Chapter 11 SG

Salvage value

The estimated amount that will be received at the time the asset is sold or removed from service.

(L.O. 1) The accounting concept of depreciation reflects the decline in value associated with a plant asset.

FALSE

Obsolenscence

An economic factor for retiring an asset that does not specifically relate to the factors of inadequacy or supersession.

(L.O. 1) The economic factors related to an asset's service life include: A. obsolescence. B. wear and tear. C. decay. D. unexpected casualties.

A

(L.O. 1) 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

Activity method

A depreciation method in which depreciation is a function of use or productivity instead of the passage of time

Straight-line method

A depreciation method in which periodic depreciation is the same throughout the service life of the asset.

Declining-balance method

A depreciation method that applies a constant rate to the declining book value of the asset and produces a decreasing annual depreciation amount over the useful life of the asset.

Sum-of-the-years digits method

A depreciation method that produces decreasing periodic depreciation by applying a decreasing fraction to the depreciable cost of the asset.

Depreciation Methods

A. Activity method. B. Straight-line method. C. Decreasing charge methods. a. Sum-of-the-years'-digits. b. Declining-balance method. D. Special depreciation methods. a. Group and composite methods. b. Hybrid or combination methods.

(L.O. 1) When depreciation is computed for partial periods under a decreasing charge depreciation method, it is necessary to: A. charge a full year's depreciation to the year of acquisition. B. determine depreciation expense for the full year and then prorate the expense between the two periods involved. C. use the straight-line method for the year in which the asset is sold or otherwise disposed of. D. use a salvage value equal to the first year's partial depreciation charge.

B

(L.O. 1) Which of the following most accurately reflects the concept of depreciation as used in accounting? A. The process of charging the decline in value of an economic resource to income in the period in which the benefit occurred. B. The process of allocating the cost of tangible assets to expense in a systematic and rational manner to those periods expected to benefit from the use of the asset. C. A method of allocating asset cost to an expense account in a manner which closely matches the physical deterioration of the tangible asset involved. D. An accounting concept that allocates the portion of an asset used up during the year to the contra asset account for the purpose of properly recording the fair market value of tangible assets.

B

(L.O. 1) 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

(L.O. 1) A graph is set up with "depreciation expense" on the vertical axis and "time" on the horizontal axis. Assuming linear relationships, how would the graphs for declining-balance and straight-line, respectively, be drawn? A. Sloping down to the right and vertically. B. Sloping up to the right and vertically. C. Sloping down to the right and horizontally. D. Sloping up to the right and horizontally.

C

(L.O. 1) Each year Abner Corporation sets aside an amount of cash equal to depreciation expense on its only machine. When the asset is completely depreciated, the cash fund will allow the corporation to buy a new machine if: A. prices rise throughout the life of the property. B. an accelerated depreciation method was used. C. prices remain reasonably constant during the life of the property. D. the straight-line depreciation method is used.

C

(L.O. 1) The activity method of depreciation (often called the variable charge approach) assumes that depreciation is a function of: Productivity Passage of Time A. Yes Yes B. No No C. Yes No D. No Yes

C

(L.O. 1) Which of the following depreciation methods does not consider salvage value in computing the total depreciation to be taken? A. Straight-line. B. Sum-of-years'-digits. C. Declining-balance. D. Activity or production.

C

(L.O. 3) Thucydides Company purchased a new machine on May 1, 2010, for $25,000. At the time of acquisition, the machine was estimated to have a useful life of 10 years and an estimated salvage value of $1,000. The company has recorded monthly depreciation using the straight-line method. On March 1, 2019, the machine was sold for $800. What should be the loss recognized from the sale of the machine? A. $ 0. B. $2,000. C. $3,000. D. $3,400.

C

(L.O. 4) Of the following costs related to the development of natural resources, which one is not a part of depletion cost? A. Acquisition cost of the natural resource deposit. B. Exploration costs. C. Tangible equipment costs associated with machinery used to extract the natural resource. D. Intangible development costs such as drilling costs, tunnels, and shafts.

C

(L.O. 1) SL and YD Companies purchase identical equipment having an estimated service life of 5 years, with no salvage value. SL Company uses the straight-line depreciation method; YD Company uses the sum-of-the-years' digits method. Assuming that the companies are identical in all other respects: A. if both companies keep the asset for 5 years, YD Company's 5-year total for depreciation expense will be greater than SL Company's 5-year total. B. if the asset is sold after 3 years, SL Company is more likely to report a gain on the transaction than YD Company. C. SL Company's depreciation expense will be higher during the 1st year than YD's. D. SL Company's net income will be lower during the 4th year than YD Company's.

D

(L.O. 1) Which of the following is a realistic assumption of the straight-line method of depreciation? A. The asset's economic usefulness is the same each year. B. The repair and maintenance expense is essentially the same each period. C. The rate of return analysis is enhanced using the straight-line method. D. Depreciation is a function of time rather than a function of usage.

D

(L.O. 2) Plato Corporation purchased a machine with a cost of $165,000 and a salvage value of $9,000 on April 1, 2019. The machine will be depreciated over a 12 year useful life using the sum-of-years'-digits method. The amount of depreciation Plato Corporation would record for the year ended 12/31/20 would be: A. $22,000. B. $24,000. C. $16,500. D. $22,500.

D

(L.O. 1) Accelerated depreciation methods accomplish the objective of writing an asset off over a shorter period of time than its useful life.

FALSE

(L.O. 1) Companies that desire low depreciation during periods of low productivity and high depreciation during high productivity either adopt or switch to a declining-balance method.

FALSE

(L.O. 1) The straight-line depreciation method is used most often in actual practice. This is because the assumptions upon which it is based apply to most plant assets.

FALSE

(L.O. 1) Whenever the economic nature of the asset is the primary determinant of service life, maintenance plays an extremely vital role in prolonging service life.

FALSE

(L.O. 1) An asset's cost less its salvage value is referred to as the depreciable base.

TRUE

(L.O. 1) Estimation and judgment are the primary means through which the service life of an asset is determined.

TRUE

(L.O. 1) One problem associated with the activity method of depreciation concerns estimating the total units of output an asset will produce.

TRUE

(L.O. 1) Physical factors such as wear and tear set the outside limit for the service life of an asset.

TRUE

(L.O. 1) Replacing a black and white monitor with a color monitor for a computer is an example of supersession.

TRUE

(L.O. 1) The straight-line method considers depreciation a function of time rather than a function of usage.

TRUE

(L.O. 1) Under the declining-balance depreciation method, salvage value is considered only in computing the amount of depreciation for the final year(s) of an asset's service life.

TRUE

(L.O. 4) Depletion is the systematic allocation of the cost of natural resources (wasting assets).

TRUE

Amortization

The accounting process of allocating the cost of intangible assets (i.e., patents and goodwill) to expense.

Depletion

The accounting process of allocating the cost of natural resources (i.e., timber, gravel, oil, and coal) to expense.

Depreciation

The accounting process of allocating the cost of tangible assets to expense in a systematic and rational manner to those periods expected to benefit from the use of the asset.

Natural resources

Wasting assets such as petroleum, minerals, and timber.

Physical factors

Wear, tear, decay, and casualties that make it difficult for an asset to perform indefinitely.