Spiceland C11 Solutions.docx
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Spiceland C11 Solutions.docx
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SpicelandC11Solutions
Chapter11Property,Plant,andEquipmentandIntangibleAssets:
UtilizationandImpairment
QuestionsforReviewofKeyTopics
Question11-1
Thetermsdepreciation,depletion,andamortizationallrefertotheprocessofallocatingthecostofproperty,plant,andequipmentandfinite-lifeintangibleassetstoperiodsofuse.Theonlydifferencebetweenthetermsisthattheyrefertodifferenttypesoftheselong-livedassets;depreciationforplantandequipment,depletionfornaturalresources,andamortizationforintangibles.
Question11-2
Thetermdepreciationoftenisconfusedwithadeclineinvalueorworthofanasset.Depreciationisnotmeasuredasdeclineinvaluefromoneperiodtothenext.Instead,itinvolvesthedistributionofthecostofanasset,lessanyanticipatedresidualvalue,overtheasset'sestimatedusefullifeinasystematicandrationalmannerthatattemptstomatchrevenueswiththeuseoftheasset.
Question11-3
Theprocessofcostallocationforplantandequipmentandfinite-lifeintangibleassetsrequiresthatthreefactorsbeestablishedatthetimetheassetisputintouse.Thesefactorsare:
1.Service(useful)life—Theestimatedusethatthecompanyexpectstoreceivefromtheasset.
2.Allocationbase—Thevalueoftheusefulnessthatisexpectedtobeconsumed.
3.Allocationmethod—Thepatterninwhichtheusefulnessisexpectedtobeconsumed.
Question11-4
Physicallifeprovidestheupperboundforservicelife.Physicallifewillvaryaccordingtothepurposeforwhichtheassetisacquiredandtheenvironmentinwhichitisoperated.Servicelifemaybelessthanphysicallifeforseveralreasons.Forexample,theexpectedrateoftechnologicalchangesmayshortenservicelife.Managementintentalsomayshortentheperiodofanasset’susefulnessbelowitsphysicallife.Forinstance,acompanymayhaveapolicyofusingitsdeliverytrucksforathree-yearperiodbeforetradingthetrucksfornewmodels.
Question11-5
Thetotalamountofdepreciationtoberecordedduringanasset’sservicelifeiscalleditsdepreciablebase.Thisamountisthedifferencebetweentheinitialvalueoftheassetatitsacquisition(itscost)anditsresidualvalue.Residualorsalvagevalueistheamountthecompanyexpectstoreceivefortheassetattheendofitsservicelifelessanyanticipateddisposalcosts.
AnswerstoQuestions(continued)
Question11-6
Activity-basedallocationmethodsestimateservicelifeintermsofsomemeasureofproductivity.Periodicdepreciationordepletionisthendeterminedbasedontheactualproductivitygeneratedbytheassetduringtheperiod.Time-basedallocationmethodsestimateservicelifeinyears.Periodicdepreciationoramortizationisthendeterminedbasedonthepassageoftime.
Question11-7
Thestraight-linedepreciationmethodallocatesanequalamountofdepreciablebasetoeachyearofanasset’sservicelife.Accelerateddepreciationmethodsallocatehigherportionsofdepreciablebasetotheearlyyearsoftheasset’slifeandloweramountsofdepreciablebasetolateryears.Totaldepreciationisthesamebyeitherapproach.
Question11-8
Theoretically,theuseofactivity-baseddepreciationmethodswouldprovideabettermatchingofrevenuesandexpenses.Clearly,theproductivityofaplantassetismorecloselyassociatedwiththebenefitsprovidedbythatassetthanthemerepassageoftime.However,activity-basedmethodsquiteoftenareeitherinfeasibleortoocostlytouse.Forexample,buildingsdonothaveanidentifiablemeasureofproductivity.Forassetssuchasmachinery,theremaybeanidentifiablemeasureofproductivity,suchasmachinehoursorunitsproduced,butitismorecostlytodeterminetheamounteachperiodthanitistosimplymeasurethepassageoftime.Forthesereasons,mostcompaniesusetime-baseddepreciationmethods.
Question11-9
Companiesmightusethestraight-linemethodbecausetheyconsiderthatthebenefitsderivedfromthemajorityofplantassetsarerealizedapproximatelyevenlyovertheseassets’usefullives.Italsoistheeasiestmethodtounderstandandapply.Theeffectonnetincomealsocouldexplainwhysomanycompaniespreferthestraight-linemethodtotheacceleratedmethods.Straightlineproducesahighernetincomeintheearlyyearsofanasset’slife.Netincomecanaffectbonusespaidtomanagement,ordebtagreementswithlenders.Incometaxesarenotafactorindeterminingthedepreciationmethodbecauseacompanyisnotrequiredtousethesamedepreciationmethodforbothfinancialreportingandincometaxpurposes.
Question11-10
Thegroupapproachtoaggregationisappliedtoacollectionofdepreciableassetsthatsharesimilarservicelivesandotherattributes.Forexample,groupdepreciationcouldbeusedforfleetsofvehiclesorcollectionsofmachinery.Thecompositeapproachtoaggregationisappliedtodissimilaroperatingassets,suchasallofthedepreciableassetsinonemanufacturingplant.Individualassetsinthecompositemayhavediverseservicelives.Bothapproachesaresimilarinthattheyinvolveapplyingasinglestraight-lineratebasedontheaverageservicelivesoftheassetsinthegrouporcomposite.
AnswerstoQuestions(continued)
Question11-11
Theallocationofthecostofanaturalresourcetoperiodsofuseiscalleddepletion.Theprocessotherwiseisidenticaltodepreciation.Theactivity-basedunits-of-productionmethodisthepredominantmethodusedtocalculatedepletion,notthetime-basedstraight-linemethod.
Question11-12
Theamortizationoffinite-lifeintangibleassetsisbasedonthesameconceptsasdepreciationanddepletion.Thecapitalizedcostofanintangibleassetthathasafiniteusefullifemustbeallocatedtotheperiodsthecompanyexpectstheassettocontributetoitsrevenuegeneratingactivities.Intangibles,though,generallyhavenoresidualvalues,sotheamortizablebaseissimplycost.Also,intangiblespossessnophysicallifetoprovideanupperboundtoservicelife.However,mostintangibleshavealegalorcontractuallifethatlimitsusefullife.Intangibleassetsthathaveindefiniteusefullives,includinggoodwill,arenotamortized.
Question11-13
Acompanycancalculatedepreciationbasedontheactualnumberofdaysormonthstheassetwasusedduringtheyear.Acommonsimplifyingconventionistorecordone-halfofafullyear’sexpenseintheyearsofacquisitionanddisposal.Thisisknownasthehalf-yearconvention.Themodifiedhalf-yearconventionrecordsafullyear’sexpensewhentheassetisacquiredinthefirsthalfoftheyearorsoldinthesecondhalf.Noexpenseisrecordedwhentheassetisacquiredinthesecondhalfoftheyearorsoldinthefirsthalf.
Question11-14
Achangeintheservicelifeofplantandequipmentandfinite-lifeintangibleassetsisaccountedforasachangeinanestimate.Thechangeisaccountedforprospectivelybysimplydepreciatingtheremainingdepreciablebaseoftheasset(bookvalueatdateofchangelessestimatedresidualvalue)overtherevisedremainingservicelife.
Question11-15
Achangeindepreciationmethodisaccountedforprospectivelybysimplydepreciatingtheremainingdepreciablebaseoftheasset(bookvalueatdateofchangelessestimatedresidualvalue)overtherevisedremainingservicelifeusingthenewdepreciationmethod,exactlyaswewouldaccountforachangeinestimate.Onedifferenceisthatmostchangesinestimatedonotrequireacompanytojustifythechange.However,thischangeinestimateisaresultofchanginganaccountingprincipleandthereforerequiresaclearjustificationastowhythenewmethodispreferable.Adisclosurenotereportstheeffectofthechangeonnetincomeandearningspersharealongwithclearjustificationforchangingdepreciationmethods.
AnswerstoQuestions(continued)
Question11-16
Ifamaterialerrorisdiscoveredinanaccountingperiodsubsequenttotheperiodinwhichtheerrorismade,previousyears’financialstatementsthatwereincorrectasaresultoftheerrorareretrospectivelyrestatedtoreflectthecorrection.Anyaccountbalancesthatareincorrectasaresultoftheerrorarecorrectedbyjournalentry.Ifretainedearningsisoneoftheincorrectaccounts,thecorrectionisreportedasapriorperiodadjustmenttothebeginningbalanceinthestatementofshareholders’equity.Inaddition,adisclosurenoteisneededtodescribethenatureoftheerrorandtheimpactofitscorrectiononnetincome,incomebeforeextraordinaryitem,andearningspershare.
Question11-17
Impairmentinthevalueofproperty,plant,andequipmentandintangibleassetsresultswhentherehasbeenasignificantdeclineinvaluebelowcarryingvalue(bookvalue).Forproperty,plant,andequipmentandintangibleassetswithfiniteusefullives,GAAPrequiresanentitytorecognizeanimpairmentlossonlywhentheundiscountedsumofestimatedfuturecashflowsfromanassetislessthantheasset’sbookvalue.Thelossrecognizedistheamountbywhichthebookvalueexceedsthefairvalueoftheassetorgroupofassetswhenthefairvalueisreadilydeterminable.Iffairvalueisnotdeterminable,itmustbeestimated.Onemethodofestimatingfairvalueistocomputethepresentvalueofestimatedfuturecashflowsfromtheassetorgroupofassets.
Forintangibleassetswithindefiniteusefullivesotherthangoodwill,ifbookvalueexceedsfairvalue,animpairmentlossisrecognizedforthedifferences.Forgoodwill,animpairmentlossisindicatedifthefairvalueofthereportingunitislessthanitsbookvalue.Agoodwillimpairmentlossismeasuredastheexcessofbookvalueofgoodwilloverits“implied”fairvalue.
Forproperty,
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