chapter 7b

Other terms used for an activity-based depreciation method are:

units of output method units of production method

The allocation of the cost of a tangible fixed asset is referred to as _____. whereas the allocation of the cost of an intangible asset is referred to as _______.

depreciation; amortization

At the beginning of year 1, Valerie Corp. purchases equipment for $10,000. The equipment has a residual value of $4,000 and an expected service life of 4 years. What is straight-line depreciation for year 1?

$1,500 Reason: ($10,000 - 4,000)/4 years = $1,500 per year

The estimated use the company expects to obtain from an asset before disposing of it is referred to as the _______ life of the asset.

service

Formula for straight line depreciation

(cost-residual value)/useful life

the following does not differ among the different depreciation methods

Total depreciation recognized over the asset's service life.

Recording depreciation results in the allocation of the cost of a long-term asset to the years during which the asset provides

value or revenue

Which items are considered changes in estimates that would be treated on a prospective basis in the current period and future periods?

Change in service life of an asset Change in residual value of an asset

Which statement is true about the straight-line method of depreciation?

It allocates an equal amount of depreciation to each year the asset is used.

the following long-lived assets would not be depreciated

Land

Units of production or units of output are alternative terms for the ____ _____ depreciation method.

activity based

The original cost of an asset minus accumulated depreciation

book value

The original cost of the asset less the accumulated depreciation is the _____ _______ of the asset.

book value

The accumulated depreciation account is classified as a(n)

contra asset.

The formula to calculate the depreciation for the units-of-production method or activity-based depreciation, is ((cost - residual value)/total estimated production) x

current-year activity or production

The depreciation method that allocates an equal amount of the depreciable base to each year of the asset's service life is the

straight-line method.

The depreciable cost is

the cost of an asset minus its estimated residual value

Straight-line deprecation is calculated as the depreciable cost divided by

the estimated service life of the asset.

Depreciation is a process of cost ________ and not a process of valuation.

allocation

For accounting purposes, depreciation is

an allocation of a cost of an asset.

The allocation of the cost of a tangible asset over its service life is referred to as

depreciation

Depreciation is a valuation method for property and equipment. (True false question.)

false Reason: Depreciation is a process of cost allocation, not valuation.

A change in accounting estimate requires a company to account for the change

in the current and future years

When we recognize depreciation, we allocate a portion of the asset's cost to each year in which the asset

provides benefits to the company.

An estimated residual value ______ the total amount of depreciation recorded over an asset's service life.

reduces

On July 1, year 1, Smith Corp. purchased equipment for $200,000. The equipment has an expected service life of 10 years with no residual value. Smith uses the straight-line method of depreciation. The partial year depreciation for year 1 is

$10,000 Reason: $200,000/10 years = $20,000 per year x 1/2 year = $10,000 depreciation expense in year 1.

Blake uses the activity-based depreciation method. Blake purchases equipment for $100,000 and expects to use the equipment for 40,000 machine hours. The machine has a residual value of $20,000. The depreciation rate is

$2.00 per machine hour. Reason: ($100,000 - 20,000)/40,000 machine hours = $2.00 per machine hour.

On January 1, 2021, Pritchett Corporation purchased equipment for $50,000. The equipment had a five-year life with a $10,000 residual value. Pritchett uses the straight-line depreciation method. What is the book value of the equipment on January 1, 2024?

$26,000 Reason: Depreciation expense is ($50,000 - 10,000)/5 = $8,000 per year. $50,000 less accumulated depreciation of $24,000 = $26,000.

Cray uses the activity-based depreciation method. Cray purchases equipment for $210,000 and expects to use the equipment for 60,000 machine hours. The machine has a residual value of $30,000. The depreciation rate is

$3.00 per machine hour. Reason: $210,000 - $30,000 = $180,000/60,000 machine hours = $3.00 per machine hour.

On October 1, year 1, Kirby Corp. purchased equipment for $100,000. The equipment has an expected service life of 5 years with no residual value. Kirby uses the straight-line method of depreciation. The partial year depreciation for year 1 is

$5,000 Reason: $100,000/5 years = $20,000 per year x 1/4 year = $5,000 depreciation expense in year 1. October 1 - December 31 is 3 months so 1/4 year.

At the beginning of year 1, Looby Corp. purchases equipment for $100,000. The equipment has a residual value of $20,000 and an expected service life of 10 years. What is straight-line depreciation for year 1?

$8,000 Reason: ($100,000 - 20,000)/10 years = $8,000 per year

The formula to calculate an activity-based depreciation rate is:

(cost - residual value)/estimated total production.

Which account is credited in a journal entry to record depreciation on machinery?

Accumulated Depreciation

depletion

Allocation of the cost of a natural resource over its service life

Depreciation

Allocation of the cost of a tangible fixed asset

On January 1, year 1, Clem Corp. purchased equipment for $160,000. The equipment has a residual value of $10,000, and has a life of 100,000 hours. Clem uses the activity-based method of depreciation. In year 1, Clem used the machine 2,000 hours, and in year 2, Clem used the machine 3,000 hours. Which of the following statements is true?

Clem will depreciate the machine for $150,000 over its service life.

these are parts of the journal entry to record depreciation

Credit Accumulated Depreciation Debit Depreciation Expense Reason: Depreciation is recorded with a debit to Depreciation Expense (+E, -SE) and a credit to Accumulated Depreciation (-A).

the amount the company expects to receive for the asset at the end of its service life

residual value

The service life or useful life of an asset is

the estimated use that the company expects to obtain from the asset before disposing of it.

Amortization

the process of allocating to expense the cost of an intangible asset

Total depreciation recorded over an asset's service life is:

the same regardless of the depreciation method used

On January 1, year 1, Roark Corp. purchased equipment for $120,000. The equipment has a residual value of $20,000, and has a life of 1,000,000 hours. Roark uses the activity-based method of depreciation. In year 1, Roark used the machine 30,000 hours, and in year 2, Roark used the machine 50,000 hours. What is the depreciation expense for year 2?

$5,000 Reason: The depreciation rate per unit is ($120,000 - $20,000)/1,000,000 hours = $0.10 per machine hour. Year 2 depreciation is 50,000 hours x $0.10 = $5,000.

On January 1, 2021, Lennox Corporation purchased equipment for $100,000. Lennox depreciated the equipment straight--line over 10 years with no residual value. What is the book value of the equipment on January 1, 2024?

$70,000 Reason: $100,000/10 years = $10,000 depreciation per year. Historical cost of $100,000 less $30,000 depreciation (for 2021, 2022, and 2023) = $70,000.

Where is the account accumulated depreciation on equipment found on the financial statements?

As a contra account to equipment on the balance sheet

the following assets are depreciated

Equipment Land improvements Buildings