DEPRECIATION

b. Fifth year

An asset has a nine year useful life and is to be depreciated under the sum of years' digits method. The annual depreciation expense would be the same as that under the straight line method in the a. Third year b. Fifth year c. Seventh year d. Ninth year

d. Residual value

All of the following factors are considered in determining the useful life of an asset, except a. Expected usage of the asset b. Expected physical wear and tear c. Technical obsolescence d. Residual value

b. Cash proceeds received

An entity using the composite depreciation method for a fleet of trucks, cars and campers retired one of the trucks and received cash from a salvage entity. The net carrying amount of these composite asset accounts would be decreased by the a. Cash proceeds received and original cost of the truck b. Cash proceeds received c. Original cost of the truck less the cash proceeds d. Original cost of truck

d. Amount at which an asset is recognized in the statement of financial position after deducting any accumulated depreciation and accumulated impairment loss.

Carrying amount is a. Cost of an asset or the amount substituted for cost in the financial statements, less residual value. b. Amount of cash paid or the fair value of the other consideration given to acquire an asset at the time of acquisition or construction. c. Net amount which the entity expects to obtain for an asset at the end of the useful life after deducting the expected cost of disposal. d. Amount at which an asset is recognized in the statement of financial position after deducting any accumulated depreciation and accumulated impairment loss.

c. Cost allocation

Depreciation is best described as a method of a. Asset valuation b. Current value allocation c. Cost allocation d. Useful life determination

b. Declining balance

Which depreciation method applies a uniform depreciation rate each period to the carrying amount of an asset? a. Straight line b. Declining balance c. Output method d. Sum of years' digits

a. An asset's service potential declines with use.

In which of the following situations is the 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.

c. Does not recognize gain or loss on the retirement of single asset in the group.

The composite depreciation method a. Is applied to a group of homogeneous assets. b. Is an accelerated method of depreciation. c. Does not recognize gain or loss on the retirement of single asset in the group. d. Excludes residual value from the base of the depreciation calculation.

b. Ignores variation in the rate of asset use.

The principal objection to the straight line method of depreciation is that it a Provides for the declining productivity of an aging asset. b. Ignores variation in the rate of asset use. C. Tends to result in a constant rate of return on a diminishing investment base. d. Gives smaller periodic writeoff than a decreasing charge method.

d. Variable charge based on the use or output of the asset.

The production method of depreciation results in a. Constant charge over the useful life of the asset. b. Decreasing charge over the useful life of the asset. c. Increasing charge over the useful life of the asset. d. Variable charge based on the use or output of the asset.

d. Depreciation is not recognized if the fair value of an asset exceeds carrying amount.

Which statement is incorrect with respect to depreciation? a. The depreciation method shall reflect the pattern in which the asset's economc benefits are consumed by the entity. b. Depreciation of an asset begins when it is available for use or when it is in the location and condition necessary for the intended use. c. Depreciation ceases at the earlier between the date the asset is classified as held for sale and the date the asset is derecognized. d. Depreciation is not recognized if the fair value of an asset exceeds carrying amount.

a. Depreciation is a matter of valuation.

Which statement is not true in relation to depreciation? a. Depreciation is a matter of valuation. b. Depreciation is part of the matching of revenue and expense. c. Depreciation retains funds by reducing income tax and dividend. d. Depreciation is a cost allocation.

d. Depreciation should be charged if the carrying amount of an asset is less than residual value.

Which statement is not true with respect to residual value? a. Residual value is the estimated net amount currently obtainable if the asset is at the end of the useful life. b. The residual value of an asset may increase to an amount equal to or greater than carrying amount in which case the depreciation charge is zero. c. The residual value of an asset shall be reviewed at least at each financial year-end and any change is accounted for as a change in accounting estimate. d. Depreciation should be charged if the carrying amount of an asset is less than residual value.

b. Service value declines as a function of time rather than use.

Which statement 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.

a. Assets are more efficient in early years and initially generate more revenue.

Which statement 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 probably would increase in later periods so depreciation should decrease. d. Accelerated depreciation provides easier replacement because of the time value of money.

Which depreciation method is not based on the passage of time? a. Production method b. Sum of years' digits c. Declining balance d. Straight line

a. Production method

1. Which statement best describes the term depreciation? a. The systematic allocation of the cost of an asset less residual value over the useful life. b. The removal of an asset from the statement of financial position. c. The amount by which the recoverable amount of an asset exceeds carrying amount. d. The amount by which the carrying amount of an asset exceeds recoverable amount.

a. The systematic allocation of the cost of an asset less residual value over the useful life.

What factor must be present to use the production method? a. Total units to be produced can be estimated b. Production is constant over the life of the asset c. Repair costs increase with use d. Obsolescence is expected

a. Total units to be produced can be estimated

Decreasing Charge Methods

are the sum of years' digits, declining balance and double declining balance.

Variable Methods

are working hours method and output or production method.

Functional or economic depreciation

arises from inadequacy, supersession and obsolescence.

Supersession

arises when a new asset becomes available and the new asset can perform the same function more efficiently and economically or for substantially less cost.

Inadequacy

arises when an asset is no longer useful because of an increase in the volume of operations.

Obsolescence

arises when there is no future demand for the product which the asset produces.

Variable Methods

assume that depreciation is more a function of use rather than passage of time.

The straight line depreciation is not appropriate for a. An entity that is neither expanding nor contracting an investment in equipment because it is replacing equipment as the equipment depreciates. b. Equipment on which maintenance and repairs increase substantially with age. c. Equipment with useful life that is not affected by the amount of use. d. Equipment used consistently every period.

b. Equipment on which maintenance and repairs increase substantially with age.

5. The useful life of property, plant and equipment is I. The period of time over which an asset is expected to be used by the entity. II. The number of production or similar units expected to be obtained from the asset by the entity. a. I only b. II only c. Both I and II d. Neither I nor II

c. Both I and II

A method which excludes residual value from the base for the depreciation calculation is a. Straight line b. Sum of years' digits c. Double declining balance d. Output method

c. Double declining balance

The sum of years' digits method a. Results in residual value being ignored. b. Means the denominator is the number of years remaining at the beginning of the year. c. Means the carrying amount should not be reduced below residual value. d. Results in an increasing depreciation charge.

c. Means the carrying amount should not be reduced below residual value.

Straight Line Approach

considers depreciation as a function of time rather than as a function of usage.

Inventory Method

consists of merely estimating the value of the asset at the end of the period.

The double declining balance method a. Results in a decreasing depreciation charge. b. Means residual value is not deducted in computing the depreciation base. c. Means the carrying amount should not be reduced below residual value. d. All of these describe double declining balance

d. All of these describe double declining balance

Obsolescence

encompasses inadequacy and supersession. An asset becomes obsolete if it is inadequate or superseded.

Other methods of depreciation

inventory, retirement and replacement method

Straight Line Depreciation

is a constant charge over the useful life of the asset.

Useful life or service life

is either the period of time over which an asset is expected to be used by the entity or the number of production or similar units expected to be obtained from the asset by the entity.

Depreciation

is not so much a matter of valuation as it is a matter of cost allocation in recognition of the exhaustion of the life of an item of property, plant and equipment used in business operations.

Physical Depreciation

is related to the depreciable asset's wear and tear and deterioration over a period.

Depreciable amount

is the cost of an asset or other amount substituted for cost less the residual value.

Residual value

is the estimated net amount currently obtainable if the asset is at the end of the useful life.

Depreciation

is the systematic allocation of the depreciable amount of the property, plant and equipment over the useful life.

Straight Line Method

is widely used in practice because of simplicity.

Physical Depreciation

may be caused by wear and tear, passage of time, accident, action of the elements such as rain or dust, and disease or decay.

Replacement Method

no depreciation is recorded until the asset is retired and replaced.

Retirement Method of Depreciation

no depreciation is recorded until the asset is retired.

Decreasing Charge or Accelerated Methods

provide higher depreciation in the earlier years and lower depreciation in the later years of the life of the asset.

Variable charge or use-factor methods

service hours and output or production method

Equal or uniform charge methods

straight line, composite method and group method

Decreasing charge or accelerated or diminishing balance methods

sum of years' digits, declining balance and double declining balance

Straight Line Method

the annual depreciation charge is calculated by allocating the depreciable amount equally over the number of years of estimated useful life.