Question 1

All property, plant, and equipment must be depreciated for accounting purposes.

Accepted Answer

Not all property, plant, and equipment must be depreciated for accounting purposes. If an asset has an indefinite useful life, it is not subject to depreciation. Additionally, certain assets may be expensed immediately rather than being depreciated.

Question 2

While depreciation is a required expense on the financial statements, Capital Cost Allowance is an optional deduction for tax purposes.

Accepted Answer

Depreciation is a required expense on financial statements because it represents the loss of value of an asset over time. In contrast, Capital Cost Allowance (CCA) is an optional deduction for tax purposes, allowing businesses to deduct the cost of depreciable assets from their income for tax purposes.

Question 3

The carrying amount of property, plant, and equipment is always equal to its fair value.

Accepted Answer

The carrying amount of property, plant, and equipment is typically not equal to its fair value. The carrying amount may include factors such as depreciation, while the fair value is determined based on current market conditions and may be higher or lower than the carrying amount.

Question 4

Land improvements are generally debited to the Land account.

Accepted Answer

Land improvements should be capitalized separately from the Land account as they have a limited useful life and will eventually need to be replaced or renovated. They should be debited to a separate account such as Buildings and Improvements or Land Improvements.

Question 5

Canada Revenue Agency requires a company to use the same depreciation method on its income tax return that is used in preparing financial statements.

Accepted Answer

The Canada Revenue Agency (CRA) allows for different depreciation methods for tax purposes (Capital Cost Allowance) than what is used in financial statements (such as straight-line or declining balance methods).

Question 6

The depreciable amount of property, plant, and equipment is its original cost minus the depreciation for the current year.

Accepted Answer

The depreciable amount of property, plant, and equipment is its original cost minus its residual value, not just the depreciation for the current year. Depreciation for the current year is part of the calculation of the annual depreciation expense.

Question 7

When purchasing land, the costs for clearing, draining, filling, and grading should be charged to a Land Improvements account.

Accepted Answer

These costs are directly associated with preparing the land for its intended use, so they should be capitalized to the Land account, not to a separate Land Improvements account. Land Improvements typically refer to depreciable assets placed on the land.

Question 8

Using the units-of-production method of depreciation for equipment will generally result in more depreciation expense being recorded over the life of the asset than if the straight-line method had been used.

Accepted Answer

The total depreciation expense over the life of the asset will be the same under both methods; the difference lies in the timing and pattern of the expense, not the total amount.

Question 9

If land is purchased with a building on it that is to be demolished, proceeds from any salvaged materials are reported as Other Revenue in the income statement.

Accepted Answer

Proceeds from salvaged materials reduce the cost of the land, not reported as revenue.

Question 10

Under a finance lease, both the leased asset and the related lease obligation are shown on the statement of financial position.

Accepted Answer

Under a finance lease, the lessee recognizes both the leased asset and the related lease liability on the statement of financial position.

Question 11

Under an operating lease, both the leased asset and the related lease obligation are shown on the statement of financial position.

Accepted Answer

Under an operating lease, only the leased asset is shown on the statement of financial position, while the related lease obligation is disclosed in the notes to the financial statements.

Question 12

When purchasing a delivery truck, the cost of painting the company logo on the side should be debited to Delivery Truck account.

Accepted Answer

This is correct as the cost of painting the company logo on the side is considered an expense related to owning and using the delivery truck, so it should be capitalized as part of the asset's cost and therefore debited to the Delivery Truck account.

Question 13

Asset retirement costs are added to the cost of the asset.

Accepted Answer

Asset retirement costs, such as dismantling, removal, and site restoration costs, are typically incurred at the end of an asset's useful life. These costs are added to the cost of the asset to ensure that the total cost of ownership is reflected in the financial statements.

Question 14

Using the diminishing-balance method results in higher expense in the early years, and therefore lower profit.

Accepted Answer

The diminishing-balance method results in higher depreciation expense in the early years of an asset's useful life, which reduces the taxable income and therefore the profit.

Question 15

The Accumulated Depreciation account represents a cash fund available to replace property, plant, and equipment.

Accepted Answer

The Accumulated Depreciation account is a contra-asset account that is used to track the amount of depreciation that has been charged against an asset. It does not represent a cash fund available to replace property, plant, and equipment.

Question 16

Carrying amount is used in determining the amount that the diminishing-balance rate is applied to.

Accepted Answer

The diminishing-balance method of depreciation calculates the depreciation expense as a percentage of the carrying amount (or book value) of the asset. Therefore, the carrying amount is used to determine the amount that the diminishing-balance rate is applied to.

Question 17

In calculating depreciation, cost, useful life, and residual value are all based on estimates.

Accepted Answer

The answer of In calculating depreciation, cost, useful life, and...

Question 18

Recording depreciation on equipment affects both the statement of financial position and the income statement.

Accepted Answer

Depreciation expense is recorded on the income statement, reducing the net income of the company. At the same time, the accumulated depreciation is recorded on the statement of financial position, reducing the value of the equipment on the balance sheet.

Question 19

Leasehold improvements are depreciated over the remaining life of the lease or the useful life of the improvements, whichever is longer.

Accepted Answer

Leasehold improvements are depreciated over the shorter of the remaining life of the lease or the useful life of the improvements.

Question 20

Under IFRS, companies must account for their property, plant, and equipment using the revaluation model, where depreciable assets are revalued upward to their fair values.

Accepted Answer

Under IFRS, companies have a choice between using the cost model or the revaluation model for accounting for their property, plant, and equipment. Under the cost model, assets are recorded at their historical cost and then depreciated over their useful lives. Under the revaluation model, assets can be revalued upward to their fair values, but this is optional and not mandatory for all assets.

Quiz 9: Reporting and Analyzing Long-Lived Assets