Deck 11: Depreciation, Depletion, Impairment, and Disposal

Question 1

Group depreciation is applied to heterogeneous assets.

Answer 1

False

Question 2

Assets sold on or before the 15th are not considered owned for the month based on the nearest whole month convention.

Answer 2

True

Question 3

Under the MACRS principles, the residual value of the asset is not included in the computation of depreciation.

Answer 3

True

Question 4

A company must include impairment disclosures in the year of an impairment write-down and the subsequent three years following to ensure comparability in reporting.

Question 5

The nearest whole year depreciation convention considers assets acquired during the last 6 months of the year to have been owned for the entire year.

Question 6

The depreciation base is computed as follows:
Estimated Residual Value = Depreciation Base - Asset Cost

Question 7

Development costs incurred for purchasing equipment can be included as part of the cost of a natural resource.

Question 8

Acquisition costs, exploration costs, development costs, and reclamation costs can all be added to the cost of obtaining the rights to natural resources.

Question 9

A requirement of GAAP is that companies should review their assets to ensure they are not impaired, especially when a change dictates the book value may not be recoverable.

Question 10

Since the purpose of depreciation is to match the total cost of the asset with the benefits to be derived from the asset, the costs of repairs and maintenance associated with the asset should be considered when choosing a depreciation method.

Question 11

The service life of an asset can only be measured in units of activity or output.

Question 12

The use of accelerated methods is appropriate when the asset will be used more in the later periods versus earlier periods.

Question 13

GAAP does not require companies to disclose the balances of depreciable assets by nature or function but by major classes.

Question 14

The service life of an asset may be measured by all of the following except

A) units of output
B) units of activity
C) units of input
D) units of time

Question 15

Composite depreciation is applied to homogeneous assets which have similar service lives and residual values.

Question 16

Which one of the following statements is not true?

A) Depreciation is the process of allocating the purchase price of an asset minus its residual value to expense for each period benefited by the asset.
B) The cost of an asset includes all acquisition costs necessary to obtain the benefits to be derived from the asset.
C) The service life of an asset is the measure of the number of years of service expected from the asset before its disposal.
D) The residual value of an asset is the difference between the expected book value of the asset at the end of its service and the costs of disposal.

Question 17

GAAP requires the general description of the methods used in the computation of depreciation regarding major classes of assets to be disclosed in the notes of the financial statements.

Question 18

The purpose of depreciation is to allocate the asset's cost systematically and rationally over the life of the asset to ensure that the company has adequate capital for future replacement.

Question 19

Under the MACRS principles, the tax life of an asset is usually shorter than the asset's economic life.

Question 20

GAAP allows companies to choose between time-based, activity, group, or composite cost allocation methods, but once the method is chosen it must be applied consistently over time. This ensures that financial information is comparable.

Question 21

The Sahara Company purchased equipment on January 1, 2015, for $100,000. The equipment had an estimated residual value of $10,000, an estimated useful life of five years, and estimated lifetime output of 18,000 units. In 2016, the company produced 4,400 units and recorded depreciation expense of $22,000. What depreciation method did the company use?

A) straight-line method
B) sum-of-the-years'-digits method
C) double-declining-balance method
D) units-of-output method

Question 22

The Chuck Company purchased a truck on January 1, 2016. The truck cost $106,000 and was expected to have a residual value of $14,000 at the end of 2018. Chuck uses the 150%-declining-balance depreciation method. What amount of depreciation should Chuck record on the truck in 2016?

A) $53,000
B) $30,667
C) $35,333
D) $46,000

Question 23

Which one of the following is not a factor that limits the service life of an asset?

A) operational use
B) replacement value
C) deterioration as a function of time
D) obsolescence

Question 24

Which of the following depreciation methods should be used when the expected benefits to be received from an asset will decline each period?

A) straight-line method
B) units-of-production method
C) sum-of-the-years'-digits method
D) compound-interest method

Question 25

Exhibit 11-1
On January 1, Year 1, Hills purchased equipment for $350,000. The equipment had an estimated useful life of ten years and an estimated residual value of $50,000. Use the double-declining-balance method to answer the following questions).
Refer to Exhibit 11-1. What is the net book value of this asset that Hills should report on the company's balance sheet at December 31, year 2?

A) $142,600
B) $224,000
C) $192,000
D) $102,400

Question 26

Depreciation of an asset based on the number of hours of usage is an)

A) time-based method
B) accelerated method
C) replacement method
D) activity-based method

Question 27

On January 1, 2016, Lefty, Inc. purchased a machine for $6,000. The estimated life and residual value were five years and $150, respectively. The machine will produce approximately 80,000 units over its life. In 2016 and 2017, the machine produced 10,000 and 15,000 units, respectively. In 2017, Lefty recorded $1,440 of depreciation expense. The depreciation method in use was the

A) activity method
B) sum-of-the-years'-digits method
C) double-declining-balance method
D) straight-line method

Question 28

Which depreciation method ignores residual value when computing the depreciable base of an asset?

A) sum-of-the-years'-digits method
B) double-declining-balance method
C) composite method
D) group method

Question 29

Which one of the following statements is true?

A) The activity method of computing depreciation could result in zero depreciation expense in some periods of time.
B) If the activity method is in use, residual value should not be subtracted from cost to determine the depreciation base.
C) The activity method produces a constant total cost of depreciation each period.
D) The activity method should be used when the service life of the asset is affected mostly by the passage of time.

Question 30

Which of the following is not a factor in computing depreciation for a period?

A) method of cost allocation
B) service life
C) present value
D) residual value

Question 31

Which depreciation method calculates annual depreciation expense based on the book value of the asset?

A) double-declining-balance method
B) sum-of-the-years'-digits method
C) inventory systems method
D) group method

Question 32

How can service life be measured?

A) units of time
B) units of activity
C) units of output
D) All of the above answer choices can be used to measure service life.

Question 33

Devon Manufacturing Company purchased a new canning machine on July 1, 2015, for $190,000. The estimated salvage value is $15,000. The company uses units-of-production depreciation and estimates the machine will produce 125,000 units during its useful life. In 2015, the company manufactured 5,000 units after acquiring the machine. Depreciation expense for 2015 will be

A) $7,600
B) $6,500
C) $7,000
D) $14,000

Question 34

What determines residual value?

A) company policy
B) GAAP for each class of asset
C) IFRS
D) FASB

Question 35

The factors involved in computing periodic depreciation charges for an asset do not include the

A) method of cost allocation
B) current value of the asset
C) service life
D) residual value of the asset

Question 36

The Antarctica Co. acquired a machine on January 1, 2016, at a cost of $60,000. The machine is expected to have a ten-year life and a residual value of $5,000. The estimated lifetime output from the machine is expected to be 55,000 units. Under which of the following depreciation methods would the depreciation charge be the greatest in 2016 if 9,100 units were produced during the year?

A) activity units-of-output) method
B) straight-line method
C) sum-of-the-years'-digits method
D) double-declining-balance method

Question 37

What type of cost allocation must a company use?

A) systematic
B) rational
C) systematic and rational
D) systematic, rational, and reliable

Question 38

Exhibit 11-1
On January 1, Year 1, Hills purchased equipment for $350,000. The equipment had an estimated useful life of ten years and an estimated residual value of $50,000. Use the double-declining-balance method to answer the following questions).
Refer to Exhibit 11-1. How much depreciation should Hills record on the asset in year 2?

A) $16,000
B) $24,000
C) $56,000
D) $48,000

Question 39

Many companies that use the declining-balance method of depreciation switch to the straight-line method at some point in the life of a depreciable asset. When does that switch normally occur?

A) never, since one method must be applied consistently throughout the life of an asset
B) in the last quarter of the life of the asset
C) when the depreciation cost under the accelerated method exceeds the depreciation cost under the straight-line method
D) midpoint in the life of the asset

Question 40

Exhibit 11-1
On January 1, Year 1, Hills purchased equipment for $350,000. The equipment had an estimated useful life of ten years and an estimated residual value of $50,000. Use the double-declining-balance method to answer the following questions).
Refer to Exhibit 11-1. How much depreciation should Hills record on the asset in year 1?

A) $35,000
B) $30,600
C) $60,000
D) $70,000

Question 41

Lucas, Inc. purchased ten air conditioning units for $5,000 each, with an average expected service life of eight years and a residual value of $700 each. The depreciation rate for the assets, assuming the group depreciation method is used, will be

A) 10%
B) 10.75%
C) 12.5%
D) 14.5%

Question 42

On January 1, 2016, Flo, Inc. purchased an asset for $48,000. It was estimated that the asset life was seven years, after which it would have a residual value of $4,100. Assuming the use of the sum-of-the-years'-digits method, depreciation expense for 2016 would be

A) $12,804
B) $10,975
C) $12,000
D) $5,487.50

Question 43

Which one of the following statements is an advantage of the group and composite methods of depreciation?

A) Faulty estimates are concealed for long periods.
B) Gains are deferred beyond the period in which they actually occurred.
C) Record keeping is simplified.
D) Losses are not recognized in the period in which they occur.

Question 44

Which one of the following statements is true?

A) Financial statement readers cannot determine whether the depreciation method used by a company is appropriate.
B) Financial statement readers can determine the useful lives of assets depreciated during the reported period.
C) Financial statement readers cannot determine the depreciation expense for the reported period.
D) Financial statement readers can accurately estimate the effect an alternative depreciation method would have on income.

Question 45

On January 1, 2016, Mullhausen Co. began using the composite depreciation method. There were three machines to consider, as follows: At the end of the second year, Machine B was sold for $8,200. In the entry to record the sale, there should be a

A) $1,200 debit to Gain on Sale of Machine
B) $6,800 debit to Accumulated Depreciation
C) $6,800 debit to Loss on Sale of Machine
D) $8,000 debit to Accumulated Depreciation

Question 46

Which one of the following statements about group depreciation is true?

A) When assets are sold, losses will be recognized, but not gains.
B) This method is used for groups of dissimilar assets.
C) Different assets in the group will have different depreciation rates.
D) Only one accumulated depreciation account is necessary for the whole group.

Question 47

A company purchased ten delivery vehicles at a cost of $20,000 each and used the group depreciation method. Which of the following entries would be correct when recording the subsequent sale of a vehicle for $8,500 group accumulated depreciation is $88,000)?

Question 48

Which one of the following statements is true?

A) One objective of depreciating an asset is to provide funds for replacement.
B) GAAP requires the use of either straight-line or declining-balance depreciation.
C) Straight-line depreciation results in a decreasing rate of return on total assets.
D) Typically, the sum-of-the-years'-digits method will result in less depreciation expense in the year of acquisition than will the double-declining-balance method.

Question 49

Five skid steers costing $20,000 each were purchased by the Biggs Excavating Company at the beginning of 2016. Biggs capitalized the skid steers in a single asset account and depreciates them using the group method. Each skid steer was expected to have a residual value of $6,000 in four years. At the end of 2019, Biggs sold one skid steer for
$8,000. For what amount is accumulated depreciation debited in the journal entry to record the disposal of that skid steer?

A) $14,000
B) $12,000
C) $10,500
D) $20,000

Question 50

Which one of the following statements is not true regarding depreciation?

A) It is a systematic, rational method of allocating the cost of an asset over its useful life.
B) It attempts to match the costs of acquiring an asset to the benefits to be derived from the asset.
C) It does not attempt to measure the value of the asset.
D) It provides funds for the replacement of the asset through tax savings over the asset's life.

Question 51

Willis Limo Service purchased three used assets with the following characteristics: Assuming Willis uses straight-line depreciation, the composite depreciation rate is

A) 10.1%
B) 13.1%
C) 15.7%
D) 18.2%

Question 52

Which of the following is not a factor in selecting a depreciation method?

A) salvage value
B) repair and maintenance costs
C) financial statement effects
D) the risk associated with the cash flows from the asset

Question 53

Which one of the following statements is not a disclosure requirement for depreciation?

A) the balance of major classes of depreciable assets
B) a general description of the methods) used for depreciation
C) the accumulated depreciation for each major class of depreciable asset
D) the useful lives for each major class of depreciable asset

Question 54

What was the cost of the asset?

A) $5,900
B) $7,100
C) $4,500
D) $8,500

Question 55

On January 1, 2015, Morgantown Co. purchased five machines at a price of $10,000 per machine. Because the estimated life was five years and no salvage value was expected, a group depreciation rate of 20% was used. On January 1, 2017, one of the machines was sold for $5,000. The correct entry to record the sale of the machine is

Question 56

Mark Industries uses the straight-line depreciation method. One asset had been purchased for $11,000. Annual depreciation expense was $2,000 after considering residual value of $1,000. What was the estimated useful life of the asset?

A) 5.50 years
B) 5.00 years
C) 10.00 years
D) 11.00 years

Question 57

The Cardwell Company purchased a machine on January 2, 2016, at a cost of $1,200,000. The machine had an estimated useful life of eight years and a residual value of $120,000. Cardwell computes depreciation by the sum-of- the-years'-digits method. What amount, net of accumulated depreciation will appear on the company's December 31, 2018, balance sheet for this machine?

A) $570,000
B) $630,000
C) $805,094
D) $1,080,000

Question 58

What effect does depreciation have on the calculation of the rate of return on total assets?

A) affects both the numerator and denominator
B) no effect
C) increases the outcome
D) decreases the outcome

Question 59

A student is defending a certain depreciation method. She uses the argument that repairs and maintenance costs will probably increase as the asset gets older. She also argues that the asset will produce less as it gets older. What depreciation method is she probably defending?

A) straight-line method
B) sum-of-the-years'-digits method
C) sinking-fund method
D) activity method

Question 60

Which one of the following disclosures is required by generally accepted accounting principles?

A) depreciation expense for each major class of asset
B) balances of major classes of depreciable assets by nature or function
C) accumulated depreciation on each depreciable asset
D) an explanation of why the depreciation method used was selected by management

Question 61

Hill has a fiscal year-end of December 31. In February, Hill purchased a piece of equipment for $12,000 with a four- year useful life and a zero residual value. Hill used the equipment to produce finished goods in March that were sold on credit in April with cash collected in May. Hill uses straight-line depreciation. The amount of depreciation expense affecting the reported income on the first quarter income statement was

A) $250
B) $0
C) $500
D) $700

Question 62

On June 15, 2015, Jupiter Corporation purchased a machine for $50,000 with an estimated useful life of six years and a residual value of $8,000. The company uses units-of-production depreciation and estimates the machine will last 300,000 units. The machine made 15,000 units in 2015 and 45,000 units in 2016. The accumulated depreciation balance on December 31, 2016, after the adjusting entries have been posted should be

A) $8,400
B) $10,000
C) $11,200
D) $13,333

Question 63

When conducting an impairment test, a company must estimate

A) future cash inflows from its use of the asset and eventual sale.
B) future net cash flows from its use of the asset and eventual sale.
C) total net flows from its use of the asset and eventual sale.
D) total cash from its use of the asset and eventual sale.

Question 64

An example of an event where the book value of property, plant, and equipment may not be recoverable would include

A) a significant change in the way the asset is used.
B) a current period operating loss.
C) a significant decrease in the fair value of the asset.
D) All of these choices are examples where the book value may not be recoverable.

Question 65

Exhibit 11-2
Browning purchased a business copier for $4,500 on August 3, 2016. It has an estimated residual value of $500 and an expected service life of five years. Browning uses double-declining-balance depreciation computed to the nearest whole month.
Refer to Exhibit 11-2. Depreciation expense for 2017 should be

A) $600
B) $667
C) $750
D) $1,500

Question 66

On July 1, 2016, American Stereo purchased stereo equipment for $5,000. The estimated life of the equipment was ten years and the residual value was estimated to be $2,000. Double-declining-balance depreciation was used. If calculations are based on the nearest whole month, depreciation expense for the year 2018 was

A) $720
B) $900
C) $640
D) $800

Question 67

The FASB established principles for evaluating asset impairment because it hoped financial reporting would

A) be enhanced through increasing the usefulness of a company's financial statements.
B) present information that is expected to be more relevant.
C) improve comparability across companies.
D) All of these choices are reasons that FASB established principles for evaluating asset impairment.

Question 68

The Bourbon Street Ice Cream Company discovers that depreciation expense was overstated last year. How should this discovery be reported in the current year?

A) as a reduction in the current year's depreciation expense
B) as an increase to the retained earnings beginning balance
C) as a miscellaneous item in the Other Revenue/Expense section of the income statement
D) as a footnote only to the current year's financial statements

Question 69

Exhibit 11-2
Browning purchased a business copier for $4,500 on August 3, 2016. It has an estimated residual value of $500 and an expected service life of five years. Browning uses double-declining-balance depreciation computed to the nearest whole month.
Refer to Exhibit 11-2. Depreciation expense for 2016 was

A) $600
B) $667
C) $750
D) $1,500

Question 70

On June 1, 2016, Bagby Co. purchased a new car for $36,000 with a useful life of eight years and a residual value of $4,800. If the company used double-declining-balance depreciation computed to the nearest whole year, depreciation expense for 2017 was

A) $6,750.00
B) $7,687.50
C) $5,250.00
D) $5,850.00

Question 71

On July 9, 2015, Marcus Company purchased an asset for $18,000. Marcus estimated a four-year life and no salvage value. Marcus uses sum-of-the-years'-digits depreciation to the nearest whole month. Depreciation expense for 2018 will be

A) $1,800
B) $2,700
C) $3,600
D) $4,500

Question 72

On January 1, 2016, Digger purchased some equipment for $29,600. The anticipated life of the equipment was five years and residual value was estimated to be $4,100. The machine was expected to produce 600,000 units. In January of 2016, 35,000 units were produced and production was doubled in February. The company uses the activity depreciation method. What is the amount of depreciation expense for the month of February?

A) $ 637.50
B) $1,487.50
C) $3,453.33
D) $2,975.00

Question 73

Wayne Co. purchased $40,000 of equipment with a salvage value of $5,000 and a useful life of nine years on August 15, 2016. If the company used sum-of-the-years'-digits depreciation computed to the nearest whole year, depreciation expense for 2017 was

A) $6,222
B) $7,000
C) $7,111
D) $8,000

Question 74

Property, plant, and equipment must be reviewed for impairment when which one of the following events occurs?

A) A significant change in the asset's estimated useful life occurs.
B) The costs of constructing the asset are determined to be less than the budgeted amount.
C) A current period operating loss occurs.
D) Investing activities produce a negative cash flow.

Question 75

Clementine Co. computes depreciation to the nearest whole month and uses the straight-line method. On May 2, 2015, the company purchased an asset for $18,000 with a four-year life and a $3,600 residual value. On October 6, Karen also sold an asset with a cost of $34,500 that had been purchased in 2015. The sold asset had been estimated to have a five-year life and no residual value when it was purchased. The depreciation expense on these two assets for 2015 totals

A) $7,575
B) $10,500
C) $9,300
D) $7,600

Question 76

An impairment loss must be recognized when

A) an asset's book value is lower than its fair value.
B) an asset's book value is higher than its fair value
C) the present value of the asset's future cash flows is lower than the asset's fair value.
D) the present value of the asset's future cash flows is higher than the asset's fair value.

Question 77

Redeau Company has been depreciating certain assets using the straight-line method. At the beginning of the current year, the company changed to the sum-of-the-years'-digits method to depreciate these assets. Which of the following statements regarding this change is true?

A) The change should be accounted for prospectively.
B) The change should be accounted for with an adjustment of the accumulated depreciation and the retained earnings balances.
C) The change should be accounted for by including the cumulative effect of the change in the current year's income statement.
D) The accounting impact of the change is limited to the difference in current-year depreciation on the affected assets.

Question 78

On January 2, 2016, Karen's Culinary Delights purchased a piece of equipment for $42,000 with a useful life of seven years and a residual value of $6,000. If Karen's used the sum-of-the-years'-digits method with the half-year convention, depreciation expense for 2016 was

A) $9,000.00
B) $10,500.00
C) $5,250.00
D) $4,500.00

Question 79

When must a company include disclosures concerning the write down of an impaired asset?

A) In the year of the write down only.
B) In the year of the write down and the subsequent year.
C) In the year of the write down and the next two years.
D) In the year of the write down and the next three years.

Question 80

Exhibit 11-2
Browning purchased a business copier for $4,500 on August 3, 2016. It has an estimated residual value of $500 and an expected service life of five years. Browning uses double-declining-balance depreciation computed to the nearest whole month.
Refer to Exhibit 11-2. The accumulated depreciation balance at December 31, 2017, should be

A) $1,750
B) $2,000
C) $2,250
D) $2,340