Question 1

On September 1,2018,Acme,Inc,sold its sales manager's company car.The car was purchased in 2011 and was not yet fully depreciated.How many months of depreciation expense should Acme record on the car for the year ended December 31,2018?
A)9
B)12
C)8
D)0

Accepted Answer

Depreciation should be recorded for eight (8)months so that it covers January 2018 through August 2018.

Question 2

Loss on Impairment is a(n):
A)operating expense that appears on the balance sheet.
B)reduction to depreciation expense for the year.
C)contra-revenue account.
D)operating expense that appears on the income statement.

Accepted Answer

Impairment losses are classified as an operating expense on the income statement and reported above the Income from Operations subtotal.

Question 3

California Spas recently learned that the value of its building required a write-down because of the discovery that it was on an earthquake fault line.The building cost $2,000,000 and has a book value of $1,570,000 before the discovery and the fair value was $975,000 after the discovery.Which of the following journal entries will be used to record the asset impairment?
A)Debit Impairment Loss and credit Accumulated Depreciation for $595,000
B)Debit Depreciation Expense and credit Building for $595,000
C)Debit Accumulated Depreciation and credit Building for $430,000
D)Debit Impairment Loss and credit Accumulated Depreciation for $430,000

Accepted Answer

Impairment occurs when events or changed circumstances interfere with a company's ability to recover the value of the asset through future operations.If this occurs,the book value should be written down to what the asset is worth (called fair value)with the amount of the write-down reported as an impairment loss.The entry includes a debit to Accumulated Depreciation and a credit to Building to eliminate the asset's accumulated depreciation and a debit to Impairment Loss and a credit to Building to write the asset down to its fair value.In this case,debit Accumulated Depreciation and credit Building $430,000 ($2,000,000 − $1,570,000)and debit Impairment Loss and a credit to Building for $595,000 ($1,570,000 − $975,000).

Question 4

On June 22,2018,Ace Electronics sold an office building,which was not yet fully depreciated.How many months of depreciation expense should Ace record on the building for the year ended December 31,2018?
A)6
B)7
C)12
D)0

Accepted Answer

Accountants typically assume the assets were purchased at the beginning of the month nearest to the actual sale,which,in this case,is July 1.Depreciation should be recorded for six (6)months so that it covers January 2018 through June 2018.

Question 5

Depreciation and impairment are different in that:
A)only depreciation results in a decrease in net income.
B)only impairment represents the decline in the current value of the related asset.
C)only depreciation results in a decrease to total assets.
D)only impairment results in a decrease to total assets.

Accepted Answer

As a result of recording depreciation,an asset's book value declines as it ages.However,because depreciation is not intended to report an asset at its current value,an asset's book value could exceed its current value,particularly if the asset becomes impaired.Impairment occurs when events or changed circumstances interfere with a company's ability to recover the value of the asset through future operations.If this occurs,the book value should be written down to what the asset is worth (called fair value)with the amount of the write-down reported as an impairment loss.

Question 6

A company sells a piece of equipment half-way through the accounting period.The straight-line rate of depreciation on the equipment is $40,000 per year.Before preparing the entry to record the sale of the equipment,the company should first debit:
A)Depreciation Expense for $40,000 and credit Accumulated Depreciation for $40,000.
B)Accumulated Depreciation for $40,000 and credit Cash for $40,000.
C)Depreciation Expense for $20,000 and credit Accumulated Depreciation for $20,000.
D)Cash for $20,000 and credit Depreciation Expense for $20,000.

Accepted Answer

Before a disposal is recorded,depreciation must be brought up to the date of the sale.
Debit Depreciation Expense and credit Accumulated Depreciation for $20,000 (or full year depreciation of $40,000 × 6 months (sold half-way through the year)÷ 12 months)

Question 7

Your company rents computers to local businesses and schools.You have 1,000 computers with a book value of $160,000.As a result of changing technology,your computers are more difficult to rent so you must drastically reduce your rental price,which causes a decrease in estimated future cash flows.The fair value of the computers is estimated to be $125,000 because of their outdated technology.Your company should report an asset impairment loss of:
A)$160,000.
B)$125,000.
C)$35,000.
D)$0.

Accepted Answer

Impairment Loss = Book Value − Fair Value
= $160,000 − $125,000 = $35,000

Question 8

On January 11,2018,Orangewood Industries bought a new cash register for $7,500.In calculating depreciation expense for the year ended December 31,2018,Orangewood's accountant will assume that the cash register was purchased on:
A)January 1,2018
B)January 11,2018
C)January 31,2018
D)February 1,2018

Accepted Answer

Accountants typically assume the assets were purchased at the beginning of the month nearest to the actual purchase,which,in this case,is January 1.

Question 9

What is the effect of an impairment loss on the accounting equation?
A)It increases total assets.
B)It has no effect.
C)It increases total stockholders' equity.
D)It decreases total stockholders' equity.

Accepted Answer

An impairment loss is recorded with a debit to Loss on Impairment (which increases expenses and,as such,decreases net income and stockholders' equity)and a credit to the impaired asset's account (which decreases assets).

Question 10

On October 21,2018,Xit Company bought a new delivery truck for $30,000.In calculating depreciation expense for the year ended December 31,2018,Xit's accountant will assume that the truck was purchased on:
A)November 1,2018.
B)October 1,2018.
C)October 21,2018.
D)January 1,2019.

Accepted Answer

Accountants typically assume the assets were purchased at the beginning of the month nearest to the actual purchase,which,in this case,is November 1.

Question 11

Beta Co.recorded a loss due to impairment of some of its assets.As a result of this journal entry:
A)liabilities are increased.
B)expenses are increased.
C)stockholders' equity is increased.
D)assets are decreased.

Accepted Answer

A loss due to impairment is recorded as a debit to Impairment Loss and a credit to the asset.Thus,as a result of recording a loss,assets are decreased.Impairment Loss is not an expense account but it does decrease net income which decreases stockholders' equity.

Question 12

The "least and latest rule" is:
A)that a taxpayer should pay the least tax legally permitted at the latest date allowed.
B)an inventory management system similar to LIFO,where the least amount of inventory on hand is from the latest purchases from suppliers.
C)the latest information technology is the least commonly used in accounting practice.
D)the least competent employees are always the latest to show up for work.

Accepted Answer

All taxpayers want to pay the least tax that is legally permitted,and at the latest possible date.This is referred to as the least and latest rule.

Question 13

Augusta Hayward Co.purchased a building for $800,000.At the end of the current year,the book value of the building is $440,000 and its fair value is $360,000.Assuming the building is rented to a tenant,the sum of future cash flows from the rental of the building is expected to be $320,000.What is the amount of impairment loss?
A)$360,000
B)$40,000
C)$80,000
D)$240,000

Accepted Answer

Impairment occurs when events or changed circumstances interfere with a company's ability to recover the value of the asset through future operations.If this occurs,the book value should be written down to what the asset is worth (called fair value)with the amount of the write-down reported as an impairment loss.
Impairment Loss = Book Value − Fair Value
= $440,000 − $360,000 = $80,000

Question 14

When a company sells equipment for cash on a date other than the last day of the accounting period,it must:
A)record Depreciation Expense for the entire accounting period during which the equipment is sold.
B)record the disposal by reducing the Equipment account and increasing a revenue account;a gain or loss is reported if the decrease and increase are not equal.
C)first record Depreciation Expense for the period up to the date of sale,and then record the disposal by increasing Cash and decreasing both Equipment and Accumulated Depreciation;a gain or loss is reported if the proceeds from the sale do not equal the asset's book value.
D)record Accumulated Depreciation for the entire current accounting period.

Accepted Answer

The disposal of a depreciable asset usually requires two accounting adjustments.First,the Depreciation Expense and Accumulated Depreciation accounts must be updated.If a long-lived asset is disposed of during the year,it should be depreciated to the date of disposal using a partial-year calculation.Then,the company records the disposal by increasing Cash and decreasing both Equipment and Accumulated Depreciation;a gain or loss is reported if the proceeds from the sale do not equal the asset's book value.

Question 15

Under what circumstances should a company record an asset impairment loss?
A)When residual value is greater than the repairs and maintenance expenses needed to keep up the asset.
B)When book value is less than the residual value of the asset.
C)When Accumulated Depreciation equals the purchase cost of the asset.
D)When book value is greater than the fair value of the asset.

Accepted Answer

Impairment occurs when events or changed circumstances interfere with a company's ability to recover the value of the asset through future operations.If this occurs,the book value should be written down to what the asset is worth (called fair value)with the amount of the write-down reported as an impairment loss.

Question 16

How does an asset impairment loss impact a company's financial statements?
A)It increases expenses and decreases both revenue and net income.
B)It decreases assets,stockholders' equity,and net income.
C)It increases expenses and decreases net income with no effect on any other items.
D)It increases liabilities and decreases stockholders' equity.

Accepted Answer

When an impairment occurs,the book value is written down to what the asset is worth (called fair value)with the amount of the write-down reported as an impairment loss.Impairment losses are classified as an operating expense on the income statement.As a result,recording an asset impairment loss will decrease assets and increase expenses.The increase in expenses decreases both net income and stockholders' equity.

Question 17

Why does the IRS allow larger depreciation amounts in the early years of an asset's life?
A)The calculations are easier if you allow more depreciation in the early years of an asset's life.
B)The government wants to encourage companies to invest in assets to promote economic renewal and growth.
C)So that most income taxes are paid by average taxpayers,rather than by big corporations.
D)The calculations are more complicated,so it provides more jobs for accountants and thus stimulates the economy.

Accepted Answer

One of the behaviors the government wants to encourage is economic renewal and growth.Thus,the IRS allows companies to deduct larger amounts of tax depreciation in the early years of an asset's life than what GAAP allows.

Question 18

The write-down of goodwill due to impairment will cause:
A)net income to increase.
B)intangible assets to decrease.
C)property and equipment to decrease.
D)long-term liabilities to increase.

Accepted Answer

An impairment loss is recorded with a debit to Loss on Impairment (which increases expenses and,as such,decreases net income and stockholders' equity)and a credit to Goodwill (which decreases intangible assets).

Question 19

A loss on disposal of an asset would be reported:
A)in the Operating Revenues section of the income statement.
B)in the Operating Expenses section of the income statement.
C)as a direct increase to the asset account on the balance sheet.
D)as a direct decrease to the asset account on the balance sheet.

Accepted Answer

A loss on disposal is reported in the Operating Expenses section of the income statement.

Question 20

Which of the following statements about asset impairment is correct?
A)Asset impairment losses appear on a company's income statement every year.
B)When a company records an asset impairment loss,it will increase net income for that period.
C)Impairment occurs when an asset's book value is less than its current value.
D)Asset impairment losses are reported on the income statement as an operating expense.

Accepted Answer

Impairment occurs when events or changed circumstances interfere with a company's ability to recover the value of the asset through future operations.If this occurs,the book value should be written down to what the asset is worth (called fair value)with the amount of the write-down reported as an impairment loss.Impairment losses are classified as an operating expense on the income statement and reported above the Income from Operations subtotal.

Quiz 9: Long-Lived Tangible and Intangible Assets

On September 1,2018,Acme,Inc,sold its sales manager's company car.The car was purchased in 2011 and was not yet fully depreciated.How many months of depreciation expense should Acme record on the car for the year ended December 31,2018?

Loss on Impairment is a(n) :

On June 22,2018,Ace Electronics sold an office building,which was not yet fully depreciated.How many months of depreciation expense should Ace record on the building for the year ended December 31,2018?

Depreciation and impairment are different in that:

A company sells a piece of equipment half-way through the accounting period.The straight-line rate of depreciation on the equipment is $40,000 per year.Before preparing the entry to record the sale of the equipment,the company should first debit:

On January 11,2018,Orangewood Industries bought a new cash register for $7,500.In calculating depreciation expense for the year ended December 31,2018,Orangewood's accountant will assume that the cash register was purchased on:

What is the effect of an impairment loss on the accounting equation?

On October 21,2018,Xit Company bought a new delivery truck for $30,000.In calculating depreciation expense for the year ended December 31,2018,Xit's accountant will assume that the truck was purchased on:

Beta Co.recorded a loss due to impairment of some of its assets.As a result of this journal entry:

The "least and latest rule" is:

When a company sells equipment for cash on a date other than the last day of the accounting period,it must:

Under what circumstances should a company record an asset impairment loss?

How does an asset impairment loss impact a company's financial statements?

Why does the IRS allow larger depreciation amounts in the early years of an asset's life?

The write-down of goodwill due to impairment will cause:

A loss on disposal of an asset would be reported:

Which of the following statements about asset impairment is correct?