Acc312_CH-11

Changes in estimates are handled prospectively by dividing the asset's book value less any salvage value by the remaining estimated life.

True.

Depreciation is a means of cost allocation, not a matter of valuation.

True.

Depreciation, depletion, and amortization all involve the allocation of the cost of a long-lived asset to expense.

True.

Gains or losses on disposals of assets do not distort periodic income when the group or composite method is used to compute depreciation.

True.

Impaired assets held for disposal should be reported at the lower of cost or net realizable value.

True.

Intangible development costs and restoration costs are part of the depletion base.

True.

The cost of an asset less its salvage value is its depreciation base.

True.

The declining-balance method does not deduct the salvage value in computing the depreciation base.

True.

The first step in determining whether an impairment has occurred is to estimate the future net cash flows expected from the use of that asset and its eventual disposition.

True.

The major objection to the straight-line method is that it assumes the asset's economic usefulness and repair expense are the same each year.

True.

The profit margin on sales ratio is a measure for analyzing the use of property, plant, and equipment.

True.

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.

The activity method of depreciation

a. is a variable charge approach.

Depletion expense

a. is usually part of cost of goods sold.

The term "depreciable base," or "depreciation base," as it is used in accounting, refers to

a. the total amount to be charged (debited) to expense over an asset's useful life.

For income statement purposes, depreciation is a variable expense if the depreciation method used is

a. units-of-production.

Which of the following disclosures is not required in the financial statements regarding depreciation?

b. Details demonstrating how depreciation was calculated.

Which of the following principles best describes the conceptual rationale for the methods of matching depreciation expense with revenues?

b. Systematic and rational allocation

Which of the following most accurately reflects the concept of depreciation as used in accounting?

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.

A change in estimate should

b. be handled in current and future periods.

When depreciation is computed for partial periods under a decreasing charge depreciation method, it is necessary to

b. determine depreciation expense for the full year and then prorate the expense between the two periods involved.

Each year a company has been investing an increasingly greater amount in machinery. Since there is a large number of small items with relatively similar useful lives, the company has been applying straight-line depreciation at a uniform rate to the machinery as a group. The ratio of this group's total accumulated depreciation to the total cost of the machinery has been steadily increasing and now stands at .75 to 1.00. The most likely explanation for this increasing ratio is the

b. estimated average life of the machinery is less than the actual average useful life.

Depreciation is normally computed on the basis of the nearest

b. full month and to the nearest dollar.

A principal objection to the straight-line method of depreciation is that it

b. ignores variations in the rate of asset use.

Lynch Printing Company determines that a printing press used in its operations has suffered a permanent impairment in value because of technological changes. An entry to record the impairment should

b. include a credit to the equipment accumulated depreciation account.

The book value of a plant asset is

b. the asset's acquisition cost less the total related depreciation recorded to date.

Myers Company acquired machinery on January 1, 2005 which it depreciated under the straight-line method with an estimated life of fifteen years and no salvage value. On January 1, 2010, Myers estimated that the remaining life of this machinery was six years with no salvage value. How should this change be accounted for by Myers?

c. By setting future annual depreciation equal to one-sixth of the book value on January 1, 2010

A graph is set up with "yearly depreciation expense" on the vertical axis and "time" on the horizontal axis. Assuming linear relationships, how would the graphs for straight-line and sum-of-the-years'-digits depreciation, respectively, be drawn?

c. Horizontally and sloping down to the right

Of the following costs related to the development of natural resources, which one is not a part of depletion cost?

c. Tangible equipment costs associated with machinery used to extract the natural resource

Composite or group depreciation is a depreciation system whereby

c. a straight-line rate is computed by dividing the total of the annual depreciation expense for all assets in the group by the total cost of the assets.

Watkins Truck Rental uses the group depreciation method for its fleet of trucks. When it retires one of its trucks and receives cash from a salvage company, the carrying value of property, plant, and equipment will be decreased by the

c. cash proceeds received.

A major objective of MACRS for tax depreciation is to

c. help companies achieve a faster write-off of their capital assets.

Use of the sum-of-the-years'-digits method

c. means the book value should not be reduced below salvage value.

Depreciation accounting

c. retains funds.

If income tax effects are ignored, accelerated depreciation methods

c. tend to offset the effect of steadily increasing repair and maintenance costs on the income statement.

Economic factors that shorten the service life of an asset include

d. All of these.

The following is true of depreciation accounting.

d. All of these.

Which of following is not a similarity in the accounting treatment for depreciation and cost depletion?

d. Both depreciation and depletion are based on time.

Which of the following is a realistic assumption of the straight-line method of depreciation?

d. Depreciation is a function of time rather than a function of usage.

The rate of return on total assets is computed by dividing

d. Net income by average total assets.

Under MACRS, which one of the following is not considered in determining depreciation for tax purposes?

d. Salvage value

Which of the following is not a difference between the accounting treatment for depreciation and cost depletion?

d. The cost of the asset is the starting point from which computation of the amount of the periodic charge is made to operations for depreciation, but the fair value reassessed each year as the starting point for the periodic charge for depletion.

Which of the following is not one of the basic questions that must be answered before the amount of depreciation charge can be computed?

d. What product or service is the asset related to?

Use of the double-declining balance method

d. all of these.

For the composite method, the composite

d. life is the total depreciable cost divided by the total annual depreciation.

The asset turnover ratio is computed by dividing

d. net sales by average total assets.

Dividends representing a return of capital to stockholders are not uncommon among companies which

d. none of these.

Reserve recognition accounting

d. requires estimates of future production costs, the appropriate discount rate, and the expected selling price of oil and gas reserves.

A general description of the depreciation methods applicable to major classes of depreciable assets

d. should be included in corporate financial statements or notes thereto.

The most common method of recording depletion for accounting purposes is the

d. units-of-production method.

If an industrial firm uses the units-of-production method for computing depreciation on its only plant asset, factory machinery, the credit to accumulated depreciation from period to period during the life of the firm will

d. vary with production.