Question 1

In which amortization method is the first year's amortization computed by applying the amortization rate to the total cost of the asset (without reducing it for residual value)?

Accepted Answer

In the declining balance method of amortization, the first year's amortization is computed by applying the amortization rate directly to the total cost of the asset, without reducing it for any residual value. This method accelerates the expense recognition, resulting in higher expenses in the earlier years compared to the straight-line method.

Question 2

Straight-line amortization emphasizes that the service value of the asset declines primarily as a function of:

Accepted Answer

Straight-line amortization evenly allocates the cost of an asset over its useful life. This method assumes that the service value of an asset declines primarily due to the passage of time, regardless of the level of use or maintenance policies. Therefore, the correct choice is B as time is the primary driver behind the decline in service value.

Question 3

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

Accepted Answer

The declining balance method of amortization recognizes an amount of amortization expense that is decreasing for each succeeding period. This is because the method applies a constant rate to the declining balance of the asset, resulting in less amortization expense as the asset's book value reduces over time.

Question 4

For each succeeding period,the units-of-production method of amortization usually recognizes an amount of amortization expense that is:

Accepted Answer

The units-of-production method of amortization recognizes a varying amount of amortization expense because the amount of usage or production varies from period to period. Therefore, the expense is based on the actual usage or production during each period.

Question 5

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:

Accepted Answer

When the general price level rises throughout the life of the property, the historical cost basis for amortization may not reflect the current market value of the asset. As a result, the amount set aside for replacement through depreciation may be insufficient to purchase a similar asset at the end of its useful life, due to inflation and increased prices.

Question 6

When a capital asset with a 5-year estimated useful life is sold during the second year,how would the use of the SYD method of amortization,instead of the straight-line method,affect the gain or loss on the sale? $$\begin{array} { | l | l | l | } 
\hline & \text { Gain } & \text { Loss } \
\hline 1 & \text { No effect } & \text { No effect } \
\hline 2 & \text { Increase } & \text { Increase } \
\hline 3 & \text { Decrease } & \text { Increase } \
\hline 4 & \text { Increase } & \text { Decrease } \
\hline
\end{array}$$

Accepted Answer

The SYD method results in higher depreciation in the early years compared to the straight-line method, leading to a lower book value at the time of sale, which increases the gain or decreases the loss.

Question 7

(Appendix 1) 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?

Accepted Answer

The Capital Cost Allowance Method (CCA) used for amortization for Canadian Income Tax purposes is most similar to the declining balance method permitted for financial reporting. Both methods use an accelerated approach in which a higher amount of amortization is recognized in the early years of an asset's life and gradually decreases over time. This is in contrast to straight-line and sum-of-the-years'-digits methods, which spread the cost of an asset evenly over its useful life. While service hours may also be an acceptable method for some assets, it is not as commonly used as the other methods mentioned.

Question 8

Which method of amortization results in periodic amortization expense that may fluctuate from one period to the next,but not necessarily in a steadily upward or downward direction?

Accepted Answer

The output or service hours method of amortization results in periodic amortization expense that may fluctuate based on the actual usage or output of the asset, rather than following a steady or predictable pattern. This method ties the amortization expense directly to the level of activity or service provided by the asset, which can vary from one period to the next.

Question 9

Which amortization method is particularly appropriate where: (a) obsolescence is not the primary factor,(b) actual use can be accounted for,and (c) the service life in units of use can be estimated reliably?

Accepted Answer

The productive output method is particularly appropriate where obsolescence is not the primary factor, actual use can be accounted for, and the service life in units of use can be estimated reliably. This is because this method calculates depreciation based on the actual use of the asset, which makes it an accurate and reliable way to allocate the cost of the asset over its useful life. The other methods listed (sum-of-the-years'-digits, double-declining balance, and straight-line) are not as suitable for situations where actual use can be accounted for and service life can be estimated reliably.

Question 10

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

Accepted Answer

Total amortization cannot exceed depreciable cost, as that would imply that the asset has negative value or has already been fully depreciated. Therefore, there is no such method that permits this situation.

Question 11

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

Accepted Answer

The reserve for plant expansion is not a negative element as it represents funds set aside for future capital expenditures and does not reduce the value of tangible capital assets. Accumulated amortization and depletion, on the other hand, reflect the decrease in value of the related assets over time and are considered negative elements.

Question 12

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

Accepted Answer

The half-year convention is used for both tax and financial accounting purposes.

Question 13

Amortization:

Accepted Answer

Amortization is a method of allocating the cost of an asset (such as property, plant, and equipment) over its useful life. It is not a process of recognizing the decreasing value of an asset or a cash expense. Option D is also incorrect as the expense of $2,000 does not necessarily reflect an increase in liquid funds.

Question 14

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

Accepted Answer

The residual value of an asset can be negative if, upon disposal of the asset, the salvage value is less than what was originally estimated.

Question 15

Which of the following statements is not correct?

Accepted Answer

Amortization accounting is a process of allocation, not valuation. It allocates the cost of intangible assets (such as patents or copyrights) over their useful lives rather than determining their current value.

Question 16

Choose the best description of depreciable cost.

Accepted Answer

Depreciable cost is the amount of cost that can be depreciated over the useful life of an asset. It is calculated as the original cost of the asset less its salvage value. Therefore, option D (Original cost less salvage value) is the best description of depreciable cost.

Question 17

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

Accepted Answer

The service hours and productive output methods of amortization will result in the same amortization expense for a particular year only when the actual usage of the asset in terms of service hours is equal to the expected production output in units or 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. In other words, if the estimates used in both methods are accurate and the asset is used as expected, the two methods should result in the same amortization expense for a particular year. Therefore, choice B is the best answer.

Question 18

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:

Accepted Answer

Amortization calculated using the productive output method varies with the level of output or usage, making it a variable expense. This method ties the amortization expense directly to the amount of production or use in a given period, unlike the other methods listed, which allocate expense based on time rather than usage.

Question 19

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?

Accepted Answer

The minimum book value to be disclosed in the balance sheet for a plant asset, which is expected to be sold for a reasonable amount at the end of its useful life is its salvage value. This is because the salvage value represents the amount of money that the company expects to recover from the asset when it is sold, and this value is considered to be the minimum value that should be disclosed in the balance sheet. The other options (A, B, D) do not properly represent the expected value of the asset at the end of its useful life, and thus are not suitable choices.

Question 20

Which of the following is not an objection to the use of the straight-line method of amortization?

Accepted Answer

This statement is not an objection to the use of the straight-line method, as the purpose of amortization is not to increase earnings, but to allocate the cost of an asset over its useful life. A and B are both valid objections to the straight-line method, as it may not adequately reflect changes in the asset's economic value or revenue-generating capacity. C is also a valid objection, as capital assets may have investment characteristics that the straight-line method does not account for.

Quiz 10: Depreciation,Amortization,and Impairment

In which amortization method is the first year's amortization computed by applying the amortization rate to the total cost of the asset (without reducing it for residual value) ?