Chapter 10 and 11 | Study unit: 8 (Depreciation and Depletion)

8.1.5. in which of the following situations is the units-of-production method of depreciation most appropriate? A. An asset's service potential declines with use. B. An asset's service potential declines with the passage of time. C. An asset is subject to rapid obsolescence. D. An asset incurs increasing repairs and maintenance with use.

A.

8.1.6. Which of the following reasons provides the best theoretical support for accelerated depreciation? A. Assets are more efficient in early years and initially generate more revenue. B. Expenses should be allocated in a manner that "smooths " earnings. C. Repairs and maintenance costs will probably increase in later periods, so depreciation should decline. D. Accelerated depreciation provides easier replacement because of the time value of money

A.

8.2.17. On the first day of its current fiscal year, Santiago Corporation purchased equipment costing $ 0, 000 with a salvage value of $80,000. Depreciation expense for the year was $160,000. If Santiago uses the double-declining-balance (DDB) method of depreciation, what is the estimated useful life of the asset? A. 5 B. 4 C. 2.5 D. 2

A.

8.2.15. On January 2Lem Corp. bought machinery under a contract that required a down payment of $10,000, plus 24 monthly payments of $5,000 each, for total cash payments of $130,000. The cash equivalent price of the machinery was $110,000. The machinery has an estimated useful life of 10 years al and estimated salvage value of $5,000. Lem uses straight-line depreciation . In its income statement for the year , what amount should Lem report as depreciation for this machinery ? A. $10,500 B. $11,000. C. $12,500 D. $13,000

A. [($110,000 cash equivalent price - $5,000 salvage) value) / 10 year] = $10,500

8.1.2. Net income is understated if, in the first year, estimated salvage value is excluded from the depreciation computation when using the Straight-line method | Activity (production-or-use) method A. Yes | No B. Yes | Yes

B

8.1.10. A machine with a 5-year estimated useful life and an estimated 10% salvage value was acquired on January 1 , Year 1. On December 31, Year 4 , accumulated depreciation using the sum-of-the years' -digits method would be A. (Original cost less salvage value) multiplied by 1/15. B. (Original cost less salvage value) multiplied by 14/15. C. Original cost multiplied by 14/15. D. Original cost multiplied by 1/15 .

B.

8.1.3. Depreciation of a plant asset is the process of A. Asset valuation for statement of financial position purposes. B. Allocation of the asset's cost to the periods of use. C. Fund accumulation for the replacement of the asset D. Asset valuation based on current replacement cost data

B.

8.1.4. Depreciation is computed on the original cost less estimated salvage value under which of the following depreciation methods? Double-declining-balance | Productive-output A. No | No B. No | Yes C. Yes | Yes D. Yes | No

B.

8.1.7. Which of the following statements is the assumption on which straight-line depreciation is based? A. The operating efficiency of the asset decreases in later years. B. Service value declines as a function of time rather than use. C. Service value declines as a function of obsolescence rather than time. D. Physical wear and tear are more important than economic obsolescence .

B.

8.1.8 . Under which of the following depreciation methods is it possible for depreciation expense to be higher in the later years of an asset's useful life? A. Straight-line. B. Activity method based on units of production. C. Sum-of-the-years'-digits. D. Declining-balance.

B.

8.2.18. Lima Company is depreciating an asset with a 5- year useful life. It cost $100,00 and has no salvage value. If the <List A > method is used, depreciation expense in the second year will be <List B> LIST A | LIST B A. Double-declining-Balance | $16,000 B. Double-declining-balance | $24,000

B.

8.2.19. A depreciable asset has an estimated 15% salvage value. Under which of the following methods, properly applied, would the accumulated depreciation equal the original cost at the end of the asset's estimated useful life? Straight line | Double declining balance (DDB) A. No | Yes B. No | No

B.

8.2.2. Sydney Co. purchased a machine that was installed and placed in service on January 1, Year 1 at a cost of $480,000. Salvage value was estimated at $80,000. The machine is being depreciated over 10 years by the double- declining- balance method. For the year ended December 31, Year 2, what amount should Sydney report as depreciation expense? A. $96,000 B. $76,800 C. $64,000 D. $61,440

B. [ $480,000 cost * (100% - 20%) ] = $384,000 ($384,000 * 20%) = $76,800 second-year depreciation

8.1.9. Ottawa Corp. uses the sum-of-the-years'-digits method of depreciation. In the third year of use of an asset with a 4-year estimated useful life, the portion of the depreciation cost for the asset that the entity will expense is A. 10% B. 20% C. 30% D. 33.33%

B. [2 years / ( 1 + 2 + 3 + 4 ) ] = 20%

8.1.13. On January 1, Year 5 , Crater, Inc., purchased equipment having an estimated salvage value equal to 20 of its original cost at the end of a 10 - year life. The equipment was sold December 31,Year 9 , for 50% of its original cost. If the equipment's disposition resulted in a reported loss, which of the following depreciation methods did Crater use? A. Double-declining balance B. Sum of the years' digits C. Straight line D. Composite

C.

8.2.16. Caracas Corp. purchased a computer on January 1 for $ 108,000. It was estimated to have a 4- year useful life and a salvage value of $18,000. The double-declining-balance ( DDB) method is to be used. The amount of depreciation to be reported at the end of the first year is A. ($108,000 - $18,000) * (25% * 2) B. ($108,000 - $18,000) * (25% * 1/2) C. ($108,000) * (25% * 2)

C.

8.2.12 . Spiro Corp. uses the sum - of-the-years' digits method to depreciate equipment purchased in January Year 2 for $ 20,000. The estimated salvage value of the equipment is $ 2,000, and the estimated useful life is 4 years. What should Spiro report as the asset's carrying amount as of December 31, Year 4? A. $1,800 B. $2,000 C. $3,800 D. $4,500

C. ($20,000 - $2,000) = $18,000

8.2.5. Samoa depreciates asset A on the double declining - balance method . How much depreciation expense should Samoa record in Year 4 for asset A? A. $32,000 B. $24,000 C. $14,400 D. $1,600

C. DDB rate = (2 * 20%) = 40% Carrying amount = ($100,000 cost - $64,000 acc depreciation) = $36,000 Annual depreciation for third year= ($36,000 * 40%) = $14,400

8.1.11 Quito Co. acquired a fixed asset with an estimated useful life of years and no salvage value for $15,000 at the beginning of Year 1. For financial statement purposes, how would the depreciation expense calculated using the double-declining balance (DDB) method compare with that calculated using the sum -of-the-years '-digits ( YD) method in Year 1 and Year 2, respectively? Year 1 | Year 2 A. Lower | Lower B. Lower | Higher C. Higher | Lower D. Higher | Hugher

C. Higher | Lower

8.1.1 . A depreciable asset has an estimated 15 % salvage value. At the end of its estimated useful life , the accumulated depreciation would equal the original cost of the asset under which of the following depreciation methods? Straight-Line | Productive-output A. YES | NO B. YES | YES C. NO | YES D. NO | NO

D.

8.1.12. Tunis Company purchased a van for $45,000. The estimated useful life of the van is 5 years or 80,000 miles, and the salvage value is $5,000. Actual mileage driven in the first year was 20,000 miles. Which of the following methods will result in the highest depreciation for the first year ? A. Straight-line. B. Activity C. Sum-of-the-years-digits. D. Double-declining-balance.

D.

8.2.7. Samoa depreciates asset C by the straight-line method. On June 30, Year 4 Samoa sold asset for $ 28,000 cash. How much gain or (loss) should Samoa record in Year 4 on the disposal of asset C? A. $2,800 B. $(2,800) C. $(5,600) D. $(8,400)

D.