ACCY 303 Chapter 11

An accelerated depreciation method is appropriate when the asset's economic usefulness is the same each year.

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.

F

Depreciation is based on the decline in the fair market value of the asset.

F

Inadequacy is the replacement of one asset with another more efficient and economical asset.

F

Normally, companies compute depletion on a straight-line basis.

F

The three factors involved in the depreciation process are the depreciation base, the useful life, and the risk of obsolescence.

F

The units-of-production approach to depreciation is appropriate when depreciation is a function of time instead of activity.

F

A change in estimate should a. result in restatement of prior period statements. b. be handled in current and future periods. c. be handled in future periods only. d. be handled retroactively.

B

Depletion expense a. is usually part of cost of goods sold. b. includes tangible equipment costs in the depletion base. c. excludes intangible development costs from the depletion base. d. excludes restoration costs from the depletion base.

A

For income statement purposes, depreciation is a variable expense if the depreciation method used is a. units-of-production. b. straight-line. c. sum-of-the-years'-digits. d. declining-balance.

A

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

The major difference between the service life of an asset and its physical life is that a. 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. b. physical life is the life of an asset without consideration of salvage value and service life requires the use of salvage value. c. physical life is always longer than service life. d. service life refers to the length of time an asset is of use to its original owner, while physical life refers to how long the asset will be used by all owners.

A

The term "depreciable base," or "depreciation base," as it is used in accounting, refers to a. the total amount to be charged (debited) to expense over an asset's useful life. b. the cost of the asset less the related depreciation recorded to date. c. the estimated market value of the asset at the end of its useful life. d. the acquisition cost of the asset.

A

A principal objection to the straight-line method of depreciation is that it a. provides for the declining productivity of an aging asset. b. ignores variations in the rate of asset use. c. tends to result in a constant rate of return on a diminishing investment base. d. gives smaller periodic write-offs than decreasing charge methods.

B

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 a. recognize an unusual loss for the period. b. include a credit to the equipment accumulated depreciation account. c. include a credit to the equipment account. d. not be made if the equipment is still being used.

B

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

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

A graph is set up with "yearly depreciation expense" on the vertical axis and "time" on the horizontal axis. Assuming linear relationships, how would the graphs for straight-line and sum-of-the-years'-digits depreciation, respectively, be drawn? a. Vertically and sloping down to the right b. Vertically and sloping up to the right c. Horizontally and sloping down to the right d. Horizontally and sloping up to the right

C

A major objective of MACRS for tax depreciation is to a. reduce the amount of depreciation deduction on business firms' tax returns. b. assure that the amount of depreciation for tax and book purposes will be the same. c. help companies achieve a faster write-off of their capital assets. d. require companies to use the actual economic lives of assets in calculating tax depreciation.

C

Each of the following are physical factors affecting depreciation except a. casualties. b. decay. c. obsolescence. d. wear and tear.

C

Of the following costs related to the develop¬ment 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

The computation of depreciation under MACRS differs from the GAAP computation except for a. a mandated tax life, which is generally shorter than the economic life. b. Cost recovery on an accelerated basis. c. the determination of asset cost. d. an assigned salvage value of zero.

C

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

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

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 a. be constant. b. vary with unit sales. c. vary with sales revenue. d. vary with production.

D

The most common method of recording depletion for accounting purposes is the a. percentage depletion method. b. decreasing charge method. c. straight-line method. d. units-of-production method.

D

Under MACRS, which one of the following is not considered in determining depreciation for tax purposes? a. Cost of asset b. Property class c. Half-year convention d. Salvage value

D

Use of the double-declining balance method a. results in a decreasing charge to depreciation expense. b. means salvage value is not deducted in computing the depreciation base. c. means the book value should not be reduced below salvage value. d. all of these answers are correct.

D

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

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

Which of the following is not a difference between the accounting treatment for depreciation and depletion? a. Depletion applies to natural resources while depreciation applies to plant and equipment. b. Depletion refers to the physical exhaustion or consumption of the asset while depreciation refers to the wear, tear, and obsolescence of the asset. c. Many formulas are used in computing depreciation but only one is used to any extent in computing depletion. d. The cost of the asset is the starting point from which computation of the amount of the periodic charge is made to operations for depreciation, but the fair value reassessed each year is the starting point for the periodic charge for depletion.

D

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

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

Changes in estimates are handled prospectively by dividing the asset's book value less any salvage value by the remaining estimated life.

T

Depreciation is a means of cost allocation, not a matter of valuation

T

Depreciation, depletion, and amortization all involve the allocation of the cost of a long-lived asset to expense.

T

Impaired assets held for disposal should be reported at the lower of cost or net realizable value.

T

Intangible development costs and restoration costs are part of the depletion base

T

The cost of an asset less its salvage value is its depreciation base.

T

The declining-balance method does not deduct the salvage value in computing the depreciation base.

T

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.

T

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.

T