karoliukas

During 2007, Big 4 Company’s warehouse was totally destroyed by a tornado. Tornados are very rare in the region where Big 4 is located. The book value of the warehouse at the time of the tornado was €10 million and Big 4 is self-insured. In addition, on June 30, 2007, Big 4 acquired one of its major suppliers. The fair value of the net assets acquired by Big 4 was greater than the purchase price. According to International Financial Reporting Standards, should Big 4 recognize an extraordinary item for tornado damage and should Big 4 recognize negative goodwill on its balance sheet due to the acquisition?

Extraordinary loss

Negative goodwill

A) No No

B) Yes No

C) No Yes

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IFRS does not permit income statement items to be recognized as “extraordinary” in the income statement. Negative goodwill is not reported on the balance sheet; rather, the excess of fair value over the price paid in an acquisition is recognized as a gain in the income statement.

karoliukas

Which of the following statements comparing straight-line depreciation methods to alternative depreciation methods is least accurate? Companies that use:

A) accelerated depreciation methods will decrease the amount of taxes in early years.

B) the units-of-production method to depreciate assets will overstate income during periods of low production.

C) accelerated depreciation methods will increase the total amount of depreciation expense over the life of an asset.

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Accelerated depreciation methods will not change the total amount of depreciation expense over the life of an asset. Accelerated depreciation methods will increase the amount of depreciation expense in the early years of the asset’s life, but the depreciation expense will be less in the latter years of the asset’s life.

karoliukas

A company is switching from straight-line depreciation to an accelerated method of depreciation. Assuming all other revenue and expenses are at the same levels for the next period, switching to an accelerated method will most likely increase the company’s:

A) total assets on the balance sheet.

B) fixed asset turnover ratio.

C) net income/sales ratio.

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The use of an accelerated depreciation method will increase depreciation expenses early in the asset’s life. The book value of the asset will be lower. Fixed asset turnover ratio (sales/fixed assets) will increase, because the book value of the fixed assets will be lower.

karoliukas

Lakeside Co. recently determined that one of its processing machines has become obsolete three years early and, unexpectedly, has no salvage value. Which of the following statements is most consistent with this discovery?

A) Historically, economic depreciation was overstated.

B) Lakeside Co. will owe back taxes.

C) Historically, economic depreciation was understated.

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Historically, economic depreciation was understated. If an asset becomes obsolete and its useful life is less than expected, accounting methods for depreciation have understated the economic depreciation. In addition, if there is no salvage value when positive salvage value was expected, the understatement problem is compounded.

karoliukas

Novak, Inc. owns equipment with a historical cost of $20,000, a useful life of 5 years, and an estimated salvage value of $5,000. Using the double declining balance method, depreciation expense in Year 3 for this equipment is:

A) $2,200.

B) $2,880.

C) $3,000.

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DDB depreciation in each year is 2/5 of the carrying value at the beginning of the year, until the carrying value reaches the estimated salvage value.Year 1 DDB depreciation = $20,000 × 2/5 = $8,000
Carrying value = $20,000 – $8,000 = $12,000 Year 2 DDB depreciation = $12,000 × 2/5 = $4,800
Carrying value = $12,000 – $4,800 = $7,200 Year 3 DDB depreciation = $7,200 × 2/5 = $2,880
Because $7,200 – $2,880 = $4,320 would depreciate the equipment below its salvage value, depreciation in Year 3 is limited to $7,200 – $5,000 = $2,200.

karoliukas

Czernezyk Company buys a delivery vehicle for €60,000. Czernezyk expects to drive the vehicle 400,000 kilometers over 4 years, at the end of which the firm expects to be able to sell the vehicle for €10,000. At the end of Year 2, the vehicle has been driven 250,000 kilometers. If Czernezyk depreciates the vehicle by the units of production method, its carrying value at the end of Year 2 is:

A) €28,750.

B) €15,000.

C) €31,250.

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Depreciation per unit of production = (€60,000 – €10,000) / 400,000 km = €0.125 per kilometer. Through year 2, depreciation expense = €0.125 × 250,000 = €31,250. Carrying value at the end of Year 2 = €60,000 – €31,250 = €28,750.

karoliukas

Component depreciation is required under:

A) IFRS, but not U.S. GAAP.

B) both IFRS and U.S. GAAP.

C) U.S. GAAP, but not IFRS.

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IFRS requires firms to use component depreciation, which refers to depreciating the identifiable components of an asset separately. U.S. GAAP permits component depreciation but does not require it.

karoliukas

This information pertains to equipment owned by Brigade Company.

• 
  Cost of equipment: $10,000.
• 
  Estimated residual value: $2,000.
• 
  Estimated useful life: 5 years.
• 
  Depreciation method: straight-line.

The accumulated depreciation at the end of year 3 is:

A) $1,600.

B) $4,800.

C) $5,200.

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Accumulated depreciation at the end of year 3 = [($10,000 − $2,000) / 5] × 3 = $4,800

karoliukas

JME acquired an asset on January 1, 2004, for $60,000 cash. At that time JME estimated the asset would last 10 years and have no salvage. During 2006 JME estimated the remaining life of the asset to be only three more years with a salvage value of $3,000. If JME uses straight line depreciation, what is the depreciation expense for 2006?

A) $6,000.

B) $15,000.

C) $12,000.

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first two years = (60,000 − 0) / 10 =  6,000 per year
yr. 2006 = (60,000 − 12,000 − 3,000) / 3  = 15,000

karoliukas

Walsh Furniture has purchased a machine with a 7-year useful life for $250,000. At the end of its life it will have an estimated salvage value of $15,000. Using the double-declining balance (DDB) method, depreciation expense in year 2 is closest to:

A) $58,750.

B) $71,430.

C) $51,020.

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Year	2 / Depreciable Life	× Book Value at Beginning of the Year	= Depreciation
1	0.2857	250,000	71,429
2	0.2857	178,571	51,020