Asset Retirement Obligations
CPA Financial Accounting and Reporting (FAR) · Learn by Concept
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CPA Financial Accounting and Reporting (FAR) › Asset Retirement Obligations
Which of the following would be included in the journal entry to retire a fixed asset?
A debit to accumulated depreciation
A debit to depreciation expense
A credit to sales revenue
A credit to accumulated depreciation
Explanation
When an asset is retired, the asset value and its related accumulated depreciation are reverse. This means a debit will be booked to accumulated depreciation to clear the account.
Of the following assets, which is an intangible that is subject to a recoverability test when testing for impairment?
Goodwill
R&D costs for a patent
A patent
A trademark with indefinite useful life
Explanation
The recoverability test is only performed on intangible assets with a limited life. A patent generally has a limited life.
Which situation would likely dictate use of units of production depreciation?
Machine which produces products
Land
Building
Truck
Explanation
Land is not depreciated, and a machine which produces products would incur damage, wear and tear, and usage only as it produces goods. Buildings and trucks would be depreciated throughout their lives.
Which of the following is not a common method of asset disposal?
Sale
Scrap
Conversion
Exchange
Explanation
The most common methods of asset disposal are sale, scrap, and exchange.
Which of the following is untrue regarding asset retirement obligations?
A business should recognize the fair value of an asset retirement obligations when it incurs the liability and if it can make a reasonable estimate of its fair value
If the fair value of an asset retirement obligation cannot initially be obtained, the liability can be recorded at a later date when the fair value is available
When estimating the fair value of an asset retirement obligation, a company should use a discounted cash flow model using a rate that factors in market risk
If a company acquires a fixed asset to which an asset retirement obligation is attached, the company should recognize a liability as of the acquisition date
Explanation
Companies do not need to discount cash flows when estimated asset retirement obligations.
Goodwill should be tested for value impairment at which of the following levels under US GAAP?
Each identifiable long term asset
Each acquisition unit
Each reporting unit
Entire business as a whole
Explanation
US GAAP requires that goodwill be tested for impairment at the reporting unit level.