chapter 7b
Other terms used for an activity-based depreciation method are:
units of output method units of production method
The allocation of the cost of a tangible fixed asset is referred to as _____. whereas the allocation of the cost of an intangible asset is referred to as _______.
depreciation; amortization
At the beginning of year 1, Valerie Corp. purchases equipment for $10,000. The equipment has a residual value of $4,000 and an expected service life of 4 years. What is straight-line depreciation for year 1?
$1,500 Reason: ($10,000 - 4,000)/4 years = $1,500 per year
The estimated use the company expects to obtain from an asset before disposing of it is referred to as the _______ life of the asset.
service
Formula for straight line depreciation
(cost-residual value)/useful life
the following does not differ among the different depreciation methods
Total depreciation recognized over the asset's service life.
Recording depreciation results in the allocation of the cost of a long-term asset to the years during which the asset provides
value or revenue
Which items are considered changes in estimates that would be treated on a prospective basis in the current period and future periods?
Change in service life of an asset Change in residual value of an asset
Which statement is true about the straight-line method of depreciation?
It allocates an equal amount of depreciation to each year the asset is used.
the following long-lived assets would not be depreciated
Land
Units of production or units of output are alternative terms for the ____ _____ depreciation method.
activity based
The original cost of an asset minus accumulated depreciation
book value
The original cost of the asset less the accumulated depreciation is the _____ _______ of the asset.
book value
The accumulated depreciation account is classified as a(n)
contra asset.
The formula to calculate the depreciation for the units-of-production method or activity-based depreciation, is ((cost - residual value)/total estimated production) x
current-year activity or production
The depreciation method that allocates an equal amount of the depreciable base to each year of the asset's service life is the
straight-line method.
The depreciable cost is
the cost of an asset minus its estimated residual value
Straight-line deprecation is calculated as the depreciable cost divided by
the estimated service life of the asset.
Depreciation is a process of cost ________ and not a process of valuation.
allocation
For accounting purposes, depreciation is
an allocation of a cost of an asset.
The allocation of the cost of a tangible asset over its service life is referred to as
depreciation
Depreciation is a valuation method for property and equipment. (True false question.)
false Reason: Depreciation is a process of cost allocation, not valuation.
A change in accounting estimate requires a company to account for the change
in the current and future years
When we recognize depreciation, we allocate a portion of the asset's cost to each year in which the asset
provides benefits to the company.
An estimated residual value ______ the total amount of depreciation recorded over an asset's service life.
reduces
On July 1, year 1, Smith Corp. purchased equipment for $200,000. The equipment has an expected service life of 10 years with no residual value. Smith uses the straight-line method of depreciation. The partial year depreciation for year 1 is
$10,000 Reason: $200,000/10 years = $20,000 per year x 1/2 year = $10,000 depreciation expense in year 1.
Blake uses the activity-based depreciation method. Blake purchases equipment for $100,000 and expects to use the equipment for 40,000 machine hours. The machine has a residual value of $20,000. The depreciation rate is
$2.00 per machine hour. Reason: ($100,000 - 20,000)/40,000 machine hours = $2.00 per machine hour.
On January 1, 2021, Pritchett Corporation purchased equipment for $50,000. The equipment had a five-year life with a $10,000 residual value. Pritchett uses the straight-line depreciation method. What is the book value of the equipment on January 1, 2024?
$26,000 Reason: Depreciation expense is ($50,000 - 10,000)/5 = $8,000 per year. $50,000 less accumulated depreciation of $24,000 = $26,000.
Cray uses the activity-based depreciation method. Cray purchases equipment for $210,000 and expects to use the equipment for 60,000 machine hours. The machine has a residual value of $30,000. The depreciation rate is
$3.00 per machine hour. Reason: $210,000 - $30,000 = $180,000/60,000 machine hours = $3.00 per machine hour.
On October 1, year 1, Kirby Corp. purchased equipment for $100,000. The equipment has an expected service life of 5 years with no residual value. Kirby uses the straight-line method of depreciation. The partial year depreciation for year 1 is
$5,000 Reason: $100,000/5 years = $20,000 per year x 1/4 year = $5,000 depreciation expense in year 1. October 1 - December 31 is 3 months so 1/4 year.
At the beginning of year 1, Looby Corp. purchases equipment for $100,000. The equipment has a residual value of $20,000 and an expected service life of 10 years. What is straight-line depreciation for year 1?
$8,000 Reason: ($100,000 - 20,000)/10 years = $8,000 per year
The formula to calculate an activity-based depreciation rate is:
(cost - residual value)/estimated total production.
Which account is credited in a journal entry to record depreciation on machinery?
Accumulated Depreciation
depletion
Allocation of the cost of a natural resource over its service life
Depreciation
Allocation of the cost of a tangible fixed asset
On January 1, year 1, Clem Corp. purchased equipment for $160,000. The equipment has a residual value of $10,000, and has a life of 100,000 hours. Clem uses the activity-based method of depreciation. In year 1, Clem used the machine 2,000 hours, and in year 2, Clem used the machine 3,000 hours. Which of the following statements is true?
Clem will depreciate the machine for $150,000 over its service life.
these are parts of the journal entry to record depreciation
Credit Accumulated Depreciation Debit Depreciation Expense Reason: Depreciation is recorded with a debit to Depreciation Expense (+E, -SE) and a credit to Accumulated Depreciation (-A).
the amount the company expects to receive for the asset at the end of its service life
residual value
The service life or useful life of an asset is
the estimated use that the company expects to obtain from the asset before disposing of it.
Amortization
the process of allocating to expense the cost of an intangible asset
Total depreciation recorded over an asset's service life is:
the same regardless of the depreciation method used
On January 1, year 1, Roark Corp. purchased equipment for $120,000. The equipment has a residual value of $20,000, and has a life of 1,000,000 hours. Roark uses the activity-based method of depreciation. In year 1, Roark used the machine 30,000 hours, and in year 2, Roark used the machine 50,000 hours. What is the depreciation expense for year 2?
$5,000 Reason: The depreciation rate per unit is ($120,000 - $20,000)/1,000,000 hours = $0.10 per machine hour. Year 2 depreciation is 50,000 hours x $0.10 = $5,000.
On January 1, 2021, Lennox Corporation purchased equipment for $100,000. Lennox depreciated the equipment straight--line over 10 years with no residual value. What is the book value of the equipment on January 1, 2024?
$70,000 Reason: $100,000/10 years = $10,000 depreciation per year. Historical cost of $100,000 less $30,000 depreciation (for 2021, 2022, and 2023) = $70,000.
Where is the account accumulated depreciation on equipment found on the financial statements?
As a contra account to equipment on the balance sheet
the following assets are depreciated
Equipment Land improvements Buildings
