ch 11
T/F: Plant assets should be written down (below cost) when their market value has declined temporarily.
false
T/F: The accounting profession has developed specifically recommended procedures for recording appraisal increases with respect to plant assets.
false
T/F: The asset turnover is computed by dividing net sales by ending total assets.
false
T/F: The revision of prior periods' depreciation estimates would be disclosed on the retained earnings statement.
false
T/F: The sum-of-the-years'-digits method of depreciation ignores salvage value in the computation of an asset's depreciable base.
false
T/F: The three factors involved in the depreciation process are the depreciation base, the useful life, and the risk of obsolescence.
false
T/F: The units-of-production approach to depreciation is appropriate when depreciation is a function of time instead of activity.
false
T/F: When using the double-declining balance method of determining depreciation, a declining percentage is applied to a constant book value.
false
T/F: Normally, companies compute depletion on a straight-line basis.
falsle
Depreciation is normally computed on the basis of the nearest
full month and to the nearest dollar.
A major objective of MACRS for tax depreciation is to
help companies achieve a faster write-off of their capital assets.
A principal objection to the straight-line method of depreciation is that it
ignores variations in the rate of asset use
Hart Corporation owns machinery with a book value of $570,000. It is estimated that the machinery will generate future cash flows of $600,000. The machinery has a fair value of $420,000. Hart should recognize a loss on impairment of
$ -0-.
In January, 2020, Yager Corporation purchased a mineral mine for $5,100,000 with removable ore estimated by geological surveys at 2,000,000 tons. The property has an estimated value of $300,000 after the ore has been extracted. The company incurred $1,500,000 of development costs preparing the mine for production. During 2020, 600,000 tons were removed and 480,000 tons were sold. What is the amount of depletion that Yager should expense for 2020?
$1,512,000
On January 2, 2018, Wang Company acquired equipment to be used in its manufacturing operations. The equipment has an estimated useful life of 10 years and an estimated salvage value of $45,000. The depreciation applicable to this equipment was $210,000 for 2021, computed under the sum-of-the-years'-digits method. What was the acquisition cost of the equipment?
$1,695,000
On January 1, 2014, Forrest Company purchased equipment at a cost of $390,000. The equipment was estimated to have a salvage value of $12,000 and it is being depreciated over eight years under the sum-of-the-years'-digits method. What should be the charge for depreciation of this equipment for the year ended December 31, 2021?
$10,500
Halltown Company purchased a depreciable asset for $600,000. The estimated salvage value is $40,000, and the estimated useful life is 8 years. The double-declining balance method will be used for depreciation. What is the depreciation expense for the second year on this asset?
$112,500
Slotkin Products purchased a machine for $65,000 on July 1, 2020. The company intends to depreciate it over 8 years using the double-declining balance method. Salvage value is $5,000. Depreciation for 2021 to the closest dollar is
$14,219
Regis Inc. bought a machine on January 1, 2011 for $800,000. The machine had an expected life of 20 years and was expected to have a salvage value of $80,000. On July 1, 2021, the company reviewed the potential of the machine and determined that its future net cash flows totaled $400,000 and its fair value was $280,000. If the company does not plan to dispose of it, what should Regis record as an impairment loss on July 1, 2021?
$142,000
Falcon Company purchased a depreciable asset for $175,000. The estimated salvage value is $14,000, and the estimated useful life is 10 years. The straight-line method will be used for depreciation. What is the depreciation base of this asset?
$161,000
Grover Corporation purchased a truck at the beginning of 2020 for $109,200. The truck is estimated to have a salvage value of $4,200 and a useful life of 120,000 miles. It was driven 21,000 miles in 2020 and 29,000 miles in 2021. What is the depreciation expense for 2020?
$18,375
In March, 2020, Mallory Mines Co. purchased a coal mine for $8,000,000. Removable coal is estimated at 1,500,000 tons. Mallory is required to restore the land at an estimated cost of $960,000, and the land should have a value of $840,000. The company incurred $2,000,000 of development costs preparing the mine for production. During 2020, 360,000 tons were removed and 240,000 tons were sold. The total amount of depletion that Mallory should record for 2020 is
$2,428,800
On January 1, 2020, Garden Company purchased a new machine for $4,200,000. The new machine has an estimated useful life of nine years and the salvage value was estimated to be $150,000. Depreciation was computed using the sum-of-the-years'-digits method. What amount should be shown in Garden's balance sheet at December 31, 2021, net of accumulated depreciation, for this machine?
$2,670,000
A plant asset with a cost of $540,000, estimated life of 5 years, and residual value of $90,000, is depreciated by the straight-line method. This asset is sold for $380,000 at the end of the second year of use. The gain or loss on the disposal (indicate by "G" or "L") is
$20,000
King Corporation owns machinery with a book value of $760,000. It is estimated that the machinery will generate future cash flows of $700,000. The machinery has a fair value of $560,000. King should recognize a loss on impairment of
$200,000.
Falcon Corporation purchased a depreciable asset for $840,000 on January 1, 2018. The estimated salvage value is $84,000, and the estimated total useful life is 9 years. The straight-line method is used for depreciation. In 2021, Falcon changed its estimates to a total useful life of 5 years with a salvage value of $140,000. What is 2021 depreciation expense?
$224,000
Grover Corporation purchased a truck at the beginning of 2020 for $109,200. The truck is estimated to have a salvage value of $4,200 and a useful life of 120,000 miles. It was driven 21,000 miles in 2020 and 29,000 miles in 2021. What is the depreciation expense for 2021?
$25,375
On April 1, 2019, Verlin Co. purchased new machinery for $450,000. The machinery has an estimated useful life of five years, and depreciation is computed by the sum-of-the- years'-digits method. The accumulated depreciation on this machinery at March 31, 2021, should be
$270,000.
Henry Company purchased a depreciable asset for $360,000. The estimated salvage value is $33,000, and the estimated useful life is 10 years. The straight-line method will be used for depreciation. What is the depreciation base of this asset?
$327,000
Rock Company purchased a depreciable asset for $600,000 on April 1, 2018. The estimated salvage value is $60,000, and the estimated total useful life is 5 years. The straight-line method is used for depreciation. What is the balance in accumulated depreciation on May 1, 2021 when the asset is sold?
$333,000
Barton Corporation acquires a coal mine at a cost of $1,800,000. Intangible development costs total $360,000. After extraction has occurred, Barton must restore the property (estimated fair value of the obligation is $180,000), after which it can be sold for $210,000. Barton estimates that 6,000 tons of coal can be extracted. What is the amount of depletion per ton?
$355
Klayton Corporation purchased factory equipment that was installed and put into service January 2, 2020, at a total cost of $150,000. Salvage value was estimated at $10,000. The equipment is being depreciated over four years using the double-declining balance method. For the year 2021, Klayton should record depreciation expense on this equipment of
$37,500
On July 1, 2020, Nowton Co. purchased machinery for $240,000. Salvage value was estimated to be $10,000. The machinery will be depreciated over ten years using the double-declining balance method. If depreciation is computed on the basis of the nearest full month, Nowton should record depreciation expense for 2021 on this machinery of
$43,200
During 2020, Logan Corporation acquired a mineral mine for $4,000,000 of which $400,000 was ascribed to land value after the mineral has been removed. Geological surveys have indicated that 10 million units of the mineral could be extracted. During 2020, 1, 500,000 units were extracted and 1,250,000 units were sold. What is the amount of depletion expensed for 2020?
$450,000.
Ramos Co. purchased machinery that was installed and ready for use on January 3, 2020, at a total cost of $230,000. Salvage value was estimated at $30,000. The machinery will be depreciated over five years using the double-declining balance method. For the year 2021, Ramos should record depreciation expense on this machinery of
$55,200.
Jasmine Company purchased a depreciable asset for $375,000. The estimated salvage value is $25,000, and the estimated useful life is 8 years. The double-declining balance method will be used for depreciation. What is the depreciation expense for the second year on this asset?
$70,313
Carson Company purchased a depreciable asset for $560,000. The estimated salvage value is $28,000, and the estimated useful life is 10,000 hours. Carson used the asset for 1,500 hours in the current year. The activity method will be used for depreciation. What is the depreciation expense on this asset in the current year?
$79,800
Slotkin Products purchased a machine for $65,000 on July 1, 2020. The company intends to depreciate it over 8 years using the double-declining balance method. Salvage value is $5,000. Depreciation for 2020 is
$8,125
A plant asset purchased for $440,000 at the beginning of the year has an estimated life of 5 years and a residual value of $40,000. Depreciation for the third year, determined by the sum-of-the-years'-digits method is
$80,000
A plant asset purchased for $500,000 has an estimated life of 10 years and a residual value of $25,000. Depreciation for the second year of use, determined by the declining-balance method at twice the straight-line rate is
$80,000
On September 19, 2020, Markham Co. purchased machinery for $475,000. Salvage value was estimated to be $25,000. The machinery will be depreciated over eight years using the sum-of-the-years'-digits method. If depreciation is computed on the basis of the nearest full month, Markham should record depreciation expense for 2021 on this machinery of
$96,875.
For 2020, Hammer Company reports beginning of the year total assets of $900,000, end of the year total assets of $1,100,000, net sales of $1,000,000, and net income of $200,000. Hammer's 2020 asset turnover is
1.00 times
In 2020, Bargain Shop reported net income of $5.7 billion, net sales of $175 billion, and average total assets of $75 billion. What is Bargain shop's asset turnover?
2.33 times.
For 2020, Hammer Company reports beginning of the year total assets of $900,000, end of the year total assets of $1,100,000, net sales of $1,000,000, and net income of $200,000. The return on assets for Hammer in 2020 is
20.0%.
In 2020, Bargain Shop reported net income of $5.7 billion, net sales of $175 billion, and average total assets of $75 billion. What is Bargain shop's return on assets?
7.6%
McDonald Company acquired machinery on January 1, 2015 which it depreciated under the straight-line method with an estimated life of fifteen years and no salvage value. On January 1, 2020, McDonald estimated that the remaining life of this machinery was six years with no salvage value. How should this change be accounted for by McDonald?
By setting future annual depreciation equal to one-sixth of the book value on January 1, 2020
The return on total assets is computed by dividing
Net income by average total assets.
Torque Co. has equipment with a carrying amount of $2,400,000. The expected future net cash flows from the equipment are $2,445,000, and its fair value is $2,040,000. The equipment is expected to be used in operations in t
No impairment should be reported.
Under MACRS, which one of the following is not considered in determining depreciation for tax purposes?
Salvage value
A plant asset has a cost of $40,000 and a salvage value of $10,000. The asset has a three-year life. If depreciation in the third year amounted to $5,000, which depreciation method was used?
Sum-of-the-years'-digits
The activity method of depreciation a. is a variable charge approach. b. assumes that depreciation is a function of the passage of time. c. conceptually associates cost in terms of input measures. d. all of these answers are correct.
a. is a variable charge approach.
Which of the following disclosures is not required in the financial statements regarding depreciation? a. Accumulated depreciation, either by major classes of depreciable assets or in total. b. Details demonstrating how depreciation was calculated. c. Depreciation expense for the period. d. Balances of major classes of depreciable assets, by nature and function.
b. Details demonstrating how depreciation was calculated.
Which of the following principles best describes the conceptual rationale for the methods of matching depreciation expense with revenues? a. Associating cause and effect b. Systematic and rational allocation c. Immediate recognition d. Partial recognition
b. Systematic and rational allocation
Which of the following most accurately reflects the concept of depreciation as used in accounting? a. The process of charging the decline in value of an economic resource to income in the period in which the benefit occurred. b. The process of allocating the cost of tangible assets to expense in a systematic and rational manner to those periods expected to benefit from the use of the asset. c. A method of allocating asset cost to an expense account in a manner which closely matches the physical deterioration of the tangible asset involved. d. An accounting concept that allocates the portion of an asset used up during the year to the contra asset account for the purpose of properly recording the fair market value of tangible assets.
b. The process of allocating the cost of tangible assets to expense in a systematic and rational manner to those periods expected to benefit from the use of the asset.
A change in estimate should
be handled in current and future periods
Of the following costs related to the development of natural resources, which one is not a part of depletion cost? a. Acquisition cost of the natural resource deposit b. Exploration costs c. Tangible equipment costs associated with machinery used to extract the natural resource d. Intangible development costs such as drilling costs, tunnels, and shafts
c. Tangible equipment costs associated with machinery used to extract the natural resource
Use of the sum-of-the-years'-digits method a. results in salvage value being ignored. b. means the denominator is the years remaining at the beginning of the year. c. means the book value should not be reduced below salvage value. d. all of these answers are correct.
c. means the book value should not be reduced below salvage value.
Each of the following are physical factors affecting depreciation except a. casualties. b. decay. c. obsolescence. d. wear and tear
c. obsolescence.
Worley Truck Rental uses the group depreciation method for its fleet of trucks. When it retires one of its trucks and receives cash from a salvage company, the carrying value of property, plant, and equipment will be decreased by the
cash proceeds received.
Which of the following is true of depreciation accounting? a. It is not a matter of valuation. b. It is part of the matching of revenues and expenses. c. It is the process of cost allocation. d. All of these answers are correct.
d. All of these answers are correct.
Which of following is not a similarity in the accounting treatment for depreciation and depletion? a. The estimated life is based on economic or productive life. b. Assets subject to either are reported in the same classification on the balance sheet. c. The rates may be changed upon revision of the estimated productive life used in the original rate computations. d. Both depreciation and depletion are based on time.
d. Both depreciation and depletion are based on time.
Which of the following is a realistic assumption of the straight-line method of depreciation? a. The asset's economic usefulness is the same each year. b. The repair and maintenance expense is essentially the same each period. c. The rate of return analysis is enhanced using the straight-line method. d. Depreciation is a function of time rather than a function of usage.
d. Depreciation is a function of time rather than a function of usage.
Which of the following is not one of the basic questions that must be answered before the amount of depreciation charge can be computed? a. What is the depreciation base to use for the asset? b. What is the asset's useful life? c. What method of cost apportionment is best for this asset? d.What product or service is the asset related to?
d. What product or service is the asset related to?
Economic factors that shorten the service life of an asset include a. obsolescence. b. supersession. c. inadequacy. d. all of these answers are correct.
d. all of these answers are correct.
T/F: Inadequacy is the replacement of one asset with another more efficient and economical asset.
false
Use of the double-declining balance method a. results in a decreasing charge to depreciation expense each year. b. requires that salvage value is not deducted in computing the depreciation base. c. requires that the book value not be reduced below salvage value. d. all of these answers are correct.
d. all of these answers are correct.
In 2013, Jarrett Company purchased a tract of land as a possible future plant site. In January, 2021, valuable sulphur deposits were discovered on adjoining property and Jarrett Company immediately began explorations on its property. In December, 2021, after incurring $480,000 in exploration costs, which were accumulated in an expense account, Jarrett discovered sulphur deposits appraised at $2,700,000 more than the value of the land. To record the discovery of the deposits, Jarrett should
debit $480,000 to an asset account.
When depreciation is computed for partial periods under a decreasing charge depreciation method, it is necessary to
determine depreciation expense for the full year and then prorate the expense between the two periods involved.
Norton, Inc. purchased equipment in 2019 at a cost of $900,000. Two years later it became apparent to Norton, Inc. that this equipment had suffered an impairment of value. In early 2021, the book value of the asset is $585,000 and it is estimated that the fair value is now only $360,000. The entry to record the impairment is
dr. Loss on Impairment of Equipment 225,000 cr. Accumulated Depreciation—Equipment 225,000
Each year a company has been investing an increasingly greater amount in machinery. Since there is a large number of small items with relatively similar useful lives, the company has been applying straight-line depreciation at a uniform rate to the machinery as a group. The ratio of this group's total accumulated depreciation to the total cost of the machinery has been steadily increasing and now stands at .75 to 1.00. The most likely explanation for this increasing ratio is the
estimated average life of the machinery is less than the actual average useful life.
T/F: Accounting depreciation is computed by determining the change in the market value of a company's plant assets during the period under review.
false
T/F: An accelerated depreciation method is appropriate when the asset's economic usefulness is the same each year.
false
T/F: An impairment loss is the amount by which the carrying amount of the asset exceeds the sum of the expected future net cash flows from the use of that asset.
false
T/F: Companies frequently use the composite approach when the assets are similar in nature and have approximately the same useful lives.
false
T/F: Depreciation is based on the decline in the fair market value of the asset.
false
Lamar Printing Company determines that a printing press used in its operations has suffered a permanent impairment in value because of technological changes. An entry to record the impairment should
include a credit to the equipment accumulated depreciation account.
Depletion expense
is usually reported as cost of goods sold when the resource is sold.
The asset turnover is computed by dividing
net sales by average total assets.
The major difference between the service life of an asset and its physical life is that
service life refers to the time an asset will be used by a company and physical life refers to how long the asset will last.
A general description of the depreciation methods applicable to major classes of depreciable assets
should be included in corporate financial statements or notes thereto.
A depreciable asset has an estimated 15% salvage value. At the end of its estimated useful life, the accumulated depreciation would equal the original cost of the asset under which of the following depreciation methods? (Y/N: Straight-line, Productive Output)
straight line: no productive output: no
The book value of a plant asset is
the asset's acquisition cost less the total related depreciation recorded to date.
The term "depreciable base," or "depreciation base," as it is used in accounting, refers to
the total amount to be charged (debited) to expense over an asset's useful life.
T/F: . The methods of depreciation based upon output assume that obsolescence will not significantly affect the usefulness of the asset.
true
T/F: An asset's cost minus its accumulated depreciation equals its book value.
true
T/F: Changes in estimates are handled prospectively by dividing the asset's book value less any salvage value by the remaining estimated life.
true
T/F: Depreciation is a means of cost allocation, not a matter of valuation
true
T/F: Depreciation, depletion, and amortization all involve the allocation of the cost of a long lived asset to expense.
true
T/F: Gains or losses on disposals of assets do not distort periodic income when the group or composite method is used to compute depreciation.
true
T/F: Impaired assets held for disposal should be reported at the lower of cost or net realizable value
true
T/F: Intangible development costs and restoration costs are part of the depletion base
true
T/F: The book value of plant assets initially declines more rapidly under decreasing-charge methods than under the straight-line method.
true
T/F: The cost of an asset less its salvage value is its depreciation base.
true
T/F: The declining-balance method does not deduct the salvage value in computing the depreciation base
true
T/F: The first step in determining whether an impairment has occurred is to estimate the future net cash flows expected from the use of that asset and its eventual disposition
true
T/F: The major objection to the straight-line method is that it assumes the asset's economic usefulness and maintenance repair expense are the same each year
true
T/F: The profit margin on sales is a measure for analyzing the use of property, plant, and equipment
true
T/F: The straight-line method of depreciation is based on the assumption that depreciation expense can be regarded as a constant function of time.
true
For income statement purposes, depreciation is a variable expense if the depreciation method used is
units-of-production
Usually, companies compute depletion for accounting purposes using a
units-of-production method.
If an industrial firm uses the units-of-production method for computing depreciation on its only plant asset, factory machinery, the credit to accumulated depreciation from period to period during the life of the firm will
vary with production
