Question 1

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

Accepted Answer

Individual assets can be tested for impairment on their own if they generate cash flows independently of other assets.

Question 2

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

Accepted Answer

According to Generally Accepted Accounting Principles (GAAP), gains or losses upon the retirement of individual asset units are not recognized when the assets concerned are natural resources. Instead, the depletion expense is recognized over the period of time during which the resources are extracted and sold.

Question 3

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

Accepted Answer

Amortization is a method of allocating the cost of an asset over its useful life to reflect its diminishing value or its wear and tear. However, the inventory system of amortization does not consider the effect of current market fluctuations on the value of the asset. Instead, it solely focuses on the useful life and wear and tear of the asset. This means that if there are significant market fluctuations that affect the value of the asset, the inventory system of amortization may not accurately reflect the true value of the asset. Therefore, the statement that current market fluctuations may be dominant rather than the effect of wear and tear is true.

Question 4

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.

Accepted Answer

The straight-line amortization method spreads the cost of an asset evenly over its useful life, resulting in consistent expense amounts each year. This does not cause the rate-of-return on assets to decrease in later years; instead, the impact on return is consistent over time.

Question 5

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

Accepted Answer

It is not always possible to determine the exact usage pattern of an asset with reasonable certainty, as it can vary depending on various unpredictable factors such as changes in market demand, technological advancements, and external factors like natural calamities or political unrest.

Question 6

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

Accepted Answer

An asset is considered impaired when its carrying value (the amount shown on the balance sheet) is higher than its recoverable amount (the higher of its fair value or its value in use, which is the present value of expected future cash flows from the asset). In such cases, the asset needs to be written down to its recoverable amount, and a corresponding impairment loss is recognized in the income statement.

Question 7

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.

Accepted Answer

The declining balance method of amortization is appropriate for assets where the value of the asset is derived mainly in the early years of the assets' life. This method allocates a higher amount of depreciation expense in the early years and gradually reduces it over time, which is suitable for software or other assets that become quickly outdated or lose their value rapidly.

Question 8

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

Accepted Answer

This is a correct statement in accordance with IFRS 3 - Business Combination. If the carrying value of the Cash Generating Unit (CGU) including Goodwill exceeds its Fair Value, then the Goodwill is considered impaired and needs to be written down. However, if the carrying value of the CGU is less than its Fair Value, then Goodwill isn't impaired.

Question 9

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

Accepted Answer

Management's decision to retire a revenue generating asset prematurely could indicate that the asset has become impaired and is no longer generating sufficient revenue to justify its continued use. This could trigger the need for impairment testing and potential recognition of impairment losses.

Question 10

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

Accepted Answer

Once assets are classified as held for sale, they are no longer depreciated as they are expected to be sold in the near future and their value will be recovered through the sale.

Question 11

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.

Accepted Answer

The answer of All other factors remaining constant, straight-line amortization...

Question 12

Amortization expense has no effect on potential cash dividends.

Accepted Answer

The answer of Amortization expense has no effect on potential...

Question 13

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

Accepted Answer

The answer of GAAP requires that fractional year amortization be...

Question 14

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

Accepted Answer

The Canada Revenue Agency (CRA) allows for different methods of calculating Capital Cost Allowance (CCA) depending on the asset class, but the most common method is the declining balance method. However, it is not mandated for all asset classes.

Question 15

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

Accepted Answer

The sum-of-the-years'-digits (SYD) amortization method does take into account the asset's estimated residual value by subtracting it from the asset's cost before calculating the depreciation expense for each year.

Question 16

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

Accepted Answer

This statement is true as per the definition of recoverable amount, which is the higher of an asset's value-in-use or its fair value less costs to sell.

Question 17

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

Accepted Answer

Impairment losses to a CGU's group assets are usually allocated among the CGU's long-lived assets including Goodwill based on the relative carrying amounts of each asset in the CGU. This is done to ensure that the impairment is appropriately reflected in the value of each asset within the CGU. Therefore, the statement is true.

Question 18

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.

Accepted Answer

Accelerated depreciation methods such as double-declining balance methods result in higher depreciation expense in earlier years and lower in later years, which is more appropriate for assets with shorter useful lives or in industries where obsolescence occurs quickly. This is because accelerated depreciation methods allocate a greater proportion of the cost of the asset to early years, reflecting the higher wear and tear or technological advances that make the asset's usefulness decline faster. In contrast, straight-line depreciation methods allocate an equal amount of depreciation expense over the asset's estimated useful life, regardless of its decline in value.

Question 19

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

Accepted Answer

The methods of amortization based on output assume that the asset's productivity or output is the primary factor in its depreciation, not obsolescence.

Question 20

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

Accepted Answer

The declining balance method of amortization focuses on accelerating the rate of depreciation of an asset's value over time but does not directly take into account the asset's residual value in its calculations.

Quiz 10: Depreciation, Amortization, and Impairment