Business Math, Ch17: Depreciation

True or false: MACRS calculates depreciation for tax purposes.

True

If an asset has a five-year useful life, then the declining-balance rate is: a) 40% b) 50% c) 30% d) 20%

a) 40% 1/UsefulLife × 100% = straight line rate. 1/5 ×100% = 20% straight-line rate. Twice this is 40%.

Book value is the cost less accumulated depreciation; therefore, as the asset is used the accumulated depreciation _______________, and the book value _______________.

increases; decreases

An estimate of the asset that will be shown as an expense during a specific period of time is the:

Depreciation

Higher depreciation results in ___________ profit and ___________ taxes.

Lower Profit, Lower Taxes

What would result in higher profit and taxes?

Lower depreciation

Classes 3, 5, 7, and 10 use a ____________________ method for a period of years before switching to straight-line depreciation.

200% declining-balance

The amount of depreciation taken to date.

Accumulated Deprecation

Landmark Co. purchased equipment for $53,000 that has a residual value of $3,000 and a five year useful life. Determine the annual depreciation expense using straight-line depreciation.

Annual depreciation = (Cost−ResidualValue)/UsefulLife (53,000-3,000)/5 years $10,000 depreciation expense per year

The declining-balance depreciation method uses up to twice which rate?

Declining-balance uses up to twice the straight-line rate.

Under MACRS, depreciation of an asset is ______________ (higher/lower) at the beginning of the asset's life than at the end.

Higher

Higher depreciation results in what profit and tax effects? A) Lower B) Higher C) No effect

Higher depreciation results in lower profit and taxes.

Asset cost is:

The total amount that the company paid for the asset.

Equipment costing $15,000 with a $1,000 residual value is expected to have a three-year useful life. Using the declining-balance method, determine depreciation for Year 3. Round to the nearest percent before multiplying to find the depreciation. Round your answer to the nearest dollar.

$15,000 - $10,050 - $3,317= $1,633 book value at the beginning of Year 3. You cannot depreciate below the residual value; therefore, only $633 is left to depreciate.

Equipment costing $15,000 with a $1,000 residual value is expected to have a three-year useful life. Using the declining-balance method, determine depreciation for Year 2. Round to the nearest percent before multiplying to find the depreciation. Round your answer to the nearest dollar.

$15,000 - $10,050 = $4,950 book value at the beginning of Year 2 × .67 = $3,317 depreciation.

3, 5, 7 and 10-year assets follow which depreciation method?

200% declining-balance switching to straight-line.

Equipment was purchased for $25,000 with a $5,000 residual value. It has a four-year estimated useful life. Match the amount with the respective term using the declining balance method. A) $20,000 B) 25% C) 50% D) $12,500 E) $6,250

A) $20,000 ---> Book Value Beginning of Year 1 B) 25% ---> Straight-line rate C) 50% ---> Twice the straight-line rate D) $12,500 ---> Year 1 depreciation E) $6,250 ---> Year 2 depreciation

Using the MACRS table, the asset type with the greatest percent of depreciation in Year 2 is? A) 5-year assets B) 3-year assets C) 7-year assets D) 10-year assets

B) 3-year assets Year 2 of a 7-year asset depreciates at 24.49%. Year 2 of a 3-year asset is 45%.

Which method is an example of accelerated depreciation? A) straight-line depreciation B) depreciation schedule C) accumulated depreciation table D) Declining balance

D) Declining balance -- accelerates depreciation, taking more at the beginning of the asset's life.

Over time, assets (decrease/increase) in market value due to depreciation.

Decrease

Landmark Co. purchased equipment for $53,000 that has a residual value of $3,000 and a five year useful life. Determine the total amount that will be depreciated over the five years using straight-line depreciation.

Total depreciation = Cost - Residual Value; $53,000 - $3,000 = $50,000 total depreciation to be taken over five years.

True or false: The book value decreases with use.

True

Units-of-production method determines depreciation on (use/time).

Units-of-production depreciation is based on how much the asset is used.

15 and 20-year assets follow which depreciation method? A) 150% declining-balance switching to straight-line. B) Straight-line C) 200% declining-balance switching to straight-line.

A) 150% declining-balance switching to straight-line.

Match the class recovery period to the asset type. A) 3-year assets B) 5-year assets C) 7-year assets D) 27.5-year Assets E) 31.5-year assets

A) 3-year assets ---> Race horses more than 2-years old B) 5-year assets ---> Light general-purpose trucks C) 7-year assets ---> Equipment and furniture D) 27.5-year Assets ---> Residential rental property E) 31.5-year assets ---> Choice, Non-residential real property Non-residential real property

Match the following class recovery periods to their asset types: A) 5-year assets B) 7-year assets C) 15-year assets D) 20-year assets E) 27.5-year Assets F) 31.5-year assets

A) 5-year assets ---> non-luxury automobiles, taxis and light general-purpose trucks B) 7-year assets ---> furniture, fixtures and equipment C) 15-year assets ---> telephone distribution plants and municipal wastewater treatment plants D) 20-year assets ---> municipal sewers E) 27.5-year Assets ---> residential rental property F) 31.5-year assets ---> non-residential real property

A partial month's depreciation is taken when an asset is purchased on: A) March 16 B) March 1 C) March 10

A) March 16 Assets purchased after the 15th of the month carry a partial month's depreciation.

27.5 and 31.5-year assets follow which depreciation method? A) Straight-line B) 150% declining-balance switching to straight-line. C) 200% declining-balance switching to straight-line.

A) Straight-line

At the end of its useful life, an asset's book value matches: A) residual value B) cost C) annual depreciation expense D) accumulated depreciation

A) residual value

The unused portion of the asset cost.

Book Value

A full month's depreciation is taken when an asset is purchased on: A) August 30 B) August 17 C) August 14

C) August 14 Assets purchased before the 15th of the month carry a full month's depreciation.

The most common type of depreciation is: A) units-of-production B) declining-balance C) straight-line

C) straight-line

Estimated useful life is: A) the total amount that the company paid for the asset. B) the expected cash value at the end of the asset's useful life. C) the number of years for which the asset is useful.

C) the number of years for which the asset is useful.

Using MACRS, depreciation is found by multiplying the identified rate by what amount?

Cost

A multi-column table illustrating an asset's cost, annual depreciation, accumulated depreciation, and book value: A) straight-line depreciation B) depreciation schedule C) accumulated depreciation table

Depreciation schedule

True or false: MACRS uses residual value when calculating depreciation.

False

True or false: Calculating depreciation based on miles driven is the straight-line method.

False Miles driven is an example of units-of-production.

True or false: According to the MACRS table, the annual depreciation percentage of a 15-year asset is the same every year.

False The 150% declining-balance doesn't convert to straight-line until Year 7.

__________________ deterioration is when an asset gradually wears out.

Physical

Select the type of depreciation that occurs when an asset wears out. A) Product Obsolescence B) Physical Deterioration C) Inadequacy

Physical Deterioration

Sybil Corp. purchased equipment for $3,000 with a residual value of $500 and a five-year estimated useful life. Determine the book value at the end of Year 4 using straight-line depreciation.

The accumulated depreciation at the end of Year 4 is $2,000 ($500 per year for four years). The book value is the cost less the accumulated depreciation. $3,000 - $2,000 = $1,000.

To take larger amounts of depreciation expense in a asset's earlier years, the ____________ method uses up to twice the ____________ method in the first year.

declining-balance; straight-line