Module 12

Property, plant, and equipment that a company intends to sell is reported at the lower of its __________ or __________.

book value; net realizable value

Which of the following is accounted for with a prior period adjustment?

correction of an error

Depreciation is a process of

cost allocation

__________ is the allocation of the cost of natural resources, such as oil, gas, minerals, and timber.

depletion

Composite depreciation may apply to

heterogeneous assets that are related but have differing service lives and residual values.

In the early life of an asset, depreciation for income tax purposes is __________ than for financial statement reporting.

higher

Group depreciation is applied to __________ assets that are expected to have similar service lives and residual values. Composite depreciation is applied to __________ assets that are related but have differing service lives and residual values.

homogeneous; heterogeneous

ABC Company, which uses a calendar year, has a desk that originally cost $1,000, has accumulated depreciation of $700, and is being depreciated at $100 per year. If ABC sells the desk for $120, what is the gain (loss) on the sale?

loss of $180

Podey Company has a machine that originally cost $20,000, has accumulated depreciation of $14,000 at the beginning of the current year, and is being depreciated at $2,000 per year with the straight-line method. If the company sells the machine for $2,400 on September 30, it will recognize a

loss on disposal of $2,100.

A change in the estimates making up depreciation for a fixed asset will result in a recalculation of depreciation expense. This recalculation is accounted for

prospectively

A company may dispose of property, plant, and equipment by all of the following except

purchase

Which of the following events or changes in circumstances will cause a company to review its property, plant, and equipment for impairment?

significant change in the way the asset is used. negative cash flow from operating activities. expectation that the asset will more likely than not be disposed of before the end of its useful life.

The __________ method is appropriate when a company estimates that the service potential of the asset will decline by an approximately constant amount each period of its useful life.

straight-line

Podey Company has a machine that originally cost $20,000, has accumulated depreciation of $14,000 at the beginning of the current year, and is being depreciated at $2,000 per year with the straight-line method. If the company sells the machine for $2,400 on September 30, it first records a depreciation expense of

$1,500

ABC Company purchased land for $2,500,000 from which it expects to extract 200,000 tons of coal. The estimated residual value is $500,000. What is the unit depletion rate for the coal?

$10 per ton

Brian Inc. purchased a piece of equipment for $30,000 with a useful life of 9 years and a residual value of $6,000 on January 2, 2019. If Brian Inc. uses the sum-of-the-years'-digits depreciation method with the half-year convention, depreciation expense for 2019 will be

$2,400

Sullly Company purchases a $10,000 asset with a 4-year life with no expected residual value on September 5 of the current year. Using the half-year convention and the double-declining-balance method, what will the recorded depreciation for the current year be?

$2,500

An asset has a depreciable base of $80,000 and an estimated useful life of 4 years. In the first year, depreciation expense under the sum-of-the-years' digits method would be

$32,000

On January 1, 2019, Jacob Corporation purchased equipment for $200,000. The equipment had an estimated useful life of 10 years and an estimated residual value of $40,000. Using the double-declining-balance method, how much depreciation expense should Jacob Corporation report on the company's balance sheet at December 31, 2020?

$32,000

Sergei Company purchases land for $4,000,000 from which it expects to extract 2,000,000 tons of coal. The estimated residual value is $400,000, and it mines 80,000 tons of coal in the first year. The unit depletion rate used to determine yearly depletion will be

1.8 per ton

Marcus Inc. purchased 10 portable heating units for $5,000 each, with an average expected service life of 4 years and a residual value of $700 each. The depreciation rate for the assets, assuming the group depreciation method is used, will be

21.5%

Property, plant, and equipment must be reviewed for impairment when which of the following events occurs?

A current-period operating loss occurs.

The depreciation base is calculated as

Asset Cost - Estimated Residual Value = Depreciation Base.

The formula for double-declining-balance depreciation on an asset with a five-year life in its second year is

Book Value × 40% = Depreciation Expense.

Accounting principles require that a company use a method of cost allocation that is systematic and rational. Three general approaches are used frequently in practice. Which of the following is not one of the three methods?

Cost methods

The formula to compute composite depreciation expense is

Cost of Assets Remaining in Service × Composite Depreciation Rate.

Which of the following statements regarding GAAP depreciation requirements is not true?

GAAP does not require depreciation expense for the period to be disclosed.

Which of the following statements regarding GAAP depreciation requirements is not true?

GAAP only allows disclosure of accumulated depreciation by major class of depreciable assets.

__________ are expenditures incurred after the resource is discovered but before production begins that are necessary for production of the resource. These costs include costs for drilling, tunnels, shafts, and wells.

Intangible development costs

MACRS differs from straight-line depreciation computed for financial reporting. In this respect, which of the following statements is not true?

MACRS uses longer asset lives.

Which of the following statements regarding recording a disposal of a fixed asset is not true?

No cash may be recognized on the disposal of property, plant, and equipment.

Which of the following is an advantage of the group and composite methods of depreciation?

Record keeping is simplified.

Which of the following is true regarding depreciation for income tax purposes?

The purpose of the depreciation methods required by the income tax laws is to stimulate capital investment through the rapid recovery of capital costs.

Which of the following statements regarding depreciation is true?

Typically, the sum-of-the-years'-digits method will result in less depreciation expense in the year of acquisition than will the double-declining-balance method.

Breezeway Company determines that equipment is impaired, reducing its value by $7,000. The journal entry to record the impairment loss will include

a credit to Accumulated Depreciation for $7,000.

When an asset in a group is retired, the entry to record the retirement would include

a credit to the asset account and a debit to Accumulated Depreciation.

The costs of a natural resource do not include

amortization costs.