Question 1

A large piece of earth-moving equipment was upgraded at a cost of $440,000 so that it could self-unload. After the upgrade was completed, management estimated that this feature would save the company $40,000 a year for the next six years.
Prepare the necessary journal entry to record the transaction. Provide a short justification for your chosen treatment.

Accepted Answer

The portion of the expenditure spent ove...

Question 2

What factor will not affect the estimated useful life of property, plant or equipment?

Accepted Answer

A)  Legal life of the asset.
B)  Technological obsolescence.
C)  Competitive pressures.
D)  Productive capacity.

Question 3

What is the meaning of "value in use"?

Accepted Answer

A)  The cost required to replace the productive capacity of an asset.
B)  The value of an asset in an input market or output market on the date of measurement.
C)  The value expected from the sale of an asset, net of any costs of disposal.
D)  The discounted value of cash flows expected from using an asset for its intended purpose.

Question 4

What is the meaning of "depreciation"?

Accepted Answer

A)  The systematic allocation of an asset's depreciable amount allocated in proportion to the productive capacity used.
B)  The systematic allocation of an asset's depreciable amount allocated evenly over the asset's estimated useful life.
C)  The systematic allocation of an asset's depreciable amount over its estimated useful life.
D)  The systematic allocation of an asset's depreciable amount whereby a period's depreciation equals the asset's net carrying amount multiplied by a fixed percentage.

Question 5

A car rental company has a fleet of 32,000 cars. Every three months all the cars are given scheduled oil changes, rotation, and replacement of small components. The cost per car is $210, ($70 in parts and $140 for the wages of the in-house mechanics), $6,720,000 in total. As well, for half of the cars a satellite radio receiver was installed at a cost of $150 each (total $2,400,000). The gadget allows the car to receive satellite radio. The company will provide this service free and promote it heavily to increase rentals. This advertising campaign will cost $1,500,000. After the original free use of the satellite feature, the company will charge later users a fee for the use of satellite radio.
Prepare the necessary journal entry to record the above transactions. Provide a short justification for your chosen treatment.

Accepted Answer

\[\begin{array} { l l r }
\text { Dr. P...

Question 6

Centennial owns a machine that it purchased on Jan 1, 2019 for $400,000. The machine had an estimated useful life of 10 years with a production capacity for 80,000 units and was expected to have no residual value. The company uses the units-of-production method to record depreciation. The machine produced 15,000 units in 2019, 18,000 units in 2020 and 25,000 units in 2021. The machine was sold on December 30, 2021 for $350,000. What was the accumulated depreciation at December 31, 2019?

Accepted Answer

A)  $39,000
B)  $40,000
C)  $75,000
D)  $90,000

Question 7

What is the meaning of "declining balance method"?

Accepted Answer

A)  The systematic allocation of an asset's depreciable amount allocated in proportion to the productive capacity used.
B)  The systematic allocation of an asset's depreciable amount allocated evenly over the asset's estimated useful life.
C)  The systematic allocation of an asset's depreciable amount over its estimated useful life.
D)  The systematic allocation of an asset's depreciable amount whereby a period's depreciation equals the asset's net carrying amount multiplied by a fixed percentage.

Question 8

Coffee-Bean Company built two similar buildings. Each building took one year to build and required $25 million in construction costs. Given the Company's limited internal financial resources, only Building Hazel could be internally financed; Building Cinnamon was financed by a $20 million loan evenly over the year (i.e., zero at the beginning and increasing to $20 million by the end of the year). The interest rate on the loan is 8%.
Both projects were finished on December 31, 2019 and were ready for occupancy immediately. The Hazel building will have an estimated useful life of 30 years while the Cinnamon building will have an expected useful life of 40 years. Neither building will have a residual value. The Company uses the straight-line method for depreciation.
Required:
a. How much interest cost can be capitalized on Building Cinnamon?
b. What will be the annual depreciation expense for each of the two buildings?
c. ASPE allows interest capitalization while IFRS recommends capitalization of interest on construction-specific loans. Ignoring the complexities of how to determine how much interest to capitalize, which treatment of interest costs is conceptually more correct? Explain your conclusion.
d. Why can interest costs not continue to be capitalized after the self-construction period is completed?

Accepted Answer

a. (20 million / 2)× 8%
= $800,000
b. Annual depreciation expense-Building Hazel: $25,000,000 / 30 = $833,333
Annual depreciation expense-Building Cinnamon: $25,800,000 / 40 = $645,000.
c. Conceptually, the treatment of interest costs by IFRS is more correct.
Interest cost is as much an essential cost of a self-constructed asset as the concrete and steel.
Without the financing, the construction would not have occurred. The benefit of the interest expenditure on the debt used to finance the asset is realized over the period of time when the completed asset is used.
Therefore, this cost should be added to the cost of the self-constructed asset and expensed via an increased depreciation expense.
Further, if the construction of the asset were outsourced, the contractor would have included its cost of financing the project as part of the contracted price.
Expensing immediately results in poor matching of expense with the realization of the benefit of the expenditure (which is the finished self-constructed asset).
d. Interest costs may be capitalized only during the construction period because once construction is completed there is no logistical reason why the owner of the asset cannot start to generate revenues or cost savings from the use of the asset. While under construction it is impossible to generate a benefit from the asset, and this is the condition that permits capitalization. Once construction is completed there is no impediment to delay the matching of expense to revenues as the item is available for use. Therefore, after completion of the construction process, interest is a period cost, not a product cost.

Question 9

Celtic Company bought three used machines located in Toronto for $20,000,000. The arrangement with the seller is to move all the equipment to Celtic's factory in Edmonton. It is understood that some of the equipment will be sold as scrap or disassembled and used as spare parts. A careful inventory of all the equipment is shown below. Celtic's plans are to maximize the value of each item by using it in its most beneficial manner.
 $$\begin{array} { | l | r | r | r | } 
\hline &{ \begin{array} { c } 
\text { Value if } \
\text { installed and } \
\text { operated }
\end{array} } &{ \begin{array} { c } 
\text { Value as } \
\text { spare parts }
\end{array} } &  { \begin{array} { c } 
\text { Value } \
\text { as scrap }
\end{array} } \
\hline \text { Machine A } & \$ 5,050,000 & \$ 3,950,000 & \$ 4,250,000 \
\hline \text { Machine B } & 3,990,000 & 4,040,000 & 740,000 \
\hline \text { Machine C } & \underline { 10,610,000 } & \underline { 10,410,000 } & \underline { 11,110,000 } \
\hline \text { Total } & \$ 19,650,000 & \$ 18,400,000 & \$ 16,100,000 \
\hline
\end{array}$$ Required:
Allocate the purchase price among the assets acquired.

Accepted Answer

\(\begin{array}{c}
\begin{array}{|l}
\hline\
\
\ \text {  PPE category} \
\hline \text { Machine A } \
\hline \text { Machine B } \
\hline \text { Machine C } \
\hline \text { Total } \
\hline
\end{array}
\begin{array}{|l}
\hline\
\
\ \text {Intended use  } \
\hline \text {Operate  } \
\hline \text { Spare } \
\hline \text { Scrap } \
\hline \text {  } \
\hline
\end{array}
\begin{array}{|l}
\hline \text { Appraised } \
 \text {value in } \
\text { optimal use } \
\hline \$5,050,000\
\hline 4,040,000 \
\hline \underline{11,110,000} \
\hline \underline{\$20,200,000} \
\hline
\end{array}
\begin{array}{|l}
\hline \text {  Fraction of } \
\text {total appraised.  } \
 \text { value  } \
\hline 5.05/20.2\
\hline4.04/20.2 \
\hline 11.11/20.2\
\hline \
\hline
\end{array} 
\begin{array}{|r|}
\hline \
\
\ \text { Total price } \
\hline \$ 20,000,000 \
\hline 20,000,000 \
\hline 20,000,000 \
\hline \
\hline 
\end{array}
\begin{array}{r|}
\hline\

\text {  Allocated  } \
 \text {price   } \
\hline \$ 5,000,000 \
\hline 4,000,000 \
\hline \underline{11,000,000} \
\hline\underline{\$ 20,000,000}\
\hline 
\end{array}
\end{array}\)

Question 10

What is the meaning of "depreciation"?

Accepted Answer

A)  The estimated amount that an entity would currently obtain from disposal of the asset, after deducting disposal costs, for an asset of similar age and condition expected at the end of its useful life.
B)  The total amount to be expensed.
C)  The systematic allocation of an asset's depreciable amount over its estimated useful life.
D)  The estimated period of time over which an asset is expected to be available for use by an entity.

Question 11

What is the meaning of "current value"?

Accepted Answer

A)  The cost required to replace the productive capacity of an asset.
B)  The value of an asset in an input market or output market on the date of measurement.
C)  The value expected from the sale of an asset, net of any costs of disposal.
D)  The actual cost of an asset at the time it was purchased.

Question 12

Which factor will affect the estimated useful life of property, plant or equipment?

Accepted Answer

A)  Legal life of the asset.
B)  Technological obsolescence.
C)  Residual value.
D)  Salvage value.

Question 13

The following entry was recorded by Williams Inc.:   Cash 57,000 Accumulated depreciation 33,000 Loss on disposal of property, plant, and 10,000 equipment (PPE)   PPE 100,000\begin{array} { | l | r | r | } \hline 	ext { Cash } & 57,000 & \\hline 	ext { Accumulated depreciation } & 33,000 & \\hline 	ext { Loss on disposal of property, plant, and } & 10,000 & \	ext { equipment (PPE)  } & & \\hline 	ext { PPE } & & 100,000 \\hline\end{array} Cash  Accumulated depreciation  Loss on disposal of property, plant, and  equipment (PPE)   PPE ​57,00033,00010,000​100,000​​  What is the effect of this entry on the financial statements?

Accepted Answer

A)  Current assets increased by $57,000.
B)  Net assets increased by $10,000.
C)  Income decreased by $33,000.
D)  Long-term assets increased by $100,000.

Question 14

Ceila Manufacturing purchased equipment on January 1, 2020 for $275,000. It was estimated that the equipment would have a residual value of $25,000 at the end of its useful life. The asset's useful life was estimated at 5 years or 10,000 units of output. The company has a December 31 year end. Assuming the company uses the double-declining-balance depreciation method, what is the depreciation expense for 2021?

Accepted Answer

A)  $66,000
B)  $99,000
C)  $110,000
D)  $165,000

Question 15

A truck has a new engine installed for $155,000 which will increase gas mileage by 25% and reduce pollution. Originally, the truck and engine were not set up as separate assets. Management confidently estimates that the cost of the engine is one-third of the overall cost of the truck. The truck's original cost was $420,000 and it is 40% depreciated.
Prepare the necessary journal entries to record the transaction. Provide a short justification for your chosen treatment.

Accepted Answer

To derecognize old engine
$\begin{array} { l l } \text { Dr. Loss on engine disposal } & 84,000 \ \text { Dr. Accumulated depreciation - truck (engine) } & 56,000 \end{array}$ $( 140,000 \times .4 )$
Cr. PPE - truck (engine) $420,000 \times 1 / 3$ $\quad $ $\quad $ $\quad $ $\quad $ $\quad $ $\quad $ $\quad $ $\quad $ 140,000
To capitalize new engine cost
Dr. Truck engine $\quad $ $\quad $ $\quad $ $\quad $ $\quad $ $\quad $ $\quad $ $\quad $ $\quad $ $\quad $ $\quad $ $\quad $ $\quad $ $\quad $155,000
Cr. Cash $\quad $ $\quad $ $\quad $ $\quad $ $\quad $ $\quad $ $\quad $ $\quad $ $\quad $ $\quad $ $\quad $ $\quad $ $\quad $ $\quad $ $\quad $ $\quad $ $\quad $ $\quad $155,000

Question 16

Base-Forward owns a machine that it purchased on Jan 1, 2019 for $600,000. The machine had an estimated useful life of 5 years and an estimated residual value of $100,000. The company uses the declining balance method with a rate of 20%. The machine was sold on December 31, 2021 for $140,000. What was the depreciation expense for 2021?

Accepted Answer

A)  $292,800
B)  $76,800
C)  $60,000
D)  $50,000

Question 17

A building costing $7,000,000 was purchased on January 1, 2020. Based on management's best estimates, the useful life of the building was estimated to be 40 years, with no residual value. During 2026 it was discovered that the local government had plans to build a freeway where the building stands. This project would require significant engineering and regulatory approval, so the site would be expropriated by January 1, 2032. The government agreed to pay $320,000 compensation for the building. The company has a December 31 year-end.
Required:
Case A: Prepare the journal entries to record depreciation for 2020 and 2026. The company uses straight-line depreciation.
Case B: Same as Case A except the company uses the double-declining balance method. The rate will be 5% until 2026 and 2/6 or 33.33% thereafter. Prepare the journal entries to record depreciation for 2020 and 2026.

Accepted Answer

\[\begin{array}{l}
\text { Case A: Strai...

Question 18

Explain how the depreciation method should be selected for property, plant and equipment.

Accepted Answer

•Enterprises should choose the depreciat...

Question 19

Which question arises at the time property, plant, and equipment is derecognized?

Accepted Answer

A)  Should the transaction be recorded at fair value or book value?
B)  When should the asset be removed from the balance sheet?
C)  When should the impairment be recorded in the income statement?
D)  Have the criteria for commercial substance been met?

Question 20

What is the meaning of "useful life"?

Accepted Answer

A)  The estimated amount that an entity would currently obtain from disposal of the asset, after deducting disposal costs, for an asset of similar age and condition expected at the end of its useful life.
B)  The total amount to be expensed through depreciation.
C)  The systematic allocation of an asset's depreciable amount over its estimated useful life.
D)  The estimated period of time over which an asset is expected to be available for use by an entity.

Exam 8: Property, Plant and Equipment

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What factor will not affect the estimated useful life of property, plant or equipment?

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What is the meaning of "value in use"?

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What is the meaning of "depreciation"?

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\[\begin{array} { l l r }
\text { Dr. P...
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What is the meaning of "declining balance method"?

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What is the meaning of "depreciation"?

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What is the meaning of "current value"?

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Which factor will affect the estimated useful life of property, plant or equipment?

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\[\begin{array}{l}
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Explain how the depreciation method should be selected for property, plant and equipment.

Correct Answer
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•Enterprises should choose the depreciat...
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Which question arises at the time property, plant, and equipment is derecognized?

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What is the meaning of "useful life"?

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Exam 8: Property, Plant and Equipment

Correct AnswerverifiedThe portion of the expenditure spent ove...View AnswerShow Answer

What factor will not affect the estimated useful life of property, plant or equipment?

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What is the meaning of "value in use"?

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What is the meaning of "depreciation"?

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Correct Answerverified\[\begin{array} { l l r } \text { Dr. P...View AnswerShow Answer

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What is the meaning of "declining balance method"?

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What is the meaning of "depreciation"?

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What is the meaning of "current value"?

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Which factor will affect the estimated useful life of property, plant or equipment?

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Correct AnswerverifiedShow Answer

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Correct Answerverified\[\begin{array}{l}\text { Case A: Strai...View AnswerShow Answer

Explain how the depreciation method should be selected for property, plant and equipment.

Correct Answerverified•Enterprises should choose the depreciat...View AnswerShow Answer

Which question arises at the time property, plant, and equipment is derecognized?

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What is the meaning of "useful life"?

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The portion of the expenditure spent ove...
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\[\begin{array} { l l r }
\text { Dr. P...
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•Enterprises should choose the depreciat...
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