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Chapter 11 – Exercises & Cases

Multiple Choice Questions​

  1. Which of the following is a tangible asset? a) Patent b) Goodwill c) Equipment d) Trademark Answer: c) Equipment is a tangible (physical) asset.

  2. Depreciation is: a) A valuation process b) An allocation process c) A cash expense d) Only for tax purposes Answer: b) Depreciation allocates cost over useful life.

  3. Which depreciation method results in the same amount each year? a) Declining balance b) Straight-line c) Units-of-production d) Sum-of-years-digits Answer: b) Straight-line method results in constant annual depreciation.

  4. Which PCN account is used for equipment? a) 220000 b) 223000 c) 224000 d) 225000

    Answer: b) 223000 is Equipment and Machinery (Matériel et Outillage).

  5. Goodwill is: a) Amortized over 40 years b) Amortized over 10 years c) Not amortized d) Expensed immediately Answer: c) Goodwill has indefinite life and is not amortized, but tested for impairment.

  6. If an asset costs €10,000, has a 5-year life, and €1,000 salvage value, straight-line depreciation is: a) €2,000 per year b) €1,800 per year c) €1,000 per year d) €10,000 in year 1 Answer: b) (€10,000 - €1,000) ÷ 5 = €1,800 per year.

  7. Accumulated Depreciation is: a) An expense account b) A contra-asset account c) A liability account d) An equity account Answer: b) Accumulated Depreciation is a contra-asset account.

  8. Which should be capitalized? a) Routine maintenance b) Small office supplies c) Equipment purchase with 5-year life d) Monthly utilities Answer: c) Equipment with long-term benefit should be capitalized.

  9. Intangible assets with finite life are: a) Not amortized b) Amortized over useful life c) Expensed immediately d) Only depreciated Answer: b) Finite-life intangibles are amortized over useful life.

  10. In Luxembourg, tax depreciation: a) Must match book depreciation b) Can differ from book depreciation c) Is not allowed d) Is optional Answer: b) Tax depreciation can differ from book depreciation in Luxembourg.

Questions​

  1. Explain the difference between tangible and intangible assets. Give examples of each.

  2. When should a cost be capitalized versus expensed? What factors determine this?

  3. Compare straight-line and declining balance depreciation methods. When might each be appropriate?

  4. How is depreciation calculated using the straight-line method? What information is needed?

  5. Explain the difference between amortization and depreciation. When is each used?

  6. What are the PCN Class 2 account classifications for fixed assets in Luxembourg?

  7. How does goodwill differ from other intangible assets in terms of accounting treatment?

  8. What is impairment? When should assets be tested for impairment?

  9. How should the disposal of a fixed asset be accounted for? What accounts are involved?

  10. How do Luxembourg tax depreciation rules affect financial reporting?

Problems Set A​

Problem A-1: Straight-Line Depreciation

Calculate annual depreciation using straight-line method:

  • Equipment: €20,000
  • Useful Life: 10 years
  • Salvage Value: €2,000

Problem A-2: Declining Balance Depreciation

Calculate depreciation for first 3 years using double-declining balance:

  • Equipment: €20,000
  • Useful Life: 10 years
  • (No salvage value for declining balance)

Problem A-3: Capitalize vs. Expense

Classify each as capitalize or expense: a) Equipment purchase: €5,000 b) Delivery cost: €200 c) Installation: €500 d) Routine maintenance: €100 e) Major renovation extending life: €3,000

Problem A-4: Asset Disposal

Record disposal of equipment:

  • Original Cost: €15,000
  • Accumulated Depreciation: €12,000
  • Sale Price: €4,000

Problem A-5: Intangible Asset Amortization

Calculate annual amortization:

  • Patent: €60,000
  • Useful Life: 15 years

Problems Set B​

Problem B-1: Complete Depreciation Schedule

Prepare 5-year depreciation schedule using straight-line:

  • Equipment: €50,000
  • Useful Life: 5 years
  • Salvage Value: €5,000

Show annual depreciation, accumulated depreciation, and book value.

Problem B-2: Partial Year Depreciation

Equipment purchased July 1 for €30,000, 5-year life, €3,000 salvage value. Calculate depreciation for first year (pro-rata).

Problem B-3: Asset Exchange

Trade in old equipment (cost €10,000, accumulated depreciation €7,000) for new equipment (price €15,000). Pay €10,000 cash. Record the exchange.

Problem B-4: Impairment

Equipment with book value of €8,000 is determined to have recoverable amount of €5,000. Record impairment loss.

Comprehensive Problem​

Comprehensive Problem 11: Complete Fixed Asset Accounting

Le Petit Bistro has the following fixed asset transactions during 2024:

January 15: Purchase kitchen equipment €25,000 (excluding VAT), VAT 17%, 10-year life, €2,500 salvage value.

March 1: Purchase delivery vehicle €30,000 (excluding VAT), VAT 17%, 5-year life, €5,000 salvage value.

June 1: Purchase computer equipment €5,000 (excluding VAT), VAT 17%, 3-year life, €500 salvage value.

September 1: Major renovation to dining area €15,000 (excluding VAT), VAT 17%, extends building life by 10 years.

December 31: Sell old equipment (original cost €10,000, accumulated depreciation €8,000) for €1,500.

Required:

  1. Record all asset purchases with proper PCN accounts and VAT handling.

  2. Calculate depreciation for 2024 using straight-line method (pro-rata for partial years).

  3. Record all depreciation entries.

  4. Record disposal of old equipment.

  5. Show fixed assets on balance sheet (December 31, 2024).

  6. Explain Luxembourg tax depreciation implications.

  7. Explain PCN Class 2 account classifications used.

Cases​

Case 11-1: Capitalize or Expense?

Marie is renovating her restaurant and has various costs:

  • New kitchen equipment: €20,000
  • Delivery and installation: €2,000
  • Painting walls: €3,000
  • New light fixtures: €5,000
  • Routine equipment maintenance: €500
  • Training staff on new equipment: €1,000

Questions:

  1. Which costs should be capitalized? Which should be expensed?
  2. What PCN accounts are involved?
  3. How should VAT be handled?
  4. What depreciation should be used?

Case 11-2: Depreciation Method Choice

A business is choosing between straight-line and declining balance depreciation for new equipment (€50,000, 5-year life).

Questions:

  1. What are the advantages and disadvantages of each method?
  2. How do Luxembourg tax rules affect the choice?
  3. What are the implications for financial statements?
  4. Which method would you recommend and why?

Solutions are published in supplementary/instructor/solutions/chapter_11_solutions.md.