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Exam 11: Operational Assets: Utilization and Impairment

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Question 51

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A change in the estimated recoverable units used to compute depletion requires retroactive adjustments to the financial statements.

A) True
B) False

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Question 52

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Eckland Manufacturing Co. purchased equipment on January 1, 2007, at a cost of $90,000. Depreciation for 2007 and 2008 was based on an estimated eight-year life and $2,000 estimated residual value. In 2009, Eckland revised its estimate and now believes the equipment will have a total service life of only six years, while the residual value remains the same. Required: Compute depreciation for 2009 and 2010.

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Question 53

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On September 30, 2009, Sternberg Company sold office equipment for $12,000. The equipment was purchased on March 31, 2006, for $24,000. The asset was being depreciated over a five-year life using the straight-line method, with depreciation based on months in service. No residual value was anticipated. Required: Prepare the journal entries to record 2009 depreciation and the sale of the equipment.

Depreciation (to the nearest dollar) for 2010, using sum-of-the-years' digits, would be:

Depreciation:

In testing for recoverability of an operational asset, an impairment loss is required if the:

Activity-based methods of depreciation are appropriate for assets whose service life is a function of use rather than time.

On February 20, 2009, Genoa Mining Company incurred costs of $3,600,000 to acquire and prepare to extract an estimated 4,000,000 tons of mineral deposits. 450,000 tons of ore were mined in 2009. At the beginning of 2010, Genoa geologists estimated that 3,900,000 tons of ore still remained. 700,000 tons of ore were mined in 2010. Required: Compute depletion for 2009 and 2010.

Using the double-declining balance method, depreciation for 2009 and book value at December 31, 2009, would be:

The physical life of a depreciable asset sets the lower limit of its service life.

In its 2007 annual report to shareholders, Martin Marietta Materials, Inc. included the following in its financial statement footnotes: NOTE F: PROPERTY, PLANT AND EQUIPMENT, NET Finally, the company stated the following among its accounting policies: "Depletion of mineral deposits is calculated over proven and probable reserves by the units-of-production method." Required: Compute the percentage of proven and probable reserves of mineral deposits depleted in 2007.

Briefly explain how a change in depreciation method is accounted for.

The factors that need to be determined to compute depreciation are an asset's:

Using the sum-of-the years'-digits method, depreciation for 2010 and book value at December 31, 2010, would be

Briefly explain the disclosures that are required relative to depreciable assets.

Required: Compute depreciation for 2009 and 2010 and the book value of the spooler at December 31, 2009 and 2010, assuming the double-declining-balance method is used.

MACRS (Modified accelerated cost recovery system) depreciation is equivalent to sum-of-the-years' digits depreciation.

Required: Compute depreciation for 2009 and 2010 and the book value of the drill press at December 31, 2009 and 2010, assuming the double-declining-balance method is used.

Accounting for impairment losses:

Gonzaga Company has used the double-declining-balance method for depreciation since it started business in 2005. At the beginning of 2009, the company decided to change to the straight-line method. Depreciation as reported and what it would have been reported if the company had always used straight-line is listed below: Required: What journal entry, if any, should Gonzaga make to record the effect of the accounting change (ignore income taxes)? Explain. $\begin{array}{rrr}\text { Year }& \text { Straight-Line } & \text { DDB } \\2005 & \$ 32,000 & \$ 55,000 \\2006 & 35,000 & 50,000 \\2007 & 39,000 & 58,000 \\2008 & 39,000 & 48,000\end{array}$