Intermediate Accounting

Donald E. Kieso, Jerry J. Weygandt, Terry D. Warfield

Chapter 11

Depreciation, Impairments, and Depletion - all with Video Answers

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Chapter Questions

Problem 1

Distinguish among depreciation, depletion, and amortization.

Ameer Said

Ameer Said

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Problem 2

Identify the factors that are relevant in determining the annual depreciation charge, and explain whether these factors are determined objectively or whether they are based on judgment

Oluwadamilola Ameobi

Oluwadamilola Ameobi

Numerade Educator

Problem 3

Some believe that accounting depreciation measures the decline in the value of fixed assets. Do you agree? Explain.

Ameer Said

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Problem 4

Explain how estimation of service lives can result in unrealistically high valuations of fixed assets.

Haricharan Gupta

Haricharan Gupta

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Problem 5

The plant manager of a manufacturing firm suggested in a conference of the company's executives that accountants should speed up depreciation on the machinery in the finishing department because improvements were rapidly making those machines obsolete, and a depreciation fund big enough to cover their replacement is needed. Discuss the accounting concept of depreciation and the effect on a business concern of the depreciation recorded for plant assets, paying particular attention to the issues raised by the plant manager

Donna Densmore

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Problem 6

For what reasons are plant assets retired? Define inadequacy, supersession, and obsolescence.

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Vivek Singh

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Problem 7

What basic questions must be answered before the amount of the depreciation charge can be computed?

Oluwadamilola Ameobi

Oluwadamilola Ameobi

Numerade Educator

Problem 8

Workman Company purchased a machine on January 2 $2010,$ for $\$ 800,000 .$ The machine has an estimated useful life of 5 years and a salvage value of $\$ 100,000 .$ Depreciation was computed by the $150 \%$ declining-balance method. What is the amount of accumulated depreciation at the end of December $31,2011 ?$

Narayan Hari

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Problem 9

Silverman Company purchased machinery for $\$ 162,000$ on January $1,2010 .$ It is estimated that the machinery will have a useful life of 20 years, salvage value of $\$ 15,000$ production of 84,000 units, and working hours of 42,000 During 2010 the company uses the machinery for 14,300 hours, and the machinery produces 20,000 units. Compute depreciation under the straight-line, units-of-output, working hours, sum-of-the-years'-digits, and double-decliningbalance methods.

Narayan Hari

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Problem 10

What are the major factors considered in determining what depreciation method to use?

Oluwadamilola Ameobi

Oluwadamilola Ameobi

Numerade Educator

Problem 11

Under what conditions is it appropriate for a business to use the composite method of depreciation for its plant assets? What are the advantages and disadvantages of this method?

Ameer Said

Numerade Educator

Problem 12

If Remmers, Inc. uses the composite method and its composite rate is $7.5 \%$ per year, what entry should it make when plant assets that originally cost $\$ 50,000$ and have been used for 10 years are sold for $\$ 14,000 ?$

Tanishq Gupta

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Problem 13

A building that was purchased December $31,1986,$ for $\$ 2,500,000$ was originally estimated to have a life of 50 years with no salvage value at the end of that time. Depreciation has been recorded through 2010 . During 2011 an examination of the building by an engineering firm discloses that its estimated useful life is 15 years after 2010 . What should be the amount of depreciation for $2011 ?$

Narayan Hari

Numerade Educator

Problem 14

Charlie Parker, president of Spinners Company, has recently noted that depreciation increases cash provided by operations and therefore depreciation is a good source of funds. Do you agree? Discuss.

Ameer Said

Numerade Educator

Problem 15

Andrea Torbert purchased a computer for $\$ 8,000$ on July 1 2010. She intends to depreciate it over 4 years using the double-declining-balance method. Salvage value is $\$ 1,000$ Compute depreciation for 2011

Narayan Hari

Numerade Educator

Problem 16

Walkin Inc. is considering the write-down of its long-term plant because of a lack of profitability. Explain to the management of Walkin how to determine whether a write-down is permitted.

Nick Johnson

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Problem 17

Last year Wyeth Company recorded an impairment on an asset held for use. Recent appraisals indicate that the asset has increased in value. Should Wyeth record this recovery in value?

Zach Steedman

Numerade Educator

Problem 18

Toro Co. has equipment with a carrying amount of $\$ 700,000 .$ The expected future net cash flows from the equipment are $\$ 705,000,$ and its fair value is $\$ 590,000$. The equipment is expected to be used in operations in the future. What amount (if any) should Toro report as an impairment to its equipment?

Julie Silva

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Problem 19

Explain how gains or losses on impaired assets should be reported in income.

Kaylee Mcclellan

Kaylee Mcclellan

Numerade Educator

Problem 20

It has been suggested that plant and equipment could be replaced more quickly if depreciation rates for income tax and accounting purposes were substantially increased. As a result, business operations would receive the benefit of more modern and more efficient plant facilities. Discuss the merits of this proposition.

Md.Daniyal Arshad

Md.Daniyal Arshad

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Problem 21

Neither depreciation on replacement cost nor depreciation adjusted for changes in the purchasing power of the dollar has been recognized as generally accepted accounting principles for inclusion in the primary financial statements. Briefly present the accounting treatment that might be used to assist in the maintenance of the ability of a company to replace its productive capacity.

Chris Trentman

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Problem 22

List (a) the similarities and (b) the differences in the accounting treatments of depreciation and cost depletion.

Ameer Said

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Problem 23

Describe cost depletion and percentage depletion. Why is the percentage depletion method permitted?

Ronald Prasad

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Problem 24

In what way may the use of percentage depletion violate sound accounting theory?

Ameer Said

Numerade Educator

Problem 25

In the extractive industries, businesses may pay dividends in excess of net income. What is the maximum permissible? How can this practice be justified?

Lottie Adams

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Problem 26

The following statement appeared in a financial magazine: "RRA-or Rah-Rah, as it's sometimes dubbed- has kicked up quite a storm. Oil companies, for example, are convinced that the approach is misleading. Major accounting firms agree." What is RRA? Why might oil companies believe that this approach is misleading?

Daniel Cisneros

Daniel Cisneros

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Problem 27

Shumway Oil uses successful-efforts accounting and also provides full-cost results as well. Under full-cost, Shumway Oil would have reported retained earnings of $\$ 42$ million and net income of $\$ 4$ million. Under successful-efforts, retained earnings were $\$ 29$ million, and net income was \$3 million. Explain the difference between full-costing and successful-efforts accounting.

Riham Bassal

Numerade Educator

Problem 28

Target Corporation in 2007 reported net income of $\$ 2.9$ billion, net sales of $\$ 61.5$ billion, and average total assets of $\$ 41.0$ billion. What is Target's asset turnover ratio? What is Target's rate of return on assets?

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Ankit Gupta

Numerade Educator

Problem 29

Where can authoritative iGAAP guidance be found related to property, plant, and equipment?

Himanshu Garg

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Problem 30

Briefly describe some of the similarities and differences between U.S. GAAP and iGAAP with respect to the accounting for property, plant, and equipment.

Ameer Said

Numerade Educator

Problem 31

Mandive Corp., in accordance with iGAAP, applies revaluation accounting to plant assets with a carrying value of $\$ 400,000,$ a useful life of 4 years, and no salvage value. At the end of year $1,$ independent appraisers determine that the asset has a fair value of $\$ 360,000$. Prepare the entries to record this revaluation and depreciation, assuming straight-line depreciation.

Willis James

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Problem 32

At a recent executive committee meeting, the controller for Ricardo Company remarked, "With only a single key difference between U.S. GAAP and iGAAP for property, plant, and equipment, it should be smooth sailing for the FASB and IASB to converge their standards in this area." Prepare a response to the controller.

Oluwadamilola Ameobi

Oluwadamilola Ameobi

Numerade Educator

Problem 33

What is a modified accelerated cost recovery system (MACRS)? Speculate as to why this system is now required for tax purposes.

Kaylee Mcclellan

Kaylee Mcclellan

Numerade Educator