (discontinuing historical cost).

On the statement of financial position as part of accumulated comprehensive income

(equity).

All of these answer choices are correct.

Which of the following statements concerning IFRS and U.S. GAAP is true?

IFRS permits revaluation of all intangible assets, whereas U.S. GAAP prohibits revaluation of
intangible assets.

Gains on exchange of assets when the exchange has commercial substance are
recognized under both IFRS and U.S. GAAP.

Changes in depreciation method under IFRS are reported in current and future periods, under
U.S. GAAP such changes are treated as prior period adjustments.

All of these answer choices are correct.

The book value of an asset will equal its fair value at the date of sale if

the plant asset is fully depreciated.

a loss on disposal is recorded.

 no gain or loss on disposal is recorded.

a gain on disposal is recorded.

Depletion is

the method used to record unsuccessful patents.

a decrease in fair value of natural resources.

the amount of spoilage that occurs when natural resources are extracted.

the allocation of the cost of natural resources to expense.

If a mining company extracts 2,000,000 tons in a period but only sells 1,500,000 tons,

depletion is recognized on the 2,000,000 tons extracted.

depletion is recognized on the 1,500,000 tons extracted and sold.

a separate accumulated depletion account is set up to record depletion on the 500,000 tons
extracted but not sold.

total depletion on the mine is based on the 1,500,000 tons.