Chp 11

The following is true of depreciation accounting.
a. It is not a matter of valuation.
b. It is part of the matching of revenues and expenses.
c. It retains funds by reducing income taxes and dividends.
d. All of these

d. All of these

Which of the following principles best describes the conceptual rationale for the methods
of matching depreciation expense with revenues?
a. Associating cause and effect
b. Systematic and rational allocation
c. Immediate recognition
d. Partial recognition

b. Systematic and rational allocation

Depreciation accounting
a. provides funds.
b. funds replacements.
c. retains funds.
d. all of these.

c. retains funds.

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. 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.

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. 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 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.

b. the cost of the asset less the related depreciation recorded to date.

c. the estimated market value of the asset at the end of its useful life.

d. the acquisition cost of the asset.

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

Economic factors that shorten the service life of an asset include
a. obsolescence.
b. supersession.
c. inadequacy.
d. all of these.

d. all of these

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

a. What is the depreciation base to use for the asset?
b. What is the asset’s useful life?
c. What method of cost apportionment is best for this asset?
d. What product or service is the asset related to?

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

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

The activity method of depreciation
a. is a variable charge approach.
b. assumes that depreciation is a function of the passage of time.
c. conceptually associates cost in terms of input measures.
d. all of these.

a. is a variable charge approach.

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

a. units-of-production.
b. straight-line.
c. sum-of-the-years’-digits.
d. declining-balance.

a. units-of-production.

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

a. be constant.
b. vary with unit sales.
c. vary with sales revenue.
d. vary with production.

d. vary with production.

Use of the double-declining balance method

a. results in a decreasing charge to depreciation expense.
b. means salvage value is not deducted in computing the depreciation base.
c. means the book value should not be reduced below salvage value.
d. all of these.

d. all of these.

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

a. results in salvage value being ignored.
b. means the denominator is the years remaining at the beginning of the year.
c. means the book value should not be reduced below salvage value.
d. all of these.

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

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?
a. Vertically and sloping down to the right
b. Vertically and sloping up to the right
c. Horizontally and sloping down to the right
d. Horizontally and sloping up to the right

c. Horizontally and sloping down to the right

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

a. provides for the declining productivity of an aging asset.
b. ignores variations 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 write-offs than decreasing charge methods.

b. ignores variations in the rate of asset use.

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

a. company should have been using one of the accelerated methods of depreciation.
b. estimated average life of the machinery is less than the actual average useful life.
c. estimated average life of the machinery is greater than the actual average useful life.
d. company has been retiring fully depreciated machinery that should have remained in
service.

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

For the composite method, the composite

a. rate is the total cost divided by the total annual depreciation.
b. rate is the total annual depreciation divided by the total depreciable cost.
c. life is the total cost divided by the total annual depreciation.
d. life is the total depreciable cost divided by the total annual depreciation.

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

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
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

c. cash proceeds received.

Composite or group depreciation is a depreciation system whereby

a. the years of useful life of the various assets in the group are added together and the
total divided by the number of items.

b. the cost of individual units within an asset group is charged to expense in the year a
unit is retired from service.

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.

d. the original cost of all items in a given group or class of assets is retained in the asset
account and the cost of replacements is charged to expense when they are acquired.

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.

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

Depreciation is normally computed on the basis of the nearest

a. full month and to the nearest cent.
b. full month and to the nearest dollar.
c. day and to the nearest cent.
d. day and to the nearest dollar.

b. full month and to the nearest dollar.

Myers Company acquired machinery on January 1, 2007 which it depreciated under the
straight-line method with an estimated life of fifteen years and no salvage value. On
January 1, 2012, 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?

a. As a prior period adjustment

b. As the cumulative effect of a change in accounting principle in 2012

c. By setting future annual depreciation equal to one-sixth of the book value on January
1, 2012

d. By continuing to depreciate the machinery over the original fifteen year life

c. By setting future annual depreciation equal to one-sixth of the book value on January 1, 2012

A change in estimate should

a. result in restatement of prior period statements.
b. be handled in current and future periods.
c. be handled in future periods only.
d. be handled retroactively.

b. be handled in current and future periods.

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

a. recognize an extraordinary loss for the period.

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

c. include a credit to the equipment account.

d. not be made if the equipment is still being used.

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

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

a. The estimated life is based on economic or productive life.

b. Assets subject to either are reported in the same classification on the balance sheet.

c. The rates may be changed upon revision of the estimated productive life used in the
original rate computations.

d. Both depreciation and depletion are based on time.

d. Both depreciation and depletion are based on time.

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

a. Depletion applies to natural resources while depreciation applies to plant and
equipment.

b. Depletion refers to the physical exhaustion or consumption of the asset while
depreciation refers to the wear, tear, and obsolescence of the asset.

c. Many formulas are used in computing depreciation but only one is used to any extent
in computing 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.

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.

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

a. use accelerated depreciation methods.
b. use straight-line depreciation methods.
c. recognize both functional and physical factors in depreciation.
d. none of these

d. none of these

Depletion expense

a. is usually part of cost of goods sold.
b. includes tangible equipment costs in the depletion base.
c. excludes intangible development costs from the depletion base.
d. excludes restoration costs from the depletion base.

a. is usually part of cost of goods sold.

The most common method of recording depletion for accounting purposes is the
a. percentage depletion method.
b. decreasing charge method.
c. straight-line method.
d. units-of-production method.

d. units-of-production method.

Reserve recognition accounting

a. is presently the generally accepted accounting method for financial reporting of oil and
gas reserves.

b. is a historical cost method similar to the full cost approach and the successful efforts
approach.

c. is used for reporting of oil and gas reserves for federal income tax purposes.

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

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

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

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

a. Accumulated depreciation, either by major classes of depreciable assets or in total.

b. Details demonstrating how depreciation was calculated.

c. Depreciation expense for the period.

d. Balances of major classes of depreciable assets, by nature and function.

b. Details demonstrating how depreciation was calculated.

The book value of a plant asset is

a. the fair market value of the asset at a balance sheet date.

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

c. equal to the balance of the related accumulated depreciation account.

d. the assessed value of the asset for property tax purposes.

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

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

a. is not a current practice in financial reporting.

b. is not essential to a fair presentation of financial position.

c. is needed in financial reporting when company policy differs from income tax policy.

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

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

The asset turnover ratio is computed by dividing

a. net income by ending total assets.
b. net income by average total assets.
c. net sales by ending total assets.
d. net sales by average total assets.

d. net sales by average total assets.

The rate of return on total assets is computed by dividing

a. Net income by ending total assets.
b. Net sales by average total assets.
c. Net sales by ending total assets.
d. Net income by average total assets.

d. Net income by average total assets.

A major objective of MACRS for tax depreciation is to

a. reduce the amount of depreciation deduction on business firms’ tax returns.
b. assure that the amount of depreciation for tax and book purposes will be the same.
c. help companies achieve a faster write-off of their capital assets.
d. require companies to use the actual economic lives of assets in calculating tax
depreciation.

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

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

a. Cost of asset
b. Property recovery class
c. Half-year convention
d. Salvage value

d. Salvage value

If income tax effects are ignored, accelerated depreciation methods

a. provide funds for the earlier replacement of fixed assets.
b. increase funds provided by operations.
c. tend to offset the effect of steadily increasing repair and maintenance costs on the
income statement.
d. tend to decrease the fixed asset turnover ratio.

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

Fernandez Corporation purchased a truck at the beginning of 2014 for $57,000. The truck is estimated to have a salvage value of $2,280 and a useful life of 182,400 miles. It was driven 26,220 miles in 2014 and 35,340 miles in 2015.

Compute depreciation expense for 2014 and 2015

Depreciation expense for 2014 —7866 Depreciation expense for 2015—–10602

Lockard Company purchased machinery on January 1, 2014, for $141,120. The machinery is estimated to have a salvage value of $14,112 after a useful life of 8 years.

a.Compute 2014 depreciation expense using the straight-line method.

b.Compute 2014 depreciation expense using the straight-line method assuming the machinery was purchased on September 1, 2014.

a.15876 b.5292

Lockard Company purchased machinery on January 1, 2014, for $199,760. The machinery is estimated to have a salvage value of $19,976 after a useful life of 8 years.

Compute 2014 depreciation expense using the sum-of-the-years’-digits method.

Compute 2014 depreciation expense using the sum-of-the-years’-digits method, assuming the machinery was purchased on April 1, 2014.

39952 29964

Lockard Company purchased machinery on January 1, 2014, for $135,200. The machinery is estimated to have a salvage value of $13,520 after a useful life of 8 years.

Compute 2014 depreciation expense using the double-declining-balance method.

Compute 2014 depreciation expense using the double-declining-balance method, assuming the machinery was purchased on October 1, 2014.

33800 8450

Cominsky Company purchased a machine on July 1, 2015, for $34,440. Cominsky paid $246 in title fees and county property tax of $154 on the machine. In addition, Cominsky paid $615 shipping charges for delivery, and $584 was paid to a local contractor to build and wire a platform for the machine on the plant floor. The machine has an estimated useful life of 6 years with a salvage value of $3,690.

Determine the depreciation base of Cominsky’s new machine. Cominsky uses straight-line depreciation.

32349

Holt Company purchased a computer for $14,080 on January 1, 2013. Straight-line depreciation is used, based on a 6-year life and a $1,760 salvage value. In 2015, the estimates are revised. Holt now feels the computer will be used until December 31, 2016, when it can be sold for $880.

Compute the 2015 depreciation.

4547

Jurassic Company owns machinery that cost $2,020,500 and has accumulated depreciation of $853,100. The expected future net cash flows from the use of the asset are expected to be $1,122,500. The fair value of the machinery is $898,000.

Prepare the journal entry, if any, to record the impairment loss.

Loss on Impairment—-269400 Accumulated Depreciation-Machinery..269400

Everly Corporation acquires a coal mine at a cost of $452,800. Intangible development costs total $113,200. After extraction has occurred, Everly must restore the property (estimated fair value of the obligation is $90,560), after which it can be sold for $181,120. Everly estimates that 4,528 tons of coal can be extracted.

If 792 tons are extracted the first year, prepare the journal entry to record depletion

Inventory……..83160 Coal Mine………………………..83160

Deluxe Ezra Company purchases equipment on January 1, Year 1, at a cost of $947,380. The asset is expected to have a service life of 12 years and a salvage value of $80,800.

a. Compute the amount of depreciation for Years 1 through 3 using the straight-line depreciation method.

b. Compute the amount of depreciation for each of Years 1 through 3 using the sum-of-the-years’-digits method.

c. Compute the amount of depreciation for each of Years 1 through 3 using the double-declining-balance method.

a. 72215 b.Depreciation for Year 1—133320 Depreciation for Year 2—–122210 Depreciation for Year 3—- 111100 c.Depreciation for Year 1—157928 Depreciation for Year 2—–131602 Depreciation for Year 3—-109664

Judds Company purchased a new plant asset on April 1, 2014, at a cost of $1,116,270. It was estimated to have a service life of 20 years and a salvage value of $94,200. Judds’ accounting period is the calendar year.

a. Compute the depreciation for this asset for 2014 and 2015 using the sum-of-the-years’-digits method.

b.Compute the depreciation for this asset for 2014 and 2015 using the double-declining-balance method.

a.Depreciation for 2014……….83720 Depreciation for 2015………93690 b.Depreciation for 2014………83720 Depreciation for 2015………103255

Machinery purchased for $ 67,800 by Tom Brady Co. in 2010 was originally estimated to have a life of 8 years with a salvage value of $ 4,520 at the end of that time. Depreciation has been entered for 5 years on this basis. In 2015, it is determined that the total estimated life should be 10 years with a salvage value of $ 5,085 at the end of that time. Assume straight-line depreciation.

a. Prepare the entry to correct the prior year’s depreciation, if necessary.

b.Prepare the entry to record depreciation for 2015

a.No correcting entry is necessary because changes in estimate are handled in the current and prospective periods. b.Depreciation Expense………..4633 Accumulated Depreciation-Machinery……………4633

Presented below is information related to equipment owned by Suarez Company at December 31, 2014.

Cost $ 13,671,000
Accumulated depreciation to date 1,519,000
Expected future net cash flows 10,633,000
Fair value 7,291,200

Assume that Suarez will continue to use this asset in the future. As of December 31, 2014, the equipment has a remaining useful life of 4 years.

a.Prepare the journal entry (if any) to record the impairment of the asset at December 31, 2014.

b.Prepare the journal entry to record depreciation expense for 2015

c.The fair value of the equipment at December 31, 2015, is $7,746,900. Prepare the journal entry (if any) necessary to record this increase in fair value.

a.Loss on Impairment…..4860800 Accumulated Depreciation-Equipment……..4860800 b.Depreciation Expense….1822800 Accumulated Depreciation-Equipment…….1822800 c.No Entry………0 No Entry………………….0