Question 1

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

Accepted Answer

Accumulated Depreciation is a contra asset account that represents the total depreciation expense charged against an asset over its useful life, reducing its book value, not a cash fund.

Question 2

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

Accepted Answer

Not all property, plant, and equipment (PP&E) are depreciated. Land, for example, is not depreciated because it does not typically lose value over time.

Question 3

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, neither the leased asset nor the related lease obligation are typically recognized on the lessee's statement of financial position; instead, lease payments are recognized as an expense over the lease term.

Question 4

An item of property, plant, and equipment is considered to be impaired if its carrying amount exceeds its recoverable amount.

Accepted Answer

Impairment occurs when the carrying amount of an asset exceeds its recoverable amount, which is the higher of an asset's fair value less costs to sell and its value in use.

Question 5

The carrying amount of an asset is the original cost less anticipated residual value.

Accepted Answer

The carrying amount of an asset is the original cost less accumulated depreciation and any accumulated impairment losses, not just the anticipated residual value.

Question 6

If land is purchased with a building on it that is to be demolished, proceeds from any salvaged materials are reported in the Other Income and Expenses section of the statement of income.

Accepted Answer

Proceeds from salvaged materials are typically deducted from the cost of the land or the demolition expense, rather than being reported as Other Income and Expenses.

Question 7

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 8

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

Accepted Answer

Recording depreciation on equipment reduces the book value of the equipment on the statement of financial position (balance sheet) and also reduces net income on the statement of income (income statement) through depreciation expense.

Question 9

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 10

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 11

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

Accepted Answer

In the diminishing balance method of depreciation, the carrying amount (book value) of the asset, which is its cost minus any accumulated depreciation, is used as the base to apply the depreciation rate. This results in a decreasing annual depreciation expense over the asset's useful life.

Question 12

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 13

Using the diminishing-balance method results in higher expense in the early years, resulting in lower net income.

Accepted Answer

The diminishing-balance method of depreciation accelerates the expense recognition into the early years of an asset's life, leading to higher expenses initially and thus lower net income during those years.

Question 14

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 15

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 16

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

Accepted Answer

Under a capital lease (also known as a finance lease under newer accounting standards), the lessee recognizes both the leased asset and the lease obligation on their statement of financial position, reflecting the asset's use and the obligation to make lease payments.

Question 17

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

Accepted Answer

The cost of painting the company logo on the side of a delivery truck is considered an improvement and directly increases the value of the vehicle, thus it should be capitalized and debited to the Vehicles account.

Question 18

Land improvements are generally debited to the Land account.

Accepted Answer

Land improvements are capital expenditures and are recorded in a separate account from the Land account because they are depreciable assets, unlike land itself.

Question 19

When an impairment loss is recorded for a depreciable asset, the offsetting credit is recorded in accumulated depreciation.

Accepted Answer

When an impairment loss is recorded for a depreciable asset, the carrying value of the asset is reduced. The offsetting credit is recorded in accumulated depreciation, which represents the cumulative depreciation expense that has been recognized on the asset.

Question 20

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

Accepted Answer

Under IFRS, companies have the option to account for their property, plant, and equipment using either the cost model or the revaluation model. The revaluation model, where assets can be re-valued to their fair value, is not mandatory.

Quiz 9: Reporting and Analyzing Long-Lived Assets