On December 31, year 3, Bit Co. had capitalized costs for a
new computer software product with an economic life of five
years. Sales for year 4 were 30% of expected total sales of the
software. At December 31, year 4, the software had a net realizable
value equal to 90% of the capitalized cost. What percentage
of the original capitalized cost should be reported as the net
amount on Bit’s December 31, year 4 balance sheet?
(a) The annual amortization of capitalized software
costs shall be the greater of
1. The ratio of the software’s current sales to its expected
total sales, or
2. The straight-line method over the economic life of the
In this case, the ratio of current to expected total sales is 30%
(given). The annual straight-line rate is 20% per year (1 ÷ economic
life of five years). The 30% amortization should be recorded
in year 4, since it is the higher of the two. The unamortized
cost on the 12/31/Y4 balance sheet should, therefore, be
70% (100% – 30% amortization). Note that the unamortized
cost of capitalized software products must be compared to the
net realizable value of those assets at each balance sheet date.
Any excess of the amortized cost over the net realizable value
must be written off. In this case, the net realizable value (90%)
Module 11: Fixed Assets Multiple-Choice Answers 415
was above the unamortized cost (70%), so no additional writeoff
Which of the following statements is incorrect regarding
(b) Internal-use software is software having the following
characteristics: (1) The software is acquired, internally developed,
or modified solely to meet the entity’s internal needs,
and (2) during the software’s development or modification, no
substantive plan exists to market the software externally.
Which of the following statements is(are) correct regarding
the proper accounting treatment for internal-use software costs?
I. Preliminary costs should be capitalized as incurred.
II. Application and development costs should be capitalized as
(b) Application and development costs create probable
future benefit. Therefore, they should be capitalized as incurred.
However, preliminary costs are similar to research and development
costs and are expensed as incurred, not capitalized.
For companies that prepare financial statements in accordance
with IFRS, plant, property, and equipment should be
valued using which models?
(a) The requirement is to identify the models that may
be used to value plant, property, and equipment. Answer (a) is
correct because IFRS allows the use of the cost model or the
revaluation model for reporting plant, property, and equipment.
Which is true about the revaluation model for valuing plant,
property, and equipment?
(c) The requirement is to identify the true statement
about the revaluation model. Answer (c) is correct because IFRS
does not provide requirements as to the frequency or date of
revaluation of plant, property, and equipment.
When the revaluation model is used for reporting plant,
property, and equipment, the gain or loss should be included in
(c) The requirement is to identify where the gain or loss
should be presented. Answer (c) is correct because when the
revaluation method is used for reporting plant, property, and
equipment under IFRS, any gain or loss is recorded in a revaluation
surplus account which is classified as other comprehensive
Linden Corporation has investment property that is held to
earn rental income. Linden prepares its financial statements in
accordance with IFRS. Linden uses the fair value model for reporting
the investment property. Which of the following is true?
(a) The requirement is to identify the true statement
regarding use of the fair value model. Answer (a) is correct because
the fair value model requires that investment property be
measured at fair value, and any changes in fair value are recognized
in profit or loss of the period.
Under IFRS, when an entity chooses the revaluation model
as its accounting policy for measuring property, plant, and equipment,
which of the following statements is correct?
(a) The requirement is to identify the correct statement
regarding the use of the revaluation model. Answer (a) is correct
because when an asset is revalued, the entire class must be revalued.
Answer (b) is incorrect because the entire class must be
revalued. Answer (c) is incorrect because there are no rules regarding
the frequency of revaluation. Answer (d) is incorrect
because the revaluation surplus is presented in other comprehensive
income, not profit or loss.
On January 1, year 1, an entity acquires for $100,000 a new
piece of machinery with an estimated useful life of 10 years. The
machine has a drum that must be replaced every five years and
costs $20,000 to replace. Continued operation of the machine
requires an inspection every four years after purchase; the inspection
cost is $8,000. The company uses the straight-line method of depreciation. Under IFRS, what is the depreciation expense for
(d) The requirement is to calculate depreciation for the
asset. Answer (d) is correct because IFRS requires each major
component to be depreciated over its respective useful life. The
machinery cost $72,000 ($100,000 – $20,000 – $8,000) would
be depreciated over 10 years. The drum would be depreciated
over 5 years, and the inspection would be depreciated over 4
years. Therefore, depreciation for year 1 would be calculated as
$13,200 [($72,000/10) + ($20,000/5) + ($8,000/4)].
Taylor Company uses IFRS for financial reporting purposes.
Which of the following is true about accounting for the development
costs of the company?
(c) The requirement is to identify the correct statement
regarding accounting for development costs under IFRS. Answer
(c) is correct because development costs can be capitalized only
if six criteria are met.