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Chapter 11: Q3ISTQ (page 606)

Which of the following statements is correct?

  1. Both IFRS and GAAP permit revaluation of property, plant, and equipment.
  2. IFRS permits revaluation of property, plant, and equipment but not GAAP.
  3. Both IFRS and GAAP do not permit revaluation of property, plant, and equipment.
  4. GAAP permits revaluation of property, plant, and equipment but not IFRS.

Short Answer

Expert verified

IFRS permits revaluation of property, plant, and equipment but not GAAP. The correct option is option (b).

Step by step solution

01

Meaning of Revaluation

Revaluation funds are set up on a balance sheet to preserve a contingency account linked to other assets. Upon re-evaluation, if the carrying value of the asset changes, a line item will be created.

02

Explaining the correct option

IFRS is a collection of accounting standards produced by the International Accounting Standards Board (IASB), a non-profit organization. It is a collection of globally agreed accounting standards that lays out rules and procedures of accounting.

GAAP is a set of rules, ideas, and principles that are utilized to report a company's financial data. Therefore, option (b), which states that IFRS permits revaluation of property, plant, and equipment but not GAAP, is correct.

03

Explaining the incorrect options

Option (a): Under GAAP, it is only possible for component depreciation, although it is not mandatory, while in IFRS, revaluation of assets is permitted.

Option (c): Revaluation of assets is possible only under IFRS and not in GAAP. IFRS follows accounting standards while GAAP is rule-based.

Option (d): GAAP permits only component depreciation and not revaluation of assets. Revaluation of property, plant, and equipment are permitted in IFRS.

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Most popular questions from this chapter

(Depreciation for Partial Periods鈥擲L, Act., SYD, and Declining-Balance) The cost of equipment purchased by Charleston, Inc., on June 1, 2017, is \(89,000. It is estimated that the machine will have a \)5,000 salvage value at the end of its service life. Its service life is estimated at 7 years, its total working hours are estimated at 42,000, and its total production is estimated at 525,000 units. During 2017, the machine was operated 6,000 hours and produced 55,000 units. During 2018, the machine was operated 5,500 hours and produced 48,000 units.

Instructions Compute depreciation expense on the machine for the year ending December 31, 2017, and the year ending December 31, 2018, using the following methods.

  1. Straight-line.
  2. Units-of-output.
  3. Working hours.
  4. 厂耻尘-辞蹿-迟丑别-测别补谤蝉鈥�-诲颈驳颈迟蝉.
  5. Declining-balance (twice the straight-line rate).

(Depreciation鈥擟onceptual Understanding) Rembrandt Company acquired a plant asset at the beginning of Year 1. The asset has an estimated service life of 5 years. An employee has prepared depreciation schedules for this asset using three different methods to compare the results of using one method with the results of using other methods. You are to assume that the following schedules have been correctly prepared for this asset using (1) the straight-line method, (2) the sum-of-the years鈥�-digits method, and (3) the double-declining-balance method.

Year

Straight-Line

Sum-of-the Years鈥�-Digits

Double-Declining Balance

1

\( 9,000

\) 15,000

\(20,000

2

9,000

12,000

12,000

3

9,000

9,000

7,200

4

9,000

6,000

4,320

5

9,000

3,000

1,480

Total

\)45,000

\(45,000

\)45,000

Instructions

Answer the following questions.

  1. What is the cost of the asset being depreciated?
  2. What amount, if any, was used in the depreciation calculations for the salvage value for this asset?
  3. Which method will produce the highest charge to income in Year 1?
  4. Which method will produce the highest charge to income in Year 4?
  5. Which method will produce the highest book value for the asset at the end of Year 3?
  6. If the asset is sold at the end of Year 3, which method would yield the highest gain (or lowest loss) on disposal of the asset?

(Depreciation Concepts) As a cost accountant for San Francisco Cannery, you have been approached by Phil Perriman, canning room supervisor, about the 2017 costs charged to his department. In particular, he is concerned about the line item 鈥渄epreciation.鈥� Perriman is very proud of the excellent condition of his canning room equipment. He has always been vigilant about keeping all equipment serviced and well oiled. He is sure that the huge charge to depreciation is a mistake; it does not at all reflect the cost of minimal wear and tear that the machines have experienced over the last year. He believes that the charge should be considerably lower.

The machines being depreciated are six automatic canning machines. All were put into use on January 1, 2017. Each cost \(625,000, having a salvage value of \)55,000 and a useful life of 12 years. San Francisco depreciates this and similar assets using double-declining-balance depreciation. Perriman has also pointed out that if you used straight-line depreciation, the charge to his department would not be so great.

Instructions

Write a memo dated January 22, 2017, to Phil Perriman to clear up his misunderstanding of the term 鈥渄epreciation.鈥� Also, calculate year-1 depreciation on all machines using both methods. Explain the theoretical justification for double-declining-balance and why, in the long run, the aggregate charge to depreciation will be the same under both methods.

Identify the factors that are relevant in determining the annual depreciation charge, and explain whether these factors are determined objectively or whether they are based on judgment.

(Depreciation Computations鈥擣our Methods) Robert Parish Corporation purchased a new machine for its assembly process on August 1, 2017. The cost of this machine was \(117,900. The company estimated that the machine would have a salvage value of \)12,900 at the end of its service life. Its life is estimated at 5 years, and its working hours are estimated at 21,000 hours. Year-end is December 31.

Instructions

Compute the depreciation expense under the following methods. Each of the following should be considered unrelated.

  1. Straight-line depreciation for 2017.
  2. Activity method for 2017, assuming that machine usage was 800 hours.
  3. Sum-of-the-years鈥�-digits for 2018.
  4. Double-declining balance for 2018.
See all solutions

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