Test BanK For
Accounting Principles, Volume 2, 10th Canadian Edition Jerry J. Weygandt, Paul D. Kimmel,
Jill E. Mitchell, Valerie Warren, Lori Novak
Chapter 9-18
CHAPTER 9
LONG-LIVED ASSETS
CHAPTER STUDY OBJECTIVES
1. Calculate the cost of property, plant, and equipment. The cost of property, plant, and equipment
includes all costs that are necessary to acquire the asset and make it ready for its intended use. All
costs that benefit future periods (that is, capital expenditures) are included in the cost of the asset.
When applicable, cost also includes asset retirement costs. When multiple assets are purchased in
one transaction, or when an asset has significant components, the cost is allocated to each
individual asset or component using their relative fair values.
2. Apply depreciation methods to property, plant, and equipment. After acquisition, assets are
accounted for using the cost model or the revaluation model. Depreciation is recorded and assets
are carried at cost less accumulated depreciation. Depreciation is the allocation of the cost of a long-
lived asset to expense over its useful life (its service life) in a rational and systematic way.
Depreciation is not a process of valuation and it does not result in an accumulation of cash. There
are three commonly used depreciation methods:
Effect on Annual
Method Depreciation Calculation
Straight-line Constant amount (Cost − residual value) ÷
estimated useful life
(in years)
Diminishing- Diminishing Carrying amount at
balance amount beginning of year ×
diminishing-balance rate
Units-of- Varying (Cost − residual value) ÷
production amount total estimated units-of-
production × actual
activity during the year
Each method results in the same amount of depreciation over the asset’s useful life. Depreciation
expense for income tax purposes is called capital cost allowance (CCA).
3. Explain the factors that cause changes in periodic depreciation and calculate revised depreciation
for property, plant, and equipment. A revision to depreciation will be required if there are (a) capital
expenditures during the asset’s useful life; (b) impairments in the asset’s fair value; (c) changes in
the asset’s fair value when using the revaluation model; and/or (d) changes in the appropriate
,depreciation method, estimated useful life, or residual value. An impairment loss must be recorded
if the recoverable amount is less than the carrying amount. Revisions of periodic depreciation are
made in present and future periods, not retroactively. The new annual depreciation is determined
by using the depreciable amount (carrying amount less the revised residual value), and the
remaining useful life, at the time of the revision.
4. Demonstrate how to account for property, plant, and equipment disposals. The accounting for the
disposal of a piece of property, plant, or equipment through retirement or sale is as follows:
(a) Update any unrecorded depreciation for partial periods since depreciation was last recorded.
(b) Calculate the carrying amount (cost – accumulated depreciation).
(c) Calculate any gain (proceeds > carrying amount) or loss (proceeds < carrying amount) on
disposal.
(d) Remove the asset and accumulated depreciation accounts at the date of disposal. Record the
proceeds received and the gain or loss, if any.
An exchange of assets is recorded as the purchase of a new asset and the sale of an old asset. The
new asset is recorded at the fair value of the asset given up plus any cash paid (or less any cash
received). The fair value of the asset given up is compared with its carrying amount to calculate the
gain or loss. If the fair value of the new asset or the asset given up cannot be determined, the new
long-lived asset is recorded at the carrying amount of the old asset that was given up, plus any cash
paid (or less any cash received).
5. Record natural resource transactions and calculate depletion. The units-of-production method of
depreciation is generally used for natural resources. The depreciable amount per unit is calculated
by dividing the total depreciable amount by the number of units estimated to be in the resource.
The depreciable amount per unit is multiplied by the number of units that have been extracted to
determine the annual depletion. The depletion and any other costs to extract the resource are
recorded as inventory until the resource is sold. At that time, the costs are transferred to cost of
resource sold on the income statement. Revisions to depletion will be required for capital
expenditures during the asset’s useful life, for impairments, and for changes in the total estimated
units of the resource.
6. Identify the basic accounting issues for intangible assets and goodwill. The accounting for tangible
and intangible assets is much the same. Intangible assets are reported at cost, which includes all
expenditures necessary to prepare the asset for its intended use. An intangible asset with a finite
life is amortized over the shorter of its useful life and legal life, usually on a straight-line basis. The
extent of the annual impairment tests depends on whether IFRS or ASPE is followed and whether
the intangible asset had a finite or indefinite life. Intangible assets with indefinite lives and goodwill
are not amortized and are tested at least annually for impairment. Impairment losses on goodwill
are never reversed under both IFRS and ASPE.
7. Illustrate the reporting and analysis of long-lived assets. It is common for property, plant, and
equipment, and natural resources to be combined in financial statements under the heading
“property, plant, and equipment.” Intangible assets with finite and indefinite lives are sometimes
combined under the heading “intangible assets” or are listed separately. Goodwill must be
presented separately. Either on the balance sheet or in the notes, the cost of the major classes of
long-lived assets is presented. Accumulated depreciation (if the asset is depreciable) and carrying
,amount must be disclosed either on the balance sheet or in the notes. The depreciation and
amortization methods and rates, as well as the annual depreciation expense, must also be indicated.
The company’s impairment policy and any impairment losses should be described and reported.
Under IFRS, companies must include a reconciliation of the carrying amount at the beginning and
end of the period for each class of long-lived assets and state whether the cost or revaluation model
is used.
The asset turnover ratio (net sales ÷ average total assets) is one measure that is used by companies
to show how efficiently they are using their assets to generate sales revenue. A second ratio, return
on assets (profit ÷ average total assets), calculates how profitable the company is in terms of using
its assets to generate profit.
TRUE-FALSE STATEMENTS
1. All long-lived assets must be depreciated for accounting purposes.
Answer: False
Bloomcode: Knowledge
Difficulty: Easy
Learning Objective: Calculate the cost of property, plant, and equipment.
Section Reference: Property, Plant, and Equipment
CPA: Financial Reporting
AACSB: Analytic
2. All long-lived assets that are included in property, plant, and equipment must be used in the
operations of the business.
Answer: True
Bloomcode: Knowledge
Difficulty: Easy
Learning Objective: Calculate the cost of property, plant, and equipment.
Section Reference: Property, Plant, and Equipment
CPA: Financial Reporting
AACSB: Analytic
3. If long-lived assets are intended for sale, they are included in property, plant, and equipment.
Answer: False
Bloomcode: Knowledge
Difficulty: Easy
Learning Objective: Calculate the cost of property, plant, and equipment.
Section Reference: Property, Plant, and Equipment
CPA: Financial Reporting
AACSB: Analytic
, 4. If an item of property, plant, and equipment is recognized as an asset, it is probable that the
company will NOT receive economic benefits from the item.
Answer: False
Bloomcode: Knowledge
Difficulty: Easy
Learning Objective: Calculate the cost of property, plant, and equipment.
Section Reference: Property, Plant, and Equipment
CPA: Financial Reporting
AACSB: Analytic
5. Any non-refundable taxes incurred on the acquisition of an asset would be expensed at the time
of acquisition.
Answer: False
Bloomcode: Knowledge
Difficulty: Easy
Learning Objective: Calculate the cost of property, plant, and equipment.
Section Reference: Property, Plant, and Equipment
CPA: Financial Reporting
AACSB: Analytic
6. The expenditures necessary to bring the asset to the location and condition necessary to make it
ready for its intended use would be included in the cost of the asset.
Answer: True
Bloomcode: Knowledge
Difficulty: Easy
Learning Objective: Calculate the cost of property, plant, and equipment.
Section Reference: Property, Plant, and Equipment
CPA: Financial Reporting
AACSB: Analytic
7. Costs that benefit future periods are included in a long-lived asset account, and are called
operating expenses.
Answer: False
Bloomcode: Comprehension
Difficulty: Easy
Learning Objective: Calculate the cost of property, plant, and equipment.
Section Reference: Property, Plant, and Equipment
Accounting Principles, Volume 2, 10th Canadian Edition Jerry J. Weygandt, Paul D. Kimmel,
Jill E. Mitchell, Valerie Warren, Lori Novak
Chapter 9-18
CHAPTER 9
LONG-LIVED ASSETS
CHAPTER STUDY OBJECTIVES
1. Calculate the cost of property, plant, and equipment. The cost of property, plant, and equipment
includes all costs that are necessary to acquire the asset and make it ready for its intended use. All
costs that benefit future periods (that is, capital expenditures) are included in the cost of the asset.
When applicable, cost also includes asset retirement costs. When multiple assets are purchased in
one transaction, or when an asset has significant components, the cost is allocated to each
individual asset or component using their relative fair values.
2. Apply depreciation methods to property, plant, and equipment. After acquisition, assets are
accounted for using the cost model or the revaluation model. Depreciation is recorded and assets
are carried at cost less accumulated depreciation. Depreciation is the allocation of the cost of a long-
lived asset to expense over its useful life (its service life) in a rational and systematic way.
Depreciation is not a process of valuation and it does not result in an accumulation of cash. There
are three commonly used depreciation methods:
Effect on Annual
Method Depreciation Calculation
Straight-line Constant amount (Cost − residual value) ÷
estimated useful life
(in years)
Diminishing- Diminishing Carrying amount at
balance amount beginning of year ×
diminishing-balance rate
Units-of- Varying (Cost − residual value) ÷
production amount total estimated units-of-
production × actual
activity during the year
Each method results in the same amount of depreciation over the asset’s useful life. Depreciation
expense for income tax purposes is called capital cost allowance (CCA).
3. Explain the factors that cause changes in periodic depreciation and calculate revised depreciation
for property, plant, and equipment. A revision to depreciation will be required if there are (a) capital
expenditures during the asset’s useful life; (b) impairments in the asset’s fair value; (c) changes in
the asset’s fair value when using the revaluation model; and/or (d) changes in the appropriate
,depreciation method, estimated useful life, or residual value. An impairment loss must be recorded
if the recoverable amount is less than the carrying amount. Revisions of periodic depreciation are
made in present and future periods, not retroactively. The new annual depreciation is determined
by using the depreciable amount (carrying amount less the revised residual value), and the
remaining useful life, at the time of the revision.
4. Demonstrate how to account for property, plant, and equipment disposals. The accounting for the
disposal of a piece of property, plant, or equipment through retirement or sale is as follows:
(a) Update any unrecorded depreciation for partial periods since depreciation was last recorded.
(b) Calculate the carrying amount (cost – accumulated depreciation).
(c) Calculate any gain (proceeds > carrying amount) or loss (proceeds < carrying amount) on
disposal.
(d) Remove the asset and accumulated depreciation accounts at the date of disposal. Record the
proceeds received and the gain or loss, if any.
An exchange of assets is recorded as the purchase of a new asset and the sale of an old asset. The
new asset is recorded at the fair value of the asset given up plus any cash paid (or less any cash
received). The fair value of the asset given up is compared with its carrying amount to calculate the
gain or loss. If the fair value of the new asset or the asset given up cannot be determined, the new
long-lived asset is recorded at the carrying amount of the old asset that was given up, plus any cash
paid (or less any cash received).
5. Record natural resource transactions and calculate depletion. The units-of-production method of
depreciation is generally used for natural resources. The depreciable amount per unit is calculated
by dividing the total depreciable amount by the number of units estimated to be in the resource.
The depreciable amount per unit is multiplied by the number of units that have been extracted to
determine the annual depletion. The depletion and any other costs to extract the resource are
recorded as inventory until the resource is sold. At that time, the costs are transferred to cost of
resource sold on the income statement. Revisions to depletion will be required for capital
expenditures during the asset’s useful life, for impairments, and for changes in the total estimated
units of the resource.
6. Identify the basic accounting issues for intangible assets and goodwill. The accounting for tangible
and intangible assets is much the same. Intangible assets are reported at cost, which includes all
expenditures necessary to prepare the asset for its intended use. An intangible asset with a finite
life is amortized over the shorter of its useful life and legal life, usually on a straight-line basis. The
extent of the annual impairment tests depends on whether IFRS or ASPE is followed and whether
the intangible asset had a finite or indefinite life. Intangible assets with indefinite lives and goodwill
are not amortized and are tested at least annually for impairment. Impairment losses on goodwill
are never reversed under both IFRS and ASPE.
7. Illustrate the reporting and analysis of long-lived assets. It is common for property, plant, and
equipment, and natural resources to be combined in financial statements under the heading
“property, plant, and equipment.” Intangible assets with finite and indefinite lives are sometimes
combined under the heading “intangible assets” or are listed separately. Goodwill must be
presented separately. Either on the balance sheet or in the notes, the cost of the major classes of
long-lived assets is presented. Accumulated depreciation (if the asset is depreciable) and carrying
,amount must be disclosed either on the balance sheet or in the notes. The depreciation and
amortization methods and rates, as well as the annual depreciation expense, must also be indicated.
The company’s impairment policy and any impairment losses should be described and reported.
Under IFRS, companies must include a reconciliation of the carrying amount at the beginning and
end of the period for each class of long-lived assets and state whether the cost or revaluation model
is used.
The asset turnover ratio (net sales ÷ average total assets) is one measure that is used by companies
to show how efficiently they are using their assets to generate sales revenue. A second ratio, return
on assets (profit ÷ average total assets), calculates how profitable the company is in terms of using
its assets to generate profit.
TRUE-FALSE STATEMENTS
1. All long-lived assets must be depreciated for accounting purposes.
Answer: False
Bloomcode: Knowledge
Difficulty: Easy
Learning Objective: Calculate the cost of property, plant, and equipment.
Section Reference: Property, Plant, and Equipment
CPA: Financial Reporting
AACSB: Analytic
2. All long-lived assets that are included in property, plant, and equipment must be used in the
operations of the business.
Answer: True
Bloomcode: Knowledge
Difficulty: Easy
Learning Objective: Calculate the cost of property, plant, and equipment.
Section Reference: Property, Plant, and Equipment
CPA: Financial Reporting
AACSB: Analytic
3. If long-lived assets are intended for sale, they are included in property, plant, and equipment.
Answer: False
Bloomcode: Knowledge
Difficulty: Easy
Learning Objective: Calculate the cost of property, plant, and equipment.
Section Reference: Property, Plant, and Equipment
CPA: Financial Reporting
AACSB: Analytic
, 4. If an item of property, plant, and equipment is recognized as an asset, it is probable that the
company will NOT receive economic benefits from the item.
Answer: False
Bloomcode: Knowledge
Difficulty: Easy
Learning Objective: Calculate the cost of property, plant, and equipment.
Section Reference: Property, Plant, and Equipment
CPA: Financial Reporting
AACSB: Analytic
5. Any non-refundable taxes incurred on the acquisition of an asset would be expensed at the time
of acquisition.
Answer: False
Bloomcode: Knowledge
Difficulty: Easy
Learning Objective: Calculate the cost of property, plant, and equipment.
Section Reference: Property, Plant, and Equipment
CPA: Financial Reporting
AACSB: Analytic
6. The expenditures necessary to bring the asset to the location and condition necessary to make it
ready for its intended use would be included in the cost of the asset.
Answer: True
Bloomcode: Knowledge
Difficulty: Easy
Learning Objective: Calculate the cost of property, plant, and equipment.
Section Reference: Property, Plant, and Equipment
CPA: Financial Reporting
AACSB: Analytic
7. Costs that benefit future periods are included in a long-lived asset account, and are called
operating expenses.
Answer: False
Bloomcode: Comprehension
Difficulty: Easy
Learning Objective: Calculate the cost of property, plant, and equipment.
Section Reference: Property, Plant, and Equipment
