Ch.11

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  • 1/40 Questions

    Which of the following principles best describes the conceptual rationale for the methods of matching depreciation expense with revenues?

    • Associating cause and effect
    • Systematic and rational allocation
    • Immediate recognition
    • Partial recognition
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Ch.11 - Quiz
About This Quiz

Explore the fundamentals of depreciation in accounting through this focused quiz titled 'ch. 11'. It assesses understanding of depreciation methods, principles, and concepts crucial for asset management in financial accounting, enhancing skills relevant for accounting professionals.

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  • 2. 

    Economic factors that shorten the service life of an asset include

    • Obsolescence

    • Supersession.

    • Inadequacy.

    • All of these

    Correct Answer
    A. All of these
    Explanation
    The correct answer is "all of these". Economic factors that shorten the service life of an asset can include obsolescence, which refers to the asset becoming outdated or no longer useful due to technological advancements or changing market demands. Supersession occurs when a newer, more advanced asset replaces the existing one, making it obsolete. Inadequacy refers to the asset no longer being able to meet the needs or requirements of the users or industry. All three factors can contribute to the shortened service life of an asset.

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  • 3. 

    Depreciation is normally computed on the basis of the nearest

    • Full month and to the nearest cent

    • Full month and to the nearest dollar

    • Day and to the nearest cent.

    • Day and to the nearest dollar

    Correct Answer
    A. Full month and to the nearest dollar
    Explanation
    Depreciation is typically calculated based on the nearest full month and rounded to the nearest dollar. This means that any partial months are not taken into account, and the final depreciation amount is rounded to the nearest whole dollar. This method ensures simplicity and ease of calculation while still providing a reasonably accurate estimate of the asset's value decrease over time.

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  • 4. 

    The following is true of depreciation accounting

    • It is not a matter of valuation

    • It is part of the matching of revenues and expenses

    • It retains funds by reducing income taxes and dividends

    • All of these

    Correct Answer
    A. All of these
    Explanation
    Depreciation accounting is the process of allocating the cost of an asset over its useful life. It is not a matter of valuation because it does not determine the current value of the asset. Instead, it is part of the matching principle in accounting, where expenses are recognized in the same period as the revenues they help generate. By depreciating assets, a company can spread out the cost over time and match it with the revenue generated by those assets. Additionally, depreciation reduces a company's taxable income, resulting in lower income taxes. This, in turn, helps retain funds that can be used for other purposes, such as paying dividends to shareholders. Therefore, all of these statements are true about depreciation accounting.

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  • 5. 

    The major difference between the service life of an asset and its physical life is that

    • 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.

    • Physical life is the life of an asset without consideration of salvage value and service life requires the use of salvage value.

    • Physical life is always longer than service life.

    • 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.

    Correct Answer
    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.
    Explanation
    The major difference between the service life of an asset and its physical life is that the service life refers to the time an asset will be used by a company, while the physical life refers to how long the asset will last. This means that the service life is specific to the company's use of the asset, while the physical life is a broader measure of the asset's overall lifespan.

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  • 6. 

    The term "depreciable base," or "depreciation base," as it is used in accounting, refers to

    • The total amount to be charged (debited) to expense over an asset's useful life

    • The cost of the asset less the related depreciation recorded to date

    • The estimated market value of the asset at the end of its useful life

    • The acquisition cost of the asset

    Correct Answer
    A. The total amount to be charged (debited) to expense over an asset's useful life
    Explanation
    The correct answer is "the total amount to be charged (debited) to expense over an asset's useful life." This term refers to the cumulative amount that will be expensed over the useful life of an asset due to depreciation. It represents the cost of the asset that will be allocated as an expense over time.

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  • 7. 

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

    • Units-of-production

    • Straight-line.

    • Sum-of-the-years'-digits

    • Declining-balance.

    Correct Answer
    A. Units-of-production
    Explanation
    Depreciation is considered a variable expense for income statement purposes when the units-of-production method is used. This method calculates depreciation based on the number of units produced or the level of activity. Therefore, the expense fluctuates depending on the level of production. This is different from the straight-line, sum-of-the-years'-digits, and declining-balance methods, where depreciation is calculated based on a fixed percentage or formula, resulting in a constant expense over time.

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  • 8. 

    A change in estimate should

    • Result in restatement of prior period statements.

    • Be handled in current and future periods

    • Be handled in future periods only

    • Be handled retroactively

    Correct Answer
    A. Be handled in current and future periods
    Explanation
    When there is a change in estimate, it should be reflected in the current and future periods rather than restating the prior period statements. This means that the change in estimate should be applied prospectively, affecting the financial statements from the current period onwards. Restating prior period statements would mean revising historical financial information, which is not necessary for a change in estimate. Therefore, the correct approach is to handle the change in estimate in the current and future periods.

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  • 9. 

    Composite or group depreciation is a depreciation system whereby

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

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

    • 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

    • 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.

    Correct Answer
    A. 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
    Explanation
    The correct answer is 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. This means that the depreciation expense for each asset in the group is calculated based on the total cost of all assets in the group and the total number of years of useful life. This method ensures that the depreciation expense is allocated evenly across all the assets in the group, resulting in a consistent rate of depreciation over time.

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  • 10. 

    Of the following costs related to the development of natural resources, which one is not a part of depletion cost

    • Acquisition cost of the natural resource deposit

    • Exploration costs

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

    • Intangible development costs such as drilling costs, tunnels, and shafts

    Correct Answer
    A. Tangible equipment costs associated with machinery used to extract the natural resource
    Explanation
    The correct answer is tangible equipment costs associated with machinery used to extract the natural resource. Depletion cost refers to the cost of using up natural resources over time. The acquisition cost of the natural resource deposit, exploration costs, and intangible development costs such as drilling costs, tunnels, and shafts are all part of the depletion cost as they are directly related to the development and extraction of natural resources. Tangible equipment costs, on the other hand, are considered as separate costs and are not directly associated with the depletion of natural resources.

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  • 11. 

    The rate of return on total assets is computed by dividing

    • Net income by ending total assets

    • Net sales by average total assets.

    • Net sales by ending total assets

    • Net income by average total assets

    Correct Answer
    A. Net income by average total assets
    Explanation
    The rate of return on total assets is calculated by dividing the net income by the average total assets. This ratio measures the profitability and efficiency of a company in generating profits from its total assets. By using the average total assets, it takes into account any fluctuations in asset values over a given period, providing a more accurate representation of the company's performance.

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  • 12. 

    Myers Company acquired machinery on January 1, 2005 which it depreciated under the straight-line method with an estimated life of fifteen years and no salvage value. On January 1, 2010, 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?

    • As a prior period adjustment

    • As the cumulative effect of a change in accounting principle in 2010

    • By setting future annual depreciation equal to one-sixth of the book value on January 1, 2010

    • By continuing to depreciate the machinery over the original fifteen year life

    Correct Answer
    A. By setting future annual depreciation equal to one-sixth of the book value on January 1, 2010
    Explanation
    The change in the estimated remaining life of the machinery should be accounted for by setting future annual depreciation equal to one-sixth of the book value on January 1, 2010. This means that Myers will now depreciate the machinery over the remaining six years instead of the original fifteen-year life. This adjustment reflects the change in the estimated useful life of the asset and ensures that the depreciation expense is allocated appropriately over the revised remaining life of the machinery.

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  • 13. 

    If income tax effects are ignored, accelerated depreciation methods

    • Provide funds for the earlier replacement of fixed assets

    • Increase funds provided by operations.

    • Tend to offset the effect of steadily increasing repair and maintenance costs on the income statement

    • Tend to decrease the fixed asset turnover ratio

    Correct Answer
    A. Tend to offset the effect of steadily increasing repair and maintenance costs on the income statement
    Explanation
    Accelerated depreciation methods tend to offset the effect of steadily increasing repair and maintenance costs on the income statement. This means that by using accelerated depreciation methods, companies can allocate a larger portion of the cost of an asset to the earlier years of its useful life. This helps to reduce the reported income in those years, which can offset the higher repair and maintenance costs incurred as the asset ages. As a result, the impact of these increasing costs on the income statement is minimized, allowing the company to maintain a more stable financial performance.

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  • 14. 

    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

    • Be constant

    • Vary with unit sales

    • Vary with sales revenue

    • Vary with production

    Correct Answer
    A. Vary with production
    Explanation
    The credit to accumulated depreciation from period to period will vary with production because the units-of-production method calculates depreciation based on the actual usage or production of the asset. As the production levels increase or decrease, the depreciation expense will also increase or decrease accordingly. This method allows for a more accurate reflection of the asset's wear and tear over time.

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  • 15. 

    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

    • Original cost of the truck

    • Original cost of the truck less the cash proceeds.

    • Cash proceeds received

    • Cash proceeds received and original cost of the truck

    Correct Answer
    A. Cash proceeds received
    Explanation
    When Watkins Truck Rental 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 cash proceeds received. This means that the amount of cash received from the salvage company will be subtracted from the original cost of the truck, resulting in a decrease in the carrying value of the asset.

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  • 16. 

    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

    • Recognize an extraordinary loss for the period

    • Include a credit to the equipment accumulated depreciation account

    • Include a credit to the equipment account.

    • Not be made if the equipment is still being used

    Correct Answer
    A. Include a credit to the equipment accumulated depreciation account
    Explanation
    When a printing press used in operations suffers a permanent impairment in value due to technological changes, an entry to record the impairment should include a credit to the equipment accumulated depreciation account. This is because the accumulated depreciation account represents the total depreciation expense incurred on the equipment over its useful life. By crediting this account, the company acknowledges that the value of the equipment has decreased and needs to be adjusted. This entry is necessary to accurately reflect the decreased value of the equipment on the company's financial statements.

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  • 17. 

    When depreciation is computed for partial periods under a decreasing charge depreciation method, it is necessary to

    • Charge a full year's depreciation to the year of acquisition

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

    • Use the straight-line method for the year in which the asset is sold or otherwise disposed of.

    • Use a salvage value equal to the first year's partial depreciation charge

    Correct Answer
    A. Determine depreciation expense for the full year and then prorate the expense between the two periods involved.
    Explanation
    When depreciation is computed for partial periods under a decreasing charge depreciation method, it is necessary to determine depreciation expense for the full year and then prorate the expense between the two periods involved. This is because the decreasing charge depreciation method allocates a higher depreciation expense in the earlier years and a lower expense in the later years. Therefore, when calculating depreciation for partial periods, it is important to calculate the full year's expense and then divide it proportionally between the two periods to accurately reflect the decreasing charge pattern.

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  • 18. 

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

    • Cost of asset

    • Property recovery class

    • Half-year convention

    • Salvage value

    Correct Answer
    A. Salvage value
    Explanation
    Under MACRS (Modified Accelerated Cost Recovery System), the salvage value of an asset is not considered in determining depreciation for tax purposes. MACRS is a tax depreciation method used by businesses to recover the cost of qualifying assets over a specified period. It calculates depreciation based on the cost of the asset, property recovery class, and the half-year convention. The salvage value refers to the estimated residual value of the asset at the end of its useful life and is not taken into account when calculating depreciation under MACRS.

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  • 19. 

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

    • What is the depreciation base to use for the asset?

    • What is the asset's useful life?

    • What method of cost apportionment is best for this asset?

    • What product or service is the asset related to?

    Correct Answer
    A. What product or service is the asset related to?
    Explanation
    The question asks which of the options is not one of the basic questions that must be answered before computing the amount of depreciation charge. The first three options (depreciation base, useful life, and cost apportionment method) are all factors that need to be considered when calculating depreciation. However, the fourth option (product or service related to the asset) is not directly relevant to determining the depreciation charge. The depreciation charge is based on the asset's cost, useful life, and method of cost apportionment, not on the product or service it is related to.

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  • 20. 

    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

    • Company should have been using one of the accelerated methods of depreciation

    • Estimated average life of the machinery is less than the actual average useful life

    • Estimated average life of the machinery is greater than the actual average useful life

    • Company has been retiring fully depreciated machinery that should have remained in service.

    Correct Answer
    A. Estimated average life of the machinery is less than the actual average useful life
    Explanation
    The most likely explanation for the increasing ratio of total accumulated depreciation to the total cost of the machinery is that the estimated average life of the machinery is less than the actual average useful life. This means that the company has been depreciating the machinery at a faster rate than it should have, resulting in a higher ratio of accumulated depreciation to cost.

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  • 21. 

    The asset turnover ratio is computed by dividing

    • Net income by ending total assets

    • Net income by average total assets

    • Net sales by ending total assets

    • Net sales by average total assets

    Correct Answer
    A. Net sales by average total assets
    Explanation
    The asset turnover ratio measures the efficiency of a company in generating sales from its assets. It indicates how well a company is utilizing its assets to generate revenue. The formula for calculating the asset turnover ratio is net sales divided by average total assets. This ratio helps investors and analysts assess the company's ability to generate sales and maximize the use of its assets. By using average total assets, it takes into account any fluctuations in assets over a period of time, providing a more accurate measure of asset utilization.

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  • 22. 

    Depreciation accounting

    • Provides funds

    • Funds replacements

    • Retains funds

    • All of these

    Correct Answer
    A. Retains funds
    Explanation
    Depreciation accounting is a method used to allocate the cost of an asset over its useful life. By recording depreciation expenses, a company can set aside funds to replace the asset when it becomes obsolete or worn out. This practice helps the company retain funds for future asset replacements, ensuring that they have the necessary funds available when needed. Therefore, the correct answer is "retains funds."

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  • 23. 

    The book value of a plant asset is

    • The fair market value of the asset at a balance sheet date

    • The asset's acquisition cost less the total related depreciation recorded to date.

    • Equal to the balance of the related accumulated depreciation account.

    • The assessed value of the asset for property tax purposes

    Correct Answer
    A. The asset's acquisition cost less the total related depreciation recorded to date.
    Explanation
    The book value of a plant asset is the asset's acquisition cost less the total related depreciation recorded to date. This means that the book value represents the net value of the asset after accounting for the depreciation that has been recorded over time. It is a measure of the asset's worth on the company's balance sheet, taking into account its original cost and the amount of depreciation that has been allocated to it. The other options mentioned in the question are not accurate definitions of the book value of a plant asset.

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  • 24. 

    Use of the double-declining balance method

    • Results in a decreasing charge to depreciation expense

    • Means salvage value is not deducted in computing the depreciation base

    • Means the book value should not be reduced below salvage value

    • All of these.

    Correct Answer
    A. All of these.
    Explanation
    The use of the double-declining balance method results in a decreasing charge to depreciation expense because it allocates a higher amount of depreciation in the early years of an asset's life and gradually decreases the amount over time. This method does not deduct the salvage value in computing the depreciation base, meaning that the asset's residual value is not considered when calculating depreciation. Additionally, the book value of the asset should not be reduced below the salvage value, ensuring that the asset is not valued at less than its estimated residual worth. Therefore, all of these statements are true when using the double-declining balance method.

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  • 25. 

    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?

    • Vertically and sloping down to the right

    • Vertically and sloping up to the right

    • Horizontally and sloping down to the right

    • Horizontally and sloping up to the right

    Correct Answer
    A. Horizontally and sloping down to the right
    Explanation
    The correct answer is "Horizontally and sloping down to the right." This means that for both straight-line and sum-of-the-years'-digits depreciation methods, the graph would be drawn with the yearly depreciation expense on the horizontal axis and time on the vertical axis. The graph would slope down to the right, indicating a decrease in depreciation expense over time.

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  • 26. 

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

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

    • Details demonstrating how depreciation was calculated

    • Depreciation expense for the period

    • Balances of major classes of depreciable assets, by nature and function

    Correct Answer
    A. Details demonstrating how depreciation was calculated
    Explanation
    The financial statements are required to disclose the accumulated depreciation, depreciation expense for the period, and the balances of major classes of depreciable assets. However, the details demonstrating how depreciation was calculated are not required to be disclosed in the financial statements. This information may be included in the footnotes or in the management's discussion and analysis section of the financial statements, but it is not a required disclosure.

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  • 27. 

    Which of the following is a realistic assumption of the straight-line method of depreciation?

    • The asset's economic usefulness is the same each year

    • The repair and maintenance expense is essentially the same each period

    • The rate of return analysis is enhanced using the straight-line method

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

    Correct Answer
    A. Depreciation is a function of time rather than a function of usage
    Explanation
    The straight-line method of depreciation assumes that depreciation is a function of time rather than a function of usage. This means that the asset's value decreases evenly over its useful life, regardless of how much it is used. This assumption allows for a consistent and predictable depreciation expense each year.

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  • 28. 

    The activity method of depreciation

    • Is a variable charge approach

    • Assumes that depreciation is a function of the passage of time

    • Conceptually associates cost in terms of input measures.

    • All of these

    Correct Answer
    A. Is a variable charge approach
    Explanation
    The activity method of depreciation is a variable charge approach, meaning that it calculates depreciation based on the actual usage or activity of the asset. This method assumes that depreciation is a function of the passage of time, as the asset is expected to wear out or become obsolete over time. Additionally, the activity method conceptually associates cost in terms of input measures, such as machine hours or units produced. Therefore, the correct answer is that the activity method of depreciation is all of these - a variable charge approach, assumes depreciation is a function of time, and associates cost in terms of input measures.

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  • 29. 

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

    • Provides for the declining productivity of an aging asset.

    • Ignores variations in the rate of asset use

    • Tends to result in a constant rate of return on a diminishing investment base

    • Gives smaller periodic write-offs than decreasing charge methods.

    Correct Answer
    A. Ignores variations in the rate of asset use
    Explanation
    The straight-line method of depreciation assumes that the asset will be used at a constant rate throughout its useful life. However, in reality, the rate of asset use may vary over time. This means that the straight-line method does not account for these variations and may not accurately reflect the actual decline in the productivity of the asset. Therefore, the principal objection to the straight-line method is that it ignores variations in the rate of asset use.

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  • 30. 

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

    • Is not a current practice in financial reporting.

    • Is not essential to a fair presentation of financial position

    • Is needed in financial reporting when company policy differs from income tax policy.

    • Should be included in corporate financial statements or notes thereto

    Correct Answer
    A. Should be included in corporate financial statements or notes thereto
    Explanation
    The correct answer is that a general description of the depreciation methods applicable to major classes of depreciable assets should be included in corporate financial statements or notes thereto. This is because providing this information allows stakeholders to understand how the company is valuing and depreciating its assets over time. It enhances transparency and helps in making informed decisions regarding the financial position of the company.

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  • 31. 

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

    • Use accelerated depreciation methods

    • Use straight-line depreciation methods

    • Recognize both functional and physical factors in depreciation.

    • None of these.

    Correct Answer
    A. None of these.
    Explanation
    The correct answer is "none of these." This means that dividends representing a return of capital to stockholders are not common among companies that use accelerated depreciation methods, straight-line depreciation methods, or recognize both functional and physical factors in depreciation. This suggests that there might be other factors or reasons why companies choose to distribute dividends as a return of capital to stockholders.

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  • 32. 

    A major objective of MACRS for tax depreciation is to

    • Reduce the amount of depreciation deduction on business firms' tax returns.

    • Assure that the amount of depreciation for tax and book purposes will be the same

    • Help companies achieve a faster write-off of their capital assets.

    • Require companies to use the actual economic lives of assets in calculating tax depreciation

    Correct Answer
    A. Help companies achieve a faster write-off of their capital assets.
    Explanation
    MACRS (Modified Accelerated Cost Recovery System) for tax depreciation is designed to help companies achieve a faster write-off of their capital assets. This means that companies can recover the cost of their assets more quickly for tax purposes, allowing them to reduce their taxable income and potentially lower their tax liability. By providing accelerated depreciation deductions, MACRS incentivizes businesses to invest in new assets and stimulate economic growth. This objective is aimed at encouraging businesses to upgrade their equipment and infrastructure more frequently, which can contribute to overall economic development.

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  • 33. 

    Which of the following most accurately reflects the concept of depreciation as used in accounting?

    • The process of charging the decline in value of an economic resource to income in the period in which the benefit occurred

    • 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

    • A method of allocating asset cost to an expense account in a manner which closely matches the physical deterioration of the tangible asset involved

    • 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.

    Correct Answer
    A. 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
    Explanation
    Depreciation in accounting refers to the process of allocating the cost of tangible assets to expense in a systematic and rational manner over the periods in which the asset is expected to provide benefits. This means that the cost of the asset is spread out over its useful life, reflecting the decline in value and wear and tear that occurs over time. By doing this, the financial statements accurately reflect the true cost of using the asset and the matching principle is followed, where expenses are matched with the revenues they help generate.

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  • 34. 

    Depletion expense

    • Is usually part of cost of goods sold.

    • Includes tangible equipment costs in the depletion base

    • Excludes intangible development costs from the depletion base

    • Excludes restoration costs from the depletion base

    Correct Answer
    A. Is usually part of cost of goods sold.
    Explanation
    Depletion expense refers to the allocation of the cost of natural resources over their useful life. It is typically included as part of the cost of goods sold, which represents the direct costs associated with producing the goods or services sold by a company. This is because depletion expense directly relates to the extraction and consumption of natural resources, which are essential for the production process. Therefore, it is reasonable to include depletion expense as part of the cost of goods sold to accurately reflect the expenses incurred in the production and sale of goods.

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  • 35. 

    The most common method of recording depletion for accounting purposes is the

    • Percentage depletion method

    • Decreasing charge method

    • Straight-line method.

    • Units-of-production method

    Correct Answer
    A. Units-of-production method
    Explanation
    The units-of-production method is the most common method of recording depletion for accounting purposes because it accurately matches the depletion expense with the actual usage of the natural resource. This method calculates the depletion expense based on the number of units extracted or produced during the period. It is particularly useful when the usage of the natural resource varies from period to period, as it ensures that the depletion expense reflects the actual depletion of the resource.

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  • 36. 

    Reserve recognition accounting

    • Is presently the generally accepted accounting method for financial reporting of oil and gas reserves

    • Is a historical cost method similar to the full cost approach and the successful efforts approach.

    • Is used for reporting of oil and gas reserves for federal income tax purposes.

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

    Correct Answer
    A. Requires estimates of future production costs, the appropriate discount rate, and the expected selling price of oil and gas reserves.
    Explanation
    Reserve recognition accounting is a method used for financial reporting of oil and gas reserves. It is similar to the full cost and successful efforts approaches, which are historical cost methods. However, reserve recognition accounting specifically requires estimates of future production costs, the appropriate discount rate, and the expected selling price of oil and gas reserves. These estimates are necessary for accurately valuing and reporting the reserves.

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  • 37. 

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

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

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

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

    • Both depreciation and depletion are based on time

    Correct Answer
    A. Both depreciation and depletion are based on time
    Explanation
    The correct answer is that both depreciation and depletion are based on time. This means that the accounting treatment for depreciation and depletion is not similar in terms of being based on time. Depreciation is based on the passage of time, while depletion is based on the extraction or use of natural resources.

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  • 38. 

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

    • Depletion applies to natural resources while depreciation applies to plant and equipment

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

    • Many formulas are used in computing depreciation but only one is used to any extent in computing depletion

    • 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.

    Correct Answer
    A. 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.
    Explanation
    The difference between the accounting treatment for depreciation and cost depletion is that the cost of the asset is used as the starting point for computing the amount of the periodic charge for depreciation, while the fair value is reassessed each year as the starting point for the periodic charge for depletion.

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  • 39. 

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

    • Results in salvage value being ignored.

    • Means the denominator is the years remaining at the beginning of the year.

    • Means the book value should not be reduced below salvage value.

    • All of these

    Correct Answer
    A. Means the book value should not be reduced below salvage value.
    Explanation
    The use of the sum-of-the-years'-digits method means that the book value should not be reduced below salvage value. This method calculates depreciation by assigning more depreciation in the earlier years of an asset's life and less depreciation in the later years. As a result, the book value of the asset is reduced gradually over its useful life, but it should not be reduced below its salvage value. The salvage value represents the estimated residual value of the asset at the end of its useful life, and it serves as a minimum threshold for the book value.

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  • 40. 

    For the composite method, the composite

    • Rate is the total cost divided by the total annual depreciation

    • Rate is the total annual depreciation divided by the total depreciable cost

    • Life is the total cost divided by the total annual depreciation

    • Life is the total depreciable cost divided by the total annual depreciation

    Correct Answer
    A. Life is the total depreciable cost divided by the total annual depreciation
    Explanation
    The correct answer is "life is the total depreciable cost divided by the total annual depreciation." This is because the depreciable cost represents the initial cost of an asset minus its salvage value, and the total annual depreciation represents the amount by which the asset's value decreases each year. Dividing the total depreciable cost by the total annual depreciation gives us the number of years it takes for the asset to be fully depreciated, which is the asset's useful life.

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Quiz Review Timeline (Updated): Mar 21, 2023 +

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  • Current Version
  • Mar 21, 2023
    Quiz Edited by
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  • May 01, 2012
    Quiz Created by
    Jlyons08

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