15) If an intangible asset has a legal life of eight years but contractually the

Question

15) If an intangible asset has a legal life of eight years but contractually the usefulness is limited to six years, a company will amortize the cost over: A) Eight years B) Six years. C) Seven years D) Either six or eight years is allowed 16) Accounting for a change in the estimated service life of equipment: A) Is handled prospectively B) Requires retroactive restatement of prior years financial statements. C) Requires a prior period adjustment. D) Is handled currently as a change in accounting principle. 17) Herman Apparel has purchased equipment on January 1, 2015, for $560,000. In 2015-2017, Herman depreciated the asset on a straight-line basis with an estimated useful life of eight years and a $80,000 residual value. In 2018, Herman has started to change its business strategy and now believes that the equipment will be used for only another two years (five years total) but does not believe the residual value has changed. What depreciation would Herman record for the year 2018 on this equipment? A) S150,000. B) $175,000. C) S124,000 D) $96,000. 18) Recognition of impairment for property, plant, and equipment is required if book value exceeds A) Fair value. B) Present value of expected cash flows. C) Undiscounted expected cash flows. D) Accumulated depreciation. 19) Accounting for impairment losses: A) Involves a two-step process for recoverability and measurement. B) Applies only to depreciable assets C) Applies only to assets with finite lives. D) All of these answer choices are correct 20) According to International Financial Reporting Standards (IFRS), the impairment loss for property, plant, and equipment is the difference between book value and: A) The undiscounted sum of estimated future cash flows. B) The present value of future cash flows. C) Fair value less costs to sell. D) The higher of the present value of estimated future cash flows and the fair value less costs to sell.

Explanation / Answer

Q15: Option B is correct. Useful life will be 6 years

Q16: Option A is correct. Change in accounting estimates are handled prospectively

Q17: As per initial estimates, depreciation for first 3 years would be (560,000-80,000)/8, i.e. 480,000/8=60,000. Therefore, for 1st 3 years, depreciation would be 180,000. Net book value would be (560,000-180,000), i.e. 380,000. Residual value remains the same. Therefore, depreciable value now becomes 300,000 (380,000-80,000). Further useful life is 2 years. Therefore, depreciation in 2018 would be 150,000 (300,000/2). Therefore, option A is correct.

Q18: Option B is correct

Q19: Option A is correct

Q20: Option D is correct. Refer IAS 36 on impairment.

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