Question 1

The assets of the Aerospace Inc. (a separately incorporated entity fully owned subsidiary of ABC Transport Inc.) showed the following asset carrying values on December 31st, 2013 (in millions):$\begin{array}{|l|l|} \hline \text { Cash } & \$ 100 \ \hline \text { Accounts Receivable } & \$ 20 \ \hline \text { Inventories } & \$ 10 \ \hline \text { Property. Plant \& Equipment (net) } & \$ 200 \ \hline \text { Patents (net) } & \$ 20 \ \hline \text { Goodwill } & \$ 75 \ \hline & \ \hline \text { Total } & \$ 425 \ \hline \end{array}$ On December 31st, 2013, the fair values of the assets listed above were as follows: $\begin{array}{|l|l|} \hline \text { Cash } & \$ 100 \ \hline \text { Accounts Receivable } & \$ 15 \ \hline \text { Inventories } & \$ 25 \ \hline \text { Property. Plant \& Equipment (net) } & \$ 120 \ \hline \text { Patents (net) } & \$ 60 \ \hline & \ \hline \text { Total } & \$ 320 \ \hline \end{array}$ Both ABC and Aerospace Inc. adhere to IFRS. -Given the information provided above, what would be the carrying value of Aerospace Inc's Goodwill on January 1^st, 2014?

Accepted Answer

The carrying value of Goodwill is calculated as the difference between the carrying value of the net assets and their fair value. The carrying value of net assets is $425 million, and the fair value is $320 million. The difference is $105 million, which means the Goodwill is impaired by $105 million, reducing its carrying value to nil.

Question 2

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 method uses a rate that measures the relationship between the asset's output and its total service potential. The rate is multiplied by the output achieved during the current period to arrive at the period's depreciation expense. This method is suitable for assets whose useful lives are more directly related to their output than to the passage of time, such as factory equipment or vehicles.

Question 3

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

Accepted Answer

Straight-line amortization assumes that the service value of an asset declines primarily over time, regardless of the amount of use or maintenance policies. This is because the asset will eventually wear out or become obsolete due to the passage of time.

Question 4

All of the following amortization methods take into account residual value except:

Accepted Answer

The declining balance method of amortization does not take into account the residual value in its calculation. It applies a constant rate of depreciation to the depreciable base (cost minus salvage value) each year, but the calculation of the depreciation expense itself does not directly factor in the residual value.

Question 5

The assets of the Aerospace Inc. (a separately incorporated entity fully owned subsidiary of ABC Transport Inc.) showed the following asset carrying values on December 31st, 2013 (in millions):$\begin{array}{|l|l|} \hline \text { Cash } & \$ 100 \ \hline \text { Accounts Receivable } & \$ 20 \ \hline \text { Inventories } & \$ 10 \ \hline \text { Property. Plant \& Equipment (net) } & \$ 200 \ \hline \text { Patents (net) } & \$ 20 \ \hline \text { Goodwill } & \$ 75 \ \hline & \ \hline \text { Total } & \$ 425 \ \hline \end{array}$ On December 31st, 2013, the fair values of the assets listed above were as follows: $\begin{array}{|l|l|} \hline \text { Cash } & \$ 100 \ \hline \text { Accounts Receivable } & \$ 15 \ \hline \text { Inventories } & \$ 25 \ \hline \text { Property. Plant \& Equipment (net) } & \$ 120 \ \hline \text { Patents (net) } & \$ 60 \ \hline & \ \hline \text { Total } & \$ 320 \ \hline \end{array}$ Both ABC and Aerospace Inc. adhere to IFRS. -Given the information provided above, what would be the carrying value of Aerospace Inc's Property, Plant and Equipment on January 1^st, 2014?

Accepted Answer

The answer of The assets of the Aerospace Inc. (a...

Question 6

ABC Aerospace Inc. adheres to IFRS and applies component accounting to its major long-lived asset categories. Accordingly, the following data pertain to the company's fleet of test aircraft as at December 31, 2013 (in millions $): $$\begin{array} { | l | l | l | l | } 
\hline \text { Category } & \text { Cost } & \text { Accum ulated Depreciation } & \text { Net Book Value } \
\hline \text { Avionics } & \$ 100 & \$ 48 & \$ 52 \
\hline \text { Fuselage \& Wings } & \$ 200 & \$ 120 & \$ 80 \
\hline \text { Aircraft E ngines } & \$ 20 & \$ 16 & \$ 4 \
\hline
\end{array}$$ Additional information includes the following: - The avionics have a salvage value $2 and a remaining useful life of ten years and are depreciated on a straight-line basis.
- Both the fuselage and wings and aircraft engines are depreciated at a declining rate of 25%.
Assuming there were no acquisitions or disposals made, compute the depreciation expense for 2014 (in millions $). Round your answers to the nearest whole dollar.

Accepted Answer

The depreciation expense for 2014 can be calculated as follows:- Avionics: Straight-line depreciation = (Cost - Salvage value) / Useful life = ($100 - $2) / 10 = $9.8 ≈ $10 million.- Fuselage & Wings: Declining balance depreciation = Net book value * Depreciation rate = $80 * 25% = $20 million.- Aircraft Engines: Declining balance depreciation = Net book value * Depreciation rate = $4 * 25% = $1 million.Total depreciation expense for 2014 = $10 + $20 + $1 = $31 million.

Question 7

The assets of the Aerospace Inc. (a separately incorporated entity fully owned subsidiary of ABC Transport Inc.) showed the following asset carrying values on December 31st, 2013 (in millions):$\begin{array}{|l|l|}
\hline \text { Cash } & \$ 100 \
\hline \text { Accounts Receivable } & \$ 20 \
\hline \text { Inventories } & \$ 10 \
\hline \text { Property. Plant \& Equipment (net) } & \$ 200 \
\hline \text { Patents (net) } & \$ 20 \
\hline \text { Goodwill } & \$ 75 \
\hline & \
\hline \text { Total } & \$ 425 \
\hline
\end{array}$
On December 31st, 2013, the fair values of the assets listed above were as follows:
$\begin{array}{|l|l|}
\hline \text { Cash } & \$ 100 \
\hline \text { Accounts Receivable } & \$ 15 \
\hline \text { Inventories } & \$ 25 \
\hline \text { Property. Plant \& Equipment (net) } & \$ 120 \
\hline \text { Patents (net) } & \$ 60 \
\hline & \
\hline \text { Total } & \$ 320 \
\hline
\end{array}$
Both ABC and Aerospace Inc. adhere to IFRS.

-Has the aerospace division experienced impairment? If so, by how much?

Accepted Answer

The total carrying value of assets is $425 million, while the total fair value is $320 million, indicating an impairment loss of $105 million.

Question 8

The assets of the Aerospace Inc. (a separately incorporated entity fully owned subsidiary of ABC Transport Inc.) showed the following asset carrying values on December 31st, 2013 (in millions):$\begin{array}{|l|l|} \hline \text { Cash } & \$ 100 \ \hline \text { Accounts Receivable } & \$ 20 \ \hline \text { Inventories } & \$ 10 \ \hline \text { Property. Plant \& Equipment (net) } & \$ 200 \ \hline \text { Patents (net) } & \$ 20 \ \hline \text { Goodwill } & \$ 75 \ \hline & \ \hline \text { Total } & \$ 425 \ \hline \end{array}$ On December 31st, 2013, the fair values of the assets listed above were as follows: $\begin{array}{|l|l|} \hline \text { Cash } & \$ 100 \ \hline \text { Accounts Receivable } & \$ 15 \ \hline \text { Inventories } & \$ 25 \ \hline \text { Property. Plant \& Equipment (net) } & \$ 120 \ \hline \text { Patents (net) } & \$ 60 \ \hline & \ \hline \text { Total } & \$ 320 \ \hline \end{array}$ Both ABC and Aerospace Inc. adhere to IFRS. -Given the information provided above, what would be the carrying value of Aerospace Inc's Patents on January 1^st, 2014?

Accepted Answer

Under IFRS, if the fair value of an asset is less than its carrying amount, an impairment loss is recognized to reduce the carrying amount to its fair value. The carrying value of Patents on December 31st, 2013, is $20 million, and its fair value is $60 million. There is no need for an impairment as the fair value is higher than the carrying amount. Therefore, the carrying value remains unchanged at $20 million, but none of the provided options accurately reflects this. Given the options, the closest correct approach would be to maintain the original carrying value, but since that option isn't provided, it appears there might be a misunderstanding in the question setup or a mistake in the options given.

Question 9

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

Accepted Answer

Gains or losses upon the retirement of individual asset units are not recognized when the assets are depreciated under the group system. This method involves grouping assets with similar lives and depreciating them as a single asset, without tracking individual asset disposals.

Question 10

Which of the following amortization methods produces the highest amortization expense in the first year of life of an asset that cost $10,000, has an estimated useful life of four years, and an estimated residual value of $1,500?

Accepted Answer

The declining balance method accelerates depreciation, resulting in higher amortization expenses in the early years compared to other methods.

Question 11

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? $\begin{array}{|l|l|l|}
\hline &\text { Gain } & \text { Loss } \
\hline1& \text { No effect } & \text { No effect } \
\hline 2&\text { Increase } & \text { Increase } \
\hline 3&\text { Decrease } & \text { ncrease } \
\hline4& \text { nncrease } & \text { Decrease } \
\hline
\end{array}$

Accepted Answer

The SYD method accelerates depreciation, resulting in a higher accumulated depreciation and lower book value in the early years compared to the straight-line method. This leads to a higher gain or lower loss on sale.

Question 12

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

Accepted Answer

Option D is not a valid objection to the use of the straight-line method of amortization. The other options are valid objections that may be raised against using this method of depreciation. Option A highlights the mismatch between revenue and expense, Option B talks about obsolescence not being factored in, and Option C argues that the method does not account for investment characteristics. However, Option D is not a valid argument as the straight-line method does not necessarily result in lower earnings.

Question 13

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 14

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 15

Under which of the following amortization systems is expense recognized only in the final year an asset is used?

Accepted Answer

Under the Replacement amortization system, expense is recognized only in the final year an asset is used, when it is replaced. The other options (Group, Inventory/appraisal, Composite) allocate expenses over the useful life of the asset.

Question 16

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 amortization expense based on actual usage or production of the asset. Therefore, the amount recognized as amortization expense will vary from period to period based on the level of usage or production.

Question 17

Amortization expense is the difference between the current realizable value (in current condition) and the original cost of the asset with the:

Accepted Answer

The answer of Amortization expense is the difference between the...

Question 18

Which of the following categories of long-lived assets may or may not be amortized?

Accepted Answer

Intangible assets may or may not be amortized depending on their useful life. Investment property, biological assets, and goodwill typically are not amortized, but are subject to impairment testing.

Question 19

ABC Aerospace Inc. adheres to IFRS and applies component accounting to its major long-lived asset categories. Accordingly, the following data pertain to the company's fleet of test aircraft as at December 31, 2013 (in millions $): $\begin{array}{|l|l|l|l|} \hline \text { Category } & \text { Cost } & \text { Accumulated Depreciation } & \text { Net Book Value } \ \hline \text { Avionics } & \$ 100 & \$ 48 & \$ 52 \ \hline \text { Fuselage \& Wing }& \$ 200 & \$ 120 & \$ 80 \ \hline \text { Aircraft Engines } & \$ 20 & \$ 16 & \$ 4 \ \hline \end{array}$ Additional information includes the following: - The avionics have a salvage value $2 and a remaining useful life of ten years and are depreciated on a straight-line basis. - Both the fuselage and wings and aircraft engines are depreciated at a declining rate of 25%. On July 1^st, 2014, the aircraft's engines were all disposed of for $1.5 million. On that same date, new engines were purchased in the amount of $10 million with a useful life of 20 years and no salvage value. Determine the gain or loss on disposal of the old aircraft engines.

Accepted Answer

The answer of ABC Aerospace Inc. adheres to IFRS and...

Question 20

ABC Aerospace Inc. adheres to IFRS and applies component accounting to its major long-lived asset categories. Accordingly, the following data pertain to the company's fleet of test aircraft as at December 31, 2013 (in millions $): $\begin{array}{|l|l|l|l|} \hline \text { Category } & \text { Cost } & \text { Accumulated Depreciation } & \text { Net Book Value } \ \hline \text { Avionics } & \$ 100 & \$ 48 & \$ 52 \ \hline \text { Fuselage \& Wing } & \$ 200 & \$ 120 & \$ 80 \ \hline \text { Aircraft Engines } & \$ 20 & \$ 16 & \$ 4 \ \hline \end{array}$ Additional information includes the following: The avionics have a salvage value $2 and a remaining useful life of ten years and are depreciated on a straight-line basis. Both the fuselage and wings and aircraft engines are depreciated at a declining rate of 25%. On July 1^st, 2014, the aircraft's engines were all disposed of for $1.5 million. On that same date, new engines were purchased in the amount of $10 million with a useful life of 20 years and no salvage value. The new engines are to be depreciated on a straight-line basis. What is the carrying value of ABC's aircraft engines on December 31, 2014?

Accepted Answer

The carrying value of the new aircraft engines on December 31, 2014, is calculated by first determining the depreciation expense for the half-year period (since the engines were purchased on July 1, 2014) and then subtracting this expense from the cost of the new engines. The annual depreciation expense for the new engines is $10 million / 20 years = $0.5 million. For half a year, this amounts to $0.25 million. Therefore, the carrying value is $10 million - $0.25 million = $9.75 million.

Quiz 10: Depreciation, Amortization, and Impairment