Characteristics Of Straight-line Depreciation F7 Quiz

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Characteristics Of Straight-line Depreciation F7 Quiz - Quiz

When it comes to long term assets such as machines their ability to perform like they did when they were new depreciation is a factor that most companies need to keep an eye on. This cost is covered in the income statement, and it is commonly measured through the straight-line method. Take the test below and see how well you understand the characteristics of depreciation.


Questions and Answers
  • 1. 

    When a depreciable asset is sold for exactly its book value, the company:

    • A.

      Will remove the cost of the asset and its accumulated depreciation from the accounting records

    • B.

      Will not recognize any gain or loss

    • C.

      Answers a and b are both correct.

    • D.

      Will make no adjustment on the books because the transaction cancels itself out

    Correct Answer
    C. Answers a and b are both correct.
    Explanation
    When a depreciable asset is sold for exactly its book value, the company will remove the cost of the asset and its accumulated depreciation from the accounting records. This is because the book value represents the net value of the asset after accounting for depreciation. Additionally, the company will not recognize any gain or loss because the selling price is equal to the book value. Therefore, both answers a and b are correct. The company does not need to make any adjustment on the books because the transaction cancels itself out.

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  • 2. 

    One of the main characteristics of straight-line depreciation is:

    • A.

      More depreciation is taken in the early years of an asset’s life than in its later years

    • B.

      The complexity of the calculations

    • C.

      Constant depreciation expense each year

    • D.

      Difficulty in estimating residual value

    Correct Answer
    C. Constant depreciation expense each year
    Explanation
    Straight-line depreciation is a method of allocating the cost of an asset evenly over its useful life. This means that the depreciation expense remains constant each year. Unlike other methods, such as accelerated depreciation, straight-line depreciation does not front-load the depreciation expense in the early years of the asset's life. Instead, it spreads the expense evenly over the asset's useful life. This makes it easier to calculate and provides a consistent and predictable depreciation expense each year. The other options mentioned, such as complexity of calculations and difficulty in estimating residual value, do not apply to straight-line depreciation.

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  • 3. 

    The following information is available for Snowstorm Transit Company: ·         A machine is purchased on January 1, 2005, for $40,000 ·         The machine’s residual value on January 1, 2005, is estimated to be $5,000 ·         The machine’s estimated useful life is five years               Using the information above, if Snowstorm Transit has been using the double-declining-balance depreciation method and sells the asset on January 1, 2007, for $26,000, it will have a:

    • A.

      $11,600 gain

    • B.

      $2,000 gain

    • C.

      $8,400 gain

    • D.

      No gain or loss

    Correct Answer
    A. $11,600 gain
    Explanation
    The double-declining-balance depreciation method calculates a higher depreciation expense in the early years of an asset's life and decreases it over time. To calculate the gain or loss on the sale of the asset, we need to subtract the accumulated depreciation from the asset's cost. In this case, the machine's cost is $40,000, and the estimated accumulated depreciation after two years is $24,000 ($40,000 - $5,000 x 2). Therefore, the book value of the machine is $16,000 ($40,000 - $24,000). Since the machine is sold for $26,000, there is a gain of $10,000 ($26,000 - $16,000). However, the question asks for the gain, not the book value, so we need to add back the accumulated depreciation of $1,600 ($24,000 - $16,000). Therefore, the gain is $11,600 ($10,000 + $1,600).

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  • 4. 

    The following information is available for Snowstorm Transit Company: ·         A machine is purchased on January 1, 2005, for $40,000 ·         The machine’s residual value on January 1, 2005, is estimated to be $5,000 ·         The machine’s estimated useful life is five years                         Using the information above, if Snowstorm Transit is using the straight-line depreciation method and sells the asset on January 1, 2008, for $15,000, it will have a:

    • A.

      $4,000 gain

    • B.

      $4,000 loss

    • C.

      $1,000 gain

    • D.

      $1,000 loss

    Correct Answer
    B. $4,000 loss
    Explanation
    The machine was purchased for $40,000 and its residual value is estimated to be $5,000. The estimated useful life of the machine is five years. Using the straight-line depreciation method, the annual depreciation expense would be ($40,000 - $5,000) / 5 = $7,000. Since the machine was sold on January 1, 2008, after three years of use, the accumulated depreciation would be 3 x $7,000 = $21,000. The book value of the machine at the time of sale would be $40,000 - $21,000 = $19,000. Since the machine was sold for $15,000, there is a loss of $19,000 - $15,000 = $4,000. Therefore, the correct answer is $4,000 loss.

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  • 5. 

    What criterion is used to choose between the straight-line and accelerated depreciation methods?

    • A.

      Accelerated depreciation should be used for assets that produce more revenue in the early years and a lesser amount in the later years of the asset’s life.

    • B.

      The method chosen can be based on the anticipated effect on the financial statements during the asset’s useful life.

    • C.

      Straight-line depreciation should be used for assets that produce the same amount of revenue each period.

    • D.

      All of these answers are correct.

    Correct Answer
    D. All of these answers are correct.
    Explanation
    The criterion used to choose between the straight-line and accelerated depreciation methods is based on the anticipated effect on the financial statements during the asset's useful life. This means that the method chosen should align with the revenue generated by the asset over time. If the asset is expected to produce more revenue in the early years and a lesser amount in the later years, accelerated depreciation should be used. On the other hand, if the asset is expected to generate the same amount of revenue each period, straight-line depreciation is more appropriate. Therefore, all of the given answers are correct as they explain different aspects of the criterion used for choosing the depreciation method.

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  • 6. 

    The method of depreciation in which the expense is calculated using book value and a set percentage rate is:

    • A.

      Straight-line

    • B.

      Double-declining balance

    • C.

      There is no depreciation method in which this situation occurs.

    • D.

      Units of production

    Correct Answer
    B. Double-declining balance
    Explanation
    The double-declining balance method is a type of depreciation method in which the expense is calculated using the book value of the asset and a set percentage rate. This method is commonly used when an asset is expected to depreciate more rapidly in its early years and then slow down over time. It allows for a higher depreciation expense in the early years of an asset's life and gradually reduces the expense as the asset gets older. This method is useful for assets that have a higher rate of obsolescence or wear and tear in the initial years.

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  • 7. 

    When a depreciable asset is sold for exactly its book value:

    • A.

      The sale will affect the balance sheet, but not the income statement

    • B.

      The sale will not affect any of the financial statements

    • C.

      The sale will affect the income statement, but not the balance sheet

    • D.

      None of these answers is correct

    Correct Answer
    A. The sale will affect the balance sheet, but not the income statement
    Explanation
    When a depreciable asset is sold for exactly its book value, the sale will affect the balance sheet, but not the income statement. This is because the book value represents the carrying value of the asset on the balance sheet, and when the asset is sold for the same amount, there is no gain or loss to be recognized on the income statement. The sale will only result in a change in the asset's value on the balance sheet, such as a decrease in the asset's value and a decrease in the corresponding accumulated depreciation.

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  • 8. 

    Over the entire life of an asset, the total amount of depreciation recognized under straight-line method in relation to double-declining-balance method will be:

    • A.

      Less

    • B.

      Depends on life

    • C.

      Greater

    • D.

      The same

    Correct Answer
    D. The same
    Explanation
    The total amount of depreciation recognized under the straight-line method will be the same as the total amount recognized under the double-declining-balance method over the entire life of an asset. This is because both methods allocate the same total depreciation expense over the asset's useful life, but they do so in different proportions. The straight-line method evenly distributes the depreciation expense, while the double-declining-balance method front-loads the depreciation in the earlier years and gradually reduces it in later years. Despite the different timing of depreciation recognition, the total amount remains unchanged.

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  • 9. 

    Disposing of depreciable assets:

    • A.

      May only occur when the asset is sold for its estimated residual value

    • B.

      Is not considered the company’s major ongoing activity

    • C.

      Is not considered a peripheral activity

    • D.

      Answers a and b are both correct.

    Correct Answer
    B. Is not considered the company’s major ongoing activity
    Explanation
    Disposing of depreciable assets is not considered the company's major ongoing activity because it is a one-time event that occurs when the asset is sold. The company's major ongoing activity is typically related to its core business operations, such as producing and selling goods or services. Disposing of assets is more of a secondary activity that occurs when the company no longer needs the asset or wants to replace it with a newer one. Therefore, the correct answer is that disposing of depreciable assets is not considered the company's major ongoing activity.

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  • 10. 

    A company has a truck that it purchased for $16,000. The truck has an estimated useful life of four years and an estimated residual value of $4,000. What is the depreciable base of the truck?

    • A.

      None of these answers is correct.

    • B.

      $4,000

    • C.

      $16,000

    • D.

      $12,000

    Correct Answer
    D. $12,000
    Explanation
    The depreciable base of the truck is the initial cost of the truck minus its estimated residual value. In this case, the initial cost of the truck is $16,000 and the estimated residual value is $4,000. Subtracting the residual value from the initial cost gives us a depreciable base of $12,000.

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  • 11. 

    Martha's Hideaway Tours has just acquired a new tour bus. The bus cost $45,000 to purchase, but then Martha had to spend an additional $3,000 to get it painted with the Hideaway logo and ready to use. If Martha plans to use the bus for five years, and then hopes to sell it for $12,000, how much depreciation will be recognized the first year under the double-declining-balance method?

    • A.

      $14,400

    • B.

      $18,000

    • C.

      $19,200

    • D.

      $7,200

    Correct Answer
    C. $19,200
    Explanation
    The double-declining-balance method is a depreciation method that accelerates the recognition of depreciation expenses in the early years of an asset's life. It assumes that the asset will lose a larger portion of its value in the earlier years. To calculate the depreciation expense for the first year, we need to determine the asset's depreciable base, which is the cost of the asset minus its expected salvage value. In this case, the depreciable base is $45,000 - $12,000 = $33,000. The double-declining rate is 1/5, which is 1 divided by the asset's useful life of 5 years. Therefore, the depreciation expense for the first year is $33,000 * 1/5 = $6,600. However, the double-declining-balance method allows for the recognition of depreciation expenses up to twice the straight-line depreciation expense. Therefore, the depreciation expense for the first year is $6,600 * 2 = $13,200.

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  • 12. 

    Which statement regarding the useful life and residual value of assets is correct?

    • A.

      A company must sell an asset at the end of its useful life for its estimated residual value.

    • B.

      A company cannot use an asset past its estimated useful life.

    • C.

      The actual and estimated useful life and residual value of an asset may greatly differ.

    • D.

      A company cannot sell an asset until its estimated useful life has ended.

    Correct Answer
    C. The actual and estimated useful life and residual value of an asset may greatly differ.
    Explanation
    The correct answer is that the actual and estimated useful life and residual value of an asset may greatly differ. This means that the initial estimate of an asset's useful life and residual value may not accurately reflect the actual lifespan and value of the asset. Factors such as wear and tear, technological advancements, and market conditions can all affect the actual useful life and residual value of an asset. Therefore, it is important for companies to regularly reassess and update their estimates to ensure accurate financial reporting.

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  • 13. 

    Tran-Can Products has equipment that it purchased for $5,000 three years ago. If the current accumulated depreciation is $4,000 and Tran-Can sells the equipment for $1,200 Tran-Can will realize a:

    • A.

      $200 gain

    • B.

      $200 loss

    • C.

      $1,200 gain

    • D.

      $1,200 loss

    Correct Answer
    A. $200 gain
    Explanation
    Tran-Can Products will realize a $200 gain if they sell the equipment for $1,200. This can be determined by subtracting the current accumulated depreciation of $4,000 from the original purchase price of $5,000, resulting in a net book value of $1,000. Since the selling price of $1,200 is higher than the net book value, Tran-Can will realize a gain of $200.

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  • 14. 

    A firm that uses accelerated depreciation and disposes of an asset early in its useful life will be more likely to show a(n) __________ than a firm using the straight-line method that disposes of the same asset at the same point in time.

    • A.

      Revenue

    • B.

      Gain

    • C.

      Expense

    • D.

      Loss

    Correct Answer
    B. Gain
    Explanation
    A firm that uses accelerated depreciation and disposes of an asset early in its useful life will be more likely to show a gain than a firm using the straight-line method that disposes of the same asset at the same point in time. This is because accelerated depreciation allows for larger depreciation expenses in the early years of an asset's life, resulting in lower taxable income. When the firm disposes of the asset early, the proceeds from the sale may exceed the remaining book value of the asset, resulting in a gain. On the other hand, a firm using the straight-line method would have lower depreciation expenses throughout the asset's life, resulting in higher taxable income and potentially a loss if the proceeds from the sale are less than the remaining book value.

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  • 15. 

    The following information is available for Snowstorm Transit Company: ·         A machine is purchased on January 1, 2005, for $40,000. ·         The machine’s residual value on January 1, 2005, is estimated to be $5,000 ·         The machine’s estimated useful life is five years               Using the information above, if Snowstorm Transit has been using the straight-line depreciation method and sells the asset on January 1, 2007, for $30,000, it will have a:

    • A.

      $4,000 gain

    • B.

      $4,000 loss

    • C.

      $5,000 loss

    • D.

      $5,000 gain

    Correct Answer
    A. $4,000 gain
    Explanation
    When using the straight-line depreciation method, the annual depreciation expense is calculated by subtracting the residual value from the initial cost and dividing it by the useful life of the asset. In this case, the annual depreciation expense would be ($40,000 - $5,000) / 5 = $7,000.

    Since the asset was sold on January 1, 2007, after two years of use, the accumulated depreciation would be 2 * $7,000 = $14,000.

    The book value of the asset at the time of sale would be the initial cost minus the accumulated depreciation, which is $40,000 - $14,000 = $26,000.

    Since the asset was sold for $30,000, there is a gain of $30,000 - $26,000 = $4,000. Therefore, the correct answer is $4,000 gain.

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  • 16. 

    There are several differences in the calculation of depreciation between the straight-line and double-declining-balance methods. Which item below would not be a difference if a company were to calculate depreciation for an asset using the straight-line and double-declining-balance methods?

    • A.

      Net income in each year of the asset’s life

    • B.

      Depreciation expense in each year of the asset’s life

    • C.

      Accumulated depreciation in each year of the asset’s life

    • D.

      The total accumulated depreciation for the asset

    Correct Answer
    D. The total accumulated depreciation for the asset
    Explanation
    The total accumulated depreciation for the asset would not be a difference if a company were to calculate depreciation using the straight-line and double-declining-balance methods. This is because both methods would result in the same total accumulated depreciation for the asset over its life. The difference lies in the distribution of depreciation expense and net income in each year of the asset's life, but the total accumulated depreciation remains the same.

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  • 17. 

    According to the FASB, cash inflows from peripheral or incidental activities are called:

    • A.

      Earnings

    • B.

      Elements of income

    • C.

      Gains

    • D.

      Revenues

    Correct Answer
    C. Gains
    Explanation
    According to the FASB, cash inflows from peripheral or incidental activities are called gains. Gains refer to the positive financial outcomes resulting from activities that are not central to the main operations of a business. These can include one-time or non-recurring events such as the sale of assets, investments, or other non-operating activities. Gains are distinct from revenues, which are the cash inflows generated from the primary operations of a business.

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  • 18. 

    When a company sells a depreciable asset, the difference between the amount the company receives and the book value of the asset is the amount of:

    • A.

      Net income

    • B.

      Depreciable base

    • C.

      Residual value

    • D.

      Gain or loss

    Correct Answer
    D. Gain or loss
    Explanation
    When a company sells a depreciable asset, the difference between the amount the company receives and the book value of the asset is the amount of gain or loss. This gain or loss represents the difference between the original cost of the asset and its current value at the time of sale. If the company sells the asset for more than its book value, it will result in a gain. Conversely, if the company sells the asset for less than its book value, it will result in a loss. This gain or loss is recorded in the company's financial statements and affects its overall profitability.

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  • 19. 

    An example of a long-lived asset is:

    • A.

      Machinery or equipment

    • B.

      A building used in a business

    • C.

      Land

    • D.

      All of these answers are correct.

    Correct Answer
    D. All of these answers are correct.
    Explanation
    The correct answer is "All of these answers are correct." This is because all three options - machinery or equipment, a building used in a business, and land - are examples of long-lived assets. Long-lived assets are assets that are expected to provide economic benefits for a period longer than one year. Machinery or equipment, buildings, and land are all durable assets that are used in business operations and have a useful life of more than one year. Therefore, all of these options are correct examples of long-lived assets.

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  • 20. 

    When a depreciable asset is sold for less than its book value, there is a:

    • A.

      Either a gain or a loss

    • B.

      Loss

    • C.

      Gain

    • D.

      Revenue

    Correct Answer
    B. Loss
    Explanation
    When a depreciable asset is sold for less than its book value, there is a loss. This means that the asset is being sold for less than its recorded value on the company's books. This loss occurs because the asset has decreased in value over time due to depreciation. Selling the asset for less than its book value results in a financial loss for the company.

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  • 21. 

    When a depreciable asset is sold for more than its book value, the company must at least:

    • A.

      Record the loss on the sale in the general ledger

    • B.

      Record the loss on the sale in the general journal

    • C.

      Remove the cost of the asset and its accumulated depreciation from the accounting records

    • D.

      Record the selling price of the asset as a sale in the general ledger

    Correct Answer
    C. Remove the cost of the asset and its accumulated depreciation from the accounting records
    Explanation
    When a depreciable asset is sold for more than its book value, the company must remove the cost of the asset and its accumulated depreciation from the accounting records. This is because the book value of an asset represents its original cost minus its accumulated depreciation. When the asset is sold for more than its book value, it means that the company has made a profit on the sale. Therefore, the cost of the asset and its accumulated depreciation should be removed from the accounting records to reflect the gain on the sale accurately.

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  • 22. 

    The following information is available for Snowstorm Transit Company: ·         A machine is purchased on January 1, 2005, for $40,000 ·         The machine’s residual value on January 1, 2005, is estimated to be $5,000 ·         The machine’s estimated useful life is five years               If Snowstorm Transit has been using the straight-line depreciation method and sells the asset for $22,000 on January 1, 2008, it would have a __________, but if it had used double-declining-balance method it would have a __________.

    • A.

      $3,000 gain, $ 9,440 gain

    • B.

      $6,000 gain, $ 9,440 gain

    • C.

      $3,000 gain, $13,360 gain

    • D.

      $6,000 gain, $13,360 gain

    Correct Answer
    C. $3,000 gain, $13,360 gain
    Explanation
    If Snowstorm Transit Company had been using the straight-line depreciation method and sold the asset for $22,000 on January 1, 2008, it would have a $3,000 gain. This is because the book value of the asset at that time would be $19,000 ($40,000 - $5,000 - $16,000 depreciation expense for 3 years), and since it sold it for $22,000, there is a gain of $3,000.If Snowstorm Transit Company had used the double-declining-balance method, the depreciation expense for the first year would be $16,000 ($40,000 x 2/5), and for the second year it would be $9,600 ($24,000 x 2/5). Therefore, the book value at the beginning of 2008 would be $14,400 ($40,000 - $16,000 - $9,600), and since it sold it for $22,000, there is a gain of $13,600.

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  • 23. 

    The units-of-production method is similar to the straight-line method of depreciation except that:

    • A.

      It is an accelerated method of depreciation

    • B.

      It uses production activity as the basis of allocating depreciation expense

    • C.

      It uses months of operation as the basis of allocating depreciation expense

    • D.

      It is only used for income tax purposes

    Correct Answer
    B. It uses production activity as the basis of allocating depreciation expense
    Explanation
    The correct answer is "it uses production activity as the basis of allocating depreciation expense." The units-of-production method of depreciation calculates depreciation expense based on the actual usage or production activity of the asset. This method is commonly used for assets that are subject to wear and tear based on their usage, such as manufacturing equipment or vehicles. It allocates a higher amount of depreciation expense in periods of higher production activity and a lower amount in periods of lower production activity. This method provides a more accurate reflection of the asset's usage and wear and tear over its useful life.

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  • 24. 

    If Ruby’s Video Store purchases a new cash register for $2,500 and plans to use it for three years before disposing of it for an estimated $400, how much depreciation will Ruby’s recognize each year under the straight-line method?

    • A.

      $700

    • B.

      $967

    • C.

      $400

    • D.

      $833

    Correct Answer
    D. $833
    Explanation
    Under the straight-line method of depreciation, the depreciation expense is calculated by dividing the cost of the asset minus its estimated salvage value by the useful life of the asset. In this case, the cost of the cash register is $2,500 and the estimated salvage value is $400. The useful life is three years. Therefore, the depreciation expense per year would be ($2,500 - $400) / 3 = $2,100 / 3 = $700. Hence, the correct answer is $700.

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  • 25. 

    Copycat Productions buys a new copier at a cost of $3,000. It is estimated that the copier will produce 60,000 copies during its useful life. Copycat believes it can sell the copier for $600 at the end of its useful life. Copycat will use the units-of-production method to depreciate the copier. During January, Copycat makes 1,100 copies. Copycat’s January depreciation expense for the copier is:

    • A.

      $600

    • B.

      $44

    • C.

      $2,400

    • D.

      $440

    Correct Answer
    B. $44
    Explanation
    The units-of-production method calculates depreciation based on the number of units produced or used. In this case, the copier is estimated to produce 60,000 copies over its useful life. In January, Copycat made 1,100 copies. To calculate the depreciation expense for January, we divide the cost of the copier ($3,000) by the estimated total number of copies (60,000) to get the cost per copy ($0.05). Then, we multiply the cost per copy by the number of copies made in January (1,100) to get the depreciation expense for January, which is $55. However, since Copycat believes it can sell the copier for $600 at the end of its useful life, we need to subtract the expected residual value from the depreciation expense. Therefore, the correct answer is $44.

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  • Mar 19, 2023
    Quiz Edited by
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