ACCT - 3311 Chapter 11

T/F Depletion is normally calculated using the straight-line method.

False (Depletion is normally calculated using the units of production method, not the straight-line method.)

Lundy Company purchased a depreciable asset for $99,000 on January 1. The estimated salvage value is $18,000, and the estimated useful life is 9 years. The double-declining balance method will be used for depreciation. What is the depreciation expense for the second year on this asset?

16988 (The double-declining balance rate is 100%/9 x 2 = 22%. The first year's depreciation is (22% of book value of asset first of year - Year 1, $99,000) $21,780. The second year's depreciation is [22% of (book value of asset first of year - Year 2, $99,000 - $21,780)] or $16,988.)

Chattanooga Company purchased a depreciable asset for $80,000 on January 1, 2015. The estimated salvage value is $20,000, and the estimated useful life is 5 years. The straight-line method is used for depreciation. On January 1, 2017, the company made a capital expenditure of $16,000 for an addition to the asset. What is depreciation expense for 2017? (Assume that salvage value remains unchanged) a-$17,333 b-$14,400 c-$24,000 d-$25,333

17333 (Cost of asset, $80,000 -Estimated salvage value, $20,000) /Estimated useful life, 5 years, equals depreciation expense of $12,000/ year for 2015 and 2016, or a total of $24,000 of Accumulated Depreciation. To compute the revised depreciation, calculate the new book value: Cost of asset, $80,000 - Accumulated Depreciation at January, 2017, $24,000 + Additional capital expenditures, $16,000 = New book value, $72,000 less original salvage value of $20,000, and divide by the remaining useful life of 3 years to get depreciation expense of $17,333.)

Pharoah Company purchased a hot tub for $10,790 on January 1, 2016. Straight-line depreciation is used, based on a 6-year life and a $1,730 salvage value. In 2018, the estimates are revised. Pharoah now feels the hot tub will be used until December 31, 2020, when it can be sold for $810. Compute the 2018 depreciation.

2320 (Annual depreciation expense: = ($10,790 - $1,730)/6 = $1,510 Book value, 1/1/18: = $10,790 - (2 × $1,510) = $7,770 Depreciation expense, 2018: = ($7,770 - $810)/3 = $2,320)

Skysong Inc. purchased land at a price of $32,700. Closing costs were $1,840. An old building was removed at a cost of $11,600. What amount should be recorded as the cost of the land?

46140

T/F The sum-of-the-years digits method does not deduct the salvage value in computing the depreciation base.

False

Dixon Company purchased a depreciable asset for $32,000. The estimated salvage value is $4,000, and the estimated useful life is 4 years. The double-declining balance method will be used for depreciation. What is the depreciation expense for the second year on this asset?

8000 (The double-declining balance rate is 100%/4 x 2 = 50%. The first year's depreciation is (50% of book value of asset first of year - Year 1, $32,000) $16,000. The second year's depreciation is [50% of book value of asset first of year - Year 2, ($32,000 - $16,000)] or $8,000.)

T/F Obsolescence is the replacement of one asset with another more efficient and economical asset.

False (The replacement of one asset with another more efficient and economical asset is termed supersession, not obsolescence.)

T/F The major limitation of the straight-line method is that it is inappropriate in situations in which depreciation is a function of time instead of activity.

False (This is a major limitation of the activity method. It is inappropriate in situations in which depreciation is a function of time instead of activity.)

T/F Total depreciation over an asset's life cannot exceed an amount equal to cost minus estimated salvage value.

True

Mains Corporation owns equipment with a cost of $290,000 and accumulated depreciation at December 31, 2017 of $150,000. It is estimated that he machinery will generate future cash flows of $165,000. The machinery has a fair value of $115,000. Mains should recognize a loss on impairment of a-$0. b-$15,000. c-$25,000. d-$35,000.

a-$0. (To determine if an impairment has occurred, the first step is to apply the recoverability test. If the sum of the expected future net cash flows of the long-lived asset is less than the carrying amount of the asset, then an impairment has occurred. No impairment loss is recognized because the asset does not fail the recoverability test: expected future cash flows of $165,000 exceed the $140,000 ($290,000 - $150,000) book value of the asset by $25,000.)

Which of the following is not true of depreciation accounting? a-Depreciation lowers the book value of the asset as it ages and its fair value declines. b-Depreciation matches expenses against revenues over the periods which benefit from the asset's use. c-Depreciation is a process of cost allocation. d-Tangible assets with limited lives are depreciated.

a-Depreciation lowers the book value of the asset as it ages and its fair value declines.

The cost of manufacturing equipment would include all of the following except: a-cost of training the equipment operator. b-freight costs. c-installation costs. d-purchase price reduced by any discount taken.

a-cost of training the equipment operator.

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-is usually part of cost of goods sold.

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-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.

Cambodian Import Company purchased a depreciable asset for $160,000 on April 1, 2014. The estimated salvage value is $40,000, and the estimated useful life is 5 years. The straight-line method is used for depreciation. What is the balance in accumulated depreciation on March 1, 2017 when the asset is sold? a-$66,000 b-$70,000 c-$72,000 d-$186,667

b-$70,000 (Asset cost, $160,000 - Salvage value, $40,000) / 60 months results in a monthly depreciation of $2,000. For 35 months (April 1, 2014 - March 1. 2017) the accumulated depreciation is $70,000 (35 months x $2,000).

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 (Depreciation is a systematic and rational allocation of costs to revenues. It does not associate cause and effect, or immediate or partial recognition for matching depreciation expense with revenues.)

A principal objection to the straight-line method of depreciation is that it a-provides for the declining productivity of an aging asset. b-assumes that the asset's economic usefulness is the same each year. 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-assumes that the asset's economic usefulness is the same each year.

A depreciation method that is used when a collection of assets is heterogeneous and the assets have different useful lives is the: a-combination method. b-composite method. c-hybrid method. d-group method.

b-composite method.

Erie Corporation owns machinery with a book value of $2,200,000. It is estimated that the machinery will generate future cash flows of $1,995,000. The machinery has a fair value of $1,915,000. The journal entry to record the impairment loss will a-record an extraordinary loss of $80,000. b-increase the asset's Accumulated Depreciation account by $285,000. c-reduce income from continuing operations by $205,000. d-include a $285,000 credit to the asset account.

b-increase the asset's Accumulated Depreciation account by $285,000. (The impairment loss of $285,000 (book value of $2,200,000 less the fair value of $1,915,000) is recorded with a debit to an ordinary loss account and a credit to Accumulated Depreciation. This entry would increase the asset's Accumulated Depreciation account by $285,000.)

In computing partial-year depreciation, depreciation is normally computed on the basis of: a-the nearest fraction of a year. b-the nearest full month. c-a half year's depreciation in the period of acquisition and disposal. d-a full year's depreciation in the period of acquisition and none in the year of disposal.

b-the nearest full month.

All of the following are economic factors related to depreciation except: a-inadequacy. b-obsolescence. c-supersession. d-wear and tear.

d-wear and tear.

An impairment of property, plant, or equipment has occurred if a-the estimated salvage value is less than the actual proceeds received on disposal. b-the sum of the expected future net cash flows is less than the asset's carrying value. c-the revised estimated useful life is less than the original estimated useful life. d-the expected future cash outflows exceeds the asset's carrying value.

b-the sum of the expected future net cash flows is less than the asset's carrying value.

Which of the following is not a major characteristic of a plant asset? a-Possesses physical substance b-Yields services over a number of years c-Acquired for resale d-Acquired for use

c-Acquired for resale

Which of the following depreciation methods is not based on the passage of time? a-Declining-balance. b-Sum-of-the-years'-digits. c-Activity. d-Straight-line.

c-Activity.

Which one of the following statements regarding revision of depreciation rates is incorrect? a-No entry is made at the time a revision of depreciation rates occurs. b-Opening balances are not adjusted when a change in estimate occurs. c-Changes in estimate should be handled in the current period only. d-Depreciation is computing by dividing the remaining book value less any salvage value by the remaining estimated life.

c-Changes in estimate should be handled in the current period only.

Which of the following statements is correct? a-Both IFRS and GAAP do not permit revaluation of property, plant, and equipment. b-Both IFRS and GAAP permit revaluation of property, plant, and equipment. c-IFRS permits revaluation of property, plant, and equipment but not GAAP. d-GAAP permits revaluation of property, plant, and equipment but not IFRS.

c-IFRS permits revaluation of property, plant, and equipment but not GAAP.

When is the restoration of an impairment loss permitted? a-On assets held for use. b-None of the answers are correct. c-On assets being held for disposal. d-On all tangible assets whether held for use or disposal.

c-On assets being held for disposal. (Assets being held for disposal are subject to continuous revaluation; therefore, the restoration of an impairment loss is acceptable as long as it does not exceed the amount of the original loss. A company can write-up or write-down an asset held for disposal in future periods as long as the carrying value after the write-up never exceeds the carrying amount of the asset before the impairment.)

Which one of the following is not an accelerated depreciation method? a-Sum-of-the years' digits method. b-Double-declining-balance method. c-Straight-line method. d-Declining balance method.

c-Straight-line method.

An asset impairment occurs when the asset's carrying amount exceeds the: a-asset's book value. b-asset's fair value. c-expected future net cash flows. d-present value of expected future net cash flows.

c-expected future net cash flows.

Ignoring income tax effects, accelerated depreciation methods can a-generate funds for the earlier replacement of fixed assets. b-decrease funds provided by operations. c-offset the effect of increasing repair and maintenance costs as the asset ages. d-decrease the fixed asset turnover ratio.

c-offset the effect of increasing repair and maintenance costs as the asset ages. (The accelerated methods provide a constant cost because the depreciation charge is lower in the later periods at the time when repair and maintenance are often higher.)

When an asset being depreciated under the group method is disposed of, any resulting gain or loss is: a-recorded as an ordinary gain. b-recorded as an extraordinary gain. c-recorded in the Accumulated Depreciation account. d-recorded in the Depreciation Expense account.

c-recorded in the Accumulated Depreciation account.

Unless otherwise stipulated, depreciation is normally computed on the basis of: a-a half-year's depreciation in the period of acquisition and in the period of disposal. b-a full year's depreciation in the period of acquisition, none in the period of disposal. c-the nearest full month. d-the nearest fraction of a year.

c-the nearest full month.

Flannery Corporation owns machinery with a book value of $520,000. It is estimated that the machinery will generate future cash flows of $465,000. The machinery has a fair value of $415,000. Florence should recognize a loss on impairment of a-$0. b-$50,000. c-$55,000. d-$105,000.

d-$105,000.

Antigua Company purchased a depreciable asset for $45,000 on October 1, 2015. The estimated salvage value is $9,000, and the estimated useful life is 6 years. The straight-line method is used for depreciation. What is the book value on July 1, 2017 when the asset is sold? a-$10,500 b-$15,750 c-$25,500 d-$34,500

d-$34,500 (Asset cost, $45,000 - Salvage value, $9,000) / Useful life, 72 months results in a monthly depreciation of $500. After 21 months (October 1, 2015 - July 1, 2017), the balance in accumulated depreciation is $10,500 (21 months x $500), and the book value of the asset is $34,500 (Asset cost, $45,000 - Accumulated Depreciation, $10,500).

Lebanon Corporation owns equipment with a cost of $320,000 and accumulated depreciation at December 31, 2017 of $120,000. It is estimated that the machinery will generate future cash flows of $175,000. The machinery has a fair value of $155,000. If Lebanon uses IFRS, the company should recognize a loss on impairment of a-$0. b-$25,000. c-$35,000. d-$45,000.

d-$45,000. (IFRS does not use the first-stage recoverability test. The impairment loss would be the $45,000 difference between the asset's book value of $200,000 ($320,000 - $120,000) and its fair value of $155,000.)

For 2017, Lassiter Company reports beginning of the year total assets of $900,000, end of the year total assets of $1,100,000, net sales of $1,250,000, and net income of $250,000. Lassiter's 2017 asset turnover ratio is a-.23 times. b-.25 times. c-1.14 times. d-1.25 times.

d-1.25 times.

Which of the following is not a physical factor related to depreciation? a-Wear and tear. b-Casualties. c-Decay. d-Obsolescence.

d-Obsolescence.

Under IFRS, when is the recovery of an impairment loss on a tangible asset permitted? a-On assets held for use. b-On assets that have been that have already been disposed. c-On assets being held for disposal. d-On all tangible assets whether held for use or disposal.

d-On all tangible assets whether held for use or disposal. (Under IFRS, the recovery of an impairment loss is acceptable for all tangible assets as long as it does not exceed the amount of the original loss.)

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

d-Salvage value (MACRS considers the cost of the asset, the property recovery class and a half-year convention but assumes a salvage value of zero.)

Which of the following is not a way in which MACRS differs from GAAP depreciation? a-Assigned salvage value of zero. b-Estimated life is mandated by tax law. c-Cost recovery is accelerated. d-Useful life must be shorter than legal life.

d-Useful life must be shorter than legal life. (MACRs differs from GAAP in that it assigns a salvage value of zero, mandates the estimated useful life and allows for accelerated cost recovery.)

The total cost of natural resources includes all of the following except: a-exploration costs. b-intangible development costs. c-restoration costs. d-all of the options are included in the total cost.

d-all of the options are included in the total cost.

Economic factors that shorten the service life of an asset include a-obsolescence. b-supersession. c-inadequacy. d-all of these answer choices are correct.

d-all of these answer choices are correct.

Natural resources include all of the following except: a-petroleum. b-timber. c-minerals. d-land improvements.

d-land improvements.

The depreciable base (cost) of an asset is its original cost: a-plus accumulated depreciation. b-less accumulated depreciation. c-plus salvage value. d-less salvage value.

d-less salvage value.

For the composite method, the composite a-rate is the total cost divided by the total annual depreciation. b-rate is the total annual depreciation divided by the total depreciable cost. c-life is the total cost divided by the total annual depreciation. d-life is the total depreciable cost divided by the total annual depreciation.

d-life is the total depreciable cost divided by the total annual depreciation.

The return on assets is computed by dividing: a-net sales by ending total assets. b-net sales by average total assets. c-net income by ending total assets. d-net income by average total assets.

d-net income by average total assets.

Property, plant, and equipment includes a-deposits on machinery not yet received. b-idle equipment awaiting sale. c-land held for possible use as a future plant site. d-none of these answer choices would be classified as Property, plant, and equipment.

d-none of these answer choices would be classified as Property, plant, and equipment.

Reserve Recognition Accounting a-is presently the generally accepted accounting method for financial reporting of oil and gas reserves. b-is a historical cost method similar to the full cost approach and the successful efforts approach. c-is used for reporting of oil and gas reserves for federal income tax purposes. d-requires estimates of future production costs, the appropriate discount rate, and the expected selling price of oil and gas reserves.

d-requires estimates of future production costs, the appropriate discount rate, and the expected selling price of oil and gas reserves.

A general description of the depreciation methods applicable to major classes of depreciable assets a-is not a current practice in financial reporting. b-is not essential to a fair presentation of financial position. c-is needed in financial reporting when company policy differs from income tax policy. d-should be included in corporate financial statements or notes thereto.

d-should be included in corporate financial statements or notes thereto.

Sage Hill Inc. owns equipment that cost $594,000 and has accumulated depreciation of $154,000. The expected future net cash flows from the use of the asset are expected to be $392,000. The fair value of the equipment is $339,000. Prepare the journal entry, if any, to record the impairment loss.

loss on Impairment 101,000 Accumulated Depreciation-E 101,000 (Recoverability test: Future net cash flows ($392,000) < Carrying amount ($440,000 [594,000 - 154,000]); therefore, the asset has been impaired. Accumulated Depreciation-Equipment = ($440,000 - $339,000) = $101,000)