M4 Practice Test

In accordance with generally accepted accounting principles, which of the following methods of amortization is normally recommended for intangible assets? a. Sum-of-the-years'-digits b. Straight-line c. Group composite d. Double-declining-balance

Straight-line

Depreciation of noncurrent operating assets is an accounting process for the purpose of a. reporting declining asset values on the balance sheet. b. allocating asset costs over the periods benefited by use of the assets. c. accounting for costs to reflect the change in general price levels. d. setting aside funds to replace assets when their economic usefulness expires.

allocating asset costs over the periods benefited by use of the assets.

The sum-of-the-years'-digits method of depreciation is being used for a machine with a five-year estimated useful life. What would be the fraction applied to the cost to be depreciated in the fourth year? a. 2/5 b. 4/5 c. 2/15 d. 4/15

2/15

In order to calculate the third year's depreciation on an asset using the sum-of- the-years'-digits method, which of the following must be known about the asset? a. Its acquisition cost b. Its estimated salvage value c. Its estimated useful life d. All of these must be known.

All of these must be known.

Legal fees incurred in successfully defending a patent suit should be capitalized when the patent has been Internally Developed - Purchased from an Inventor a. Yes No b. Yes Yes c. No Yes d. No No

Yes Yes

A company using the group depreciation method for its delivery trucks retired one of the trucks after the average service life of the group was reached. Cash proceeds were received from a salvage company. The net carrying amount of these group asset accounts would be decreased by the a. original cost of the truck. b. original cost of the truck less the cash proceeds. c. cash proceeds received. d. cash proceeds received and original cost of the truck.

cash proceeds received.

Which of the following depreciation methods applies a uniform depreciation rate each period to an asset's book value? a. Straight-line b. Declining-balance c. Units-of-production d. Sum-of-the-years'-digits

Declining-balance

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 obsolescence rather than time. c. Service value declines as a function of time rather than use. d. Physical wear and tear are more important than economic obsolescence.

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

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 "smoothes" 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.

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

A depreciable asset has an estimated 15 percent 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? Productive- Sum-of-the- Double-Output Years'-Digits Declining-Balance: a. Yes No No b. No No No c. No Yes No d. Yes Yes Yes

No No No

Which of the following depreciation methods most closely approximates the method used to deplete the cost of natural resources? a. Straight-line method b. Double-declining-balance method c. Sum-of-the-years'-digits method d. Units-of-production method

Units-of-production method

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 specific assets in the group. d. excludes salvage value from the base of the depreciation calculation.

does not recognize gain or loss on the retirement of specific assets in the group.

The sale of a depreciable asset resulting in a loss indicates that the proceeds from the sale were a. less than current market value. b. greater than cost. c. greater than book value. d. less than book value.

less than book value.

When the estimate of an asset's useful life is changed, a. depreciation expense for all past periods must be recalculated. b. there is no change in the amount of depreciation expense recorded for future years. c. only the depreciation expense in the remaining years is changed. d. None of these are true.

only the depreciation expense in the remaining years is changed.