Deck 10: Depreciation, Amortization, and Impairment

Question 1

The declining balance method records higher amortization expense in the earlier years of an asset's useful life.

Answer 1

True

Question 2

Asset groups under ASPE include both assets and liabilities, while cash generating units (CGUs) under IFRS include only assets.

Answer 2

True

Question 3

Amortization expense is a source of cash because it is a non-cash expense.

Answer 3

False

Question 4

Goodwill impairment losses are reversible under IFRS but not under ASPE.

Question 5

Amortization expense each period is proportionate to usage of the asset each period with the service hours method.

Question 6

The half-year convention is applied to CCA calculations.

Question 7

If an industrial firm uses the units-of-output method for computing amortization on its only plant asset, factory machinery, the credit to accumulated amortization from period to period during the life of the firm will vary with sales revenue.

Question 8

With the exception of Goodwill, all impairment losses are reversible under ASPE.

Question 9

Amortization retains funds by reducing income and thereby impacting the dividend payment decision.

Question 10

Impairment losses on intangible assets are to be amortized over the asset's remaining useful life.

Question 11

GAAP requires that, when recording amortization expense, the credit must always be made to a contra asset account, rather than directly to the asset account.

Question 12

Component accounting requires the same amortization method be applied for all of an asset's major components.

Question 13

The residual value of an asset is the expected value of the asset at the end of its entire useful life, while scrap (salvage) value refers to the expected value of the asset at the end of its useful life to the company.

Question 14

Amortization accounting is not a matter of valuation.

Question 15

Accumulated amortization represents the cash set aside for the replacement of assets.

Question 16

ASPE specifies a minimum amount of depreciation to be taken each year while IFRS does not.

Question 17

Under IFRS, depreciation is never taken on Investment Property.

Question 18

Held-for-sale capital assets are not depreciated.

Question 19

Conceptually, the cost of a capital asset (i.e., property, plant and equipment, but not land) represents a long-term prepayment of expense.

Question 20

Goodwill impairment losses are reversible under IFRS but not under ASPE.

Question 21

Individual assets may never be tested for impairment on their own.

Question 22

Gains or losses upon the retirement of individual asset units are not recognized when the assets concerned are natural resources

Question 23

One flaw in the inventory system of amortization is that current market fluctuations, rather than the effect of wear and tear, may be dominant.

Question 24

All other factors remaining constant, use of the straight-line amortization method will result in a decreasing rate-of-return on assets in the later years of the life of an asset.

Question 25

The exact usage pattern of an asset can always be determined with reasonable certainty.

Question 26

An asset is said to be impaired when its carrying value exceeds its recoverable amount.

Question 27

The declining balance method of amortization is appropriate for software or other assets where the value of the asset is derived mainly in the early years of the assets' life.

Question 28

Goodwill is said to be impaired if the carrying value of the CGU including Goodwill is greater than its Fair Value.

Question 29

One impairment indicator may be management's decision to retire a revenue generating asset prematurely.

Question 30

Once assets are classified as held for sale, depreciation stops.

Question 31

All other factors remaining constant, straight-line amortization in a manufacturing situation produces a constant unit product cost, whereas output amortization, generally produces a changing unit product cost.

Question 32

Amortization expense has no effect on potential cash dividends.

Question 33

GAAP requires that fractional year amortization be computed to the nearest month.

Question 34

Canada Revenue Agency (CRA) mandates that the declining balance method be used to calculate CCA for all asset classes.

Question 35

The sum-of-the-years'-digits amortization method does not take into account the asset's estimated residual value.

Question 36

An asset's recoverable amount is the higher of its value-in-use or fair value less costs to sell.

Question 37

Any impairment losses to a CGU's group assets are generally prorated among the CGU's long-lived assets including Goodwill.

Question 38

Accelerated depreciation methods such as the double-declining balance methods are preferable when assets have shorter useful lives, and in industries where rapid obsolescence is the norm.

Question 39

The methods of amortization based upon output assume that obsolescence will not significantly affect the usefulness of the asset.

Question 40

The Declining balance method of amortization take into account residual value.

Question 41

Amortization is also called depreciation when it is associated with tangible capital assets and depletion when associated with natural resources.

Question 42

A major objective of capital cost allowance for tax amortization is to help companies achieve a faster write-off of their capital assets.

Question 43

Under both IFRS and ASPE, if the fair value of a reporting unit is less than its book value, an impairment loss has automatically occurred and no further impairment testing is required.

Question 44

Residual value not subtracted from cost when computing amortization when using the declining balance method until such time as the book nears the residual value.

Question 45

When the revaluation model is used, the carrying value of the assets after revaluation is the same, regardless of whether the elimination or proportionate method is used.

Question 46

Under capital cost allowance, residual value is not considered in determining amortization for tax purposes.

Question 47

When the revaluation model is applied, impairment testing must be performed annually.

Question 48

A general description of the amortization methods applicable to major classes of depreciable assets is needed in financial reporting only when company policy differs from income tax policy.

Question 49

The revaluation model applies only to long-lived assets with an active market.

Question 50

The net book value or carrying value of an asset is its original cost less any capitalized post-acquisition cost less accumulated amortization to date.

Question 51

Under ASPE, the first step in the two-step impairment test for depreciable assets is to determine whether an assets discounted cash flows exceeds its carrying amount.

Question 52

Fractional year amortization can be determined in two different ways for declining balance methods, but only one way for sum of years' digits.

Question 53

Long-lived assets with finite lives are generally tested for impairment annually under IFRS, while under ASPE; impairment testing is only performed when events or circumstances indicate that impairment(s) may have occurred.

Question 54

If income tax effects are ignored, accelerated amortization methods provide funds for the earlier replacement of fixed assets.

Question 55

When the revaluation model is applied, amortization expense must be taken annually for depreciable assets.

Question 56

If income tax effects are ignored, accelerated amortization methods tend to offset the effect of steadily increasing repair and maintenance costs on the income statement.

Question 57

In the early years of an asset's useful life, the use of double-declining balance method of amortization will result in a more favourable debt-to-equity ratio than the straight-line method would.

Question 58

A general description of the amortization methods applicable to major classes of depreciable assets is not essential to a fair presentation of financial position.

Question 59

Only long lived assets with finite lives should be tested for impairment. Long-lived assets with unlimited lives are not subject to impairment tests.

Question 60

Revaluation accounting is an option, not a requirement under IFRS.

Question 61

For financial statement purposes (for a non-manufacturing company), amortization is a variable (as opposed to a fixed) expense (in total) if the amortization method used is:

A) sum-of-the-years'-digits.
B) declining balance.
C) straight-line.
D) productive output.

Question 62

The Capital Cost Allowance Method (CCA) used for amortization for Canadian Income Tax purposes is most similar to which of the following methods permitted for financial reporting?

A) Straight-line
B) Sum-of-the-years'-digits
C) Any accelerated method
D) Declining balance
E) Service hours (with productive output being sufficiently similar)

Question 63

Which of the following is not necessarily one of the four factors leading to the periodic determination of amortization expense?

A) Original cost plus any post acquisition cost
B) Useful life
C) Expected pattern of use
D) Residual value
E) Method of amortization chosen

Question 64

For each succeeding period, the declining balance (DB) method of amortization recognizes an amount of amortization expense that is:

A) constant.
B) computed using a declining rate.
C) increasing.
D) decreasing.

Question 65

Choose the incorrect statement concerning the half-year convention as it applies to amortization.

A) It adds a year to the class life of the asset for tax purposes.
B) It reduces the accelerated nature of the deduction.
C) It can be used only for tax purposes.
D) It results in an amortization rate equal to the straight-line rate based on class life in the first year of the asset's life.

Question 66

When using the inventory appraisal system of amortization, the decline in the total appraisal value during the period is recorded directly in the asset account as amortization expense.

Question 67

What is the minimum book value to be disclosed in the balance sheet for a plant asset, which is expected to be sold for reasonable amount at the end of its useful life?

A) Zero
B) Depreciable cost
C) Salvage value
D) Total original cost less accumulated amortization

Question 68

Which of the following items relevant to the amortization of an asset can be negative?

A) Depreciable cost
B) Residual value
C) Useful life
D) Cost subsequent to acquisition

Question 69

Amortization is not recognized until the asset is in its intended condition and location and is contributing to revenue.

Question 70

Which of the following is one of the underlying rationales for recognizing periodic amortization?

A) Obsolescence
B) Inflation
C) Specific market price changes
D) Decreasing marketability

Question 71

Accumulated amortization, as used in accounting, represents:

A) funds set aside to replace assets.
B) the portion of asset cost written off as an expense since the acquisition date.
C) earnings retained in the business that will be used to purchase another capital asset when the relating asset becomes fully depreciated.
D) an income on the income statement.

Question 72

Under both the retirement and replacement systems of amortization, no gain or loss is recognized on disposal, but an accumulated amortization account continues to be used.

Question 73

Which of the following methods permits total amortization on a plant asset to exceed depreciable cost?

A) Straight-line
B) Declining balance
C) There is no such method
D) Sum-of-the-years'-digits
E) All acceptable methods if salvage value is not zero

Question 74

Amortization:

A) is an allocation of property, plant, and equipment cost to the time period of usefulness, in a systematic and rational manner.
B) is a process of recognizing the decreasing value of an asset over time.
C) is a cash expense.
D) expense of $2,000 reflects a $2,000 increase in liquid funds.

Question 75

Under what conditions will the service hours and productive output methods of amortization result in the same amortization expense for a particular year?

A) When the total estimated service hours and production in units are the same.
B) When the ratio of actual service hours to productive output for the year is the same as the ratio of the estimates used in their respective amortization rates.
C) When salvage value is zero.
D) The two methods cannot produce the same amortization expense amount for any given year.

Question 76

Which of the following is not a negative element under the "capital assets, tangible" classification?

A) Reserve for plant expansion
B) Accumulated amortization of paved parking lot
C) Accumulated amortization of buildings
D) Accumulated depletion of mineral-bearing property

Question 77

Choose the best description of depreciable cost.

A) Minimum book value
B) Book value
C) Salvage value
D) Original cost less salvage value

Question 78

Recording periodic amortization on the basis of historical cost may result in holding back insufficient assets to replace fully depreciated assets if the general price:

A) rises throughout the life of the property.
B) falls throughout the life of the property.
C) remains reasonably constant during the life of the property.
D) keeps pace with dividends paid.

Question 79

Under the elimination method of revaluation, the accumulated depreciation account is eliminated against the historical cost of the asset prior to any revaluation.

Question 80

Which of the following statements is not correct?

A) Periodic allocations of acquisition cost, made on a systematic and rational basis, are recognized as current expense in conformity with the matching principle.
B) Amortization accounting is a process of valuation, not of allocation.
C) At acquisition, tangible, capital assets are recorded at cost on the basis of the cost principle.
D) Subsequent to acquisition, tangible capital assets that have a limited life are reported at the cost recognized at acquisition less accumulated allocations of such cost.