Depreciation Paper 2

Answer (A) is correct. The units-of-production depreciation method allocates asset cost based on the level of production. As production varies, so will the credit to accumulated depreciation. Consequently, when an asset’s service potential declines with use, the units-of-production method is the most appropriate method.

Answer (C) is correct. Under the revaluation model, if the fair value of an item of property, plant, and equipment can be reliably measured, it must be carried subsequent to initial recognition at a revalued amount. This amount is fair value at the date of the revaluation minus any subsequent accumulated depreciation and impairment losses. The revaluation model is permitted by IFRS, not U.S. GAAP.

Answer (A) is correct.Cash is debited for the amount of the sale proceeds. Machinery and the related accumulated depreciation are eliminated by a credit and a debit, respectively. Because the sale price was less than the carrying amount of the asset on the date of sale, a loss on disposal should be recognized in net income or loss.

Answer (A) is correct. The selling price minus the carrying amount of the machine equals the gain or loss on disposal. The carrying amount equals $205,000 ($700,000 historical cost – $495,000 accumulated depreciation). Thus, the selling price was $280,000 ($205,000 + $75,000 gain).

Answer (D) is correct. The journal entry to record the sale of an item of PPE for cash in excess of its carrying amount should debit the cash account to record the sale proceeds received. Accumulated depreciation should be eliminated by debiting an amount equal to depreciation accumulated up to the start of the current accounting period plus any depreciation that has accumulated between the start of the current period and the date of disposal. Finally, the PPE account should asset. The gain should be recorded as a credit and recognized as income on the income statement.

Answer (B) is correct. The gain on the sale is the difference between the sale proceeds and the carrying amount of the asset (its remaining undepreciated cost). Depreciation must be taken up to the time of sale. Assuming that residual value is $0, annual depreciation is $10,000 ($100,000 ÷ 10 years). Thus, the gain is $25,000 {$80,000 sale proceeds – [$100,000 historical cost – ($10,000 × 4.5 years)]}.

Answer (C) is correct. A long-lived asset (asset group) is impaired when its carrying amount is greater than its fair value. However, a loss equal to this excess is recognized for the impairment only when the carrying amount is not recoverable. The carrying amount is not recoverable when it exceeds the sum of the undiscounted cash flows expected from the use and disposition of the asset (asset group).

Answer (B) is correct. The accumulated depreciation was $400,000 {[($1,000,000 historical cost – $100,000 residual value) ÷ 9 years estimated useful life] × 4 years}, so the carrying amount was $600,000 ($1,000,000 – $400,000). Thus, the loss was $65,000 ($600,000 carrying amount – price).

Correct answer: (D)
Cost, residual value, and service life

Correct answer: (B)
The excess of its cost over residual value.