Chpt. 11

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    GAAP requires disclosure of a general description of the method used in computing depreciation with respect to major classes of depreciable assets

    • True
    • False
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Chpt. 11 - Quiz
About This Quiz

Chpt. 11 quiz assesses understanding of asset management in accounting, focusing on asset disposal, depreciation methods, and relevant GAAP disclosures. It evaluates comprehension of depreciation computation factors and application in real-world scenarios, enhancing financial reporting skills.

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  • 2. 

    When a disposal of an asset occurs, a company recognizes a gain or loss on the disposal for the difference between

    • The book value of the asset and the consideration received

    • The historical cost of the asset and the consideration given

    • The historical cost of the asset and consideration received

    • The book value of the asset and the consideration given

    Correct Answer
    A. The book value of the asset and the consideration received
    Explanation
    When a disposal of an asset occurs, a company recognizes a gain or loss on the disposal for the difference between the book value of the asset and the consideration received. This means that the company compares the value of the asset recorded on its books (book value) with the amount of money or other assets it receives in exchange for the asset (consideration received). The difference between these two amounts will determine whether the company has made a gain or loss on the disposal.

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  • 3. 

    GAAP requires disclosure of the depreciation expense for the period as well as the accumulated depreciation

    • True

    • False

    Correct Answer
    A. True
    Explanation
    GAAP (Generally Accepted Accounting Principles) is a set of accounting standards that companies must follow when preparing financial statements. According to GAAP, companies are required to disclose the depreciation expense for the period, which represents the portion of an asset's cost that is allocated as an expense over its useful life. Additionally, GAAP also requires disclosure of the accumulated depreciation, which is the total depreciation expense recognized for an asset since its acquisition. Therefore, it is true that GAAP requires disclosure of both the depreciation expense for the period and the accumulated depreciation.

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  • 4. 

    The total amount of depreciation expense over the life of an asset is _______ under each method, the yearly amounts of depreciation expense are ________.

    • The same, different

    • Different, different

    • The same, equal

    • Different, equal

    Correct Answer
    A. The same, different
    Explanation
    The correct answer is "the same, different". This means that the total amount of depreciation expense over the life of an asset is the same under each method, but the yearly amounts of depreciation expense are different. This implies that while the total depreciation expense will be equal regardless of the method used, the allocation of depreciation expense over the years will vary.

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  • 5. 

    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?

    • Sum of the years digits method

    • Straight line method

    • Sinking fund method

    • Activity method

    Correct Answer
    A. Sum of the years digits method
    Explanation
    The student is most likely defending the sum of the years digits method for depreciation. This method takes into account the fact that repairs and maintenance costs are likely to increase as the asset gets older, as well as the fact that the asset will produce less over time. By using this method, the depreciation expense is allocated in a way that reflects the asset's decreasing productivity and increasing maintenance costs as it ages.

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  • 6. 

    On July 1, 2013, Robin Stereo purchased a camera 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 2015 was

    • 900

    • 720

    • 640

    • 800

    Correct Answer
    A. 720
    Explanation
    The double declining balance method is a type of accelerated depreciation method where the asset is depreciated at a faster rate in the early years and slower rate in the later years. The formula to calculate depreciation expense using this method is (2 / Estimated life) * Book value at the beginning of the year.

    In this case, the estimated life of the equipment is 10 years and the book value at the beginning of 2015 would be $5,000 - depreciation expense for 2013 - depreciation expense for 2014.

    To calculate depreciation expense for 2013, we use the formula (2 / 10) * $5,000 = $1,000.
    To calculate depreciation expense for 2014, we use the formula (2 / 10) * ($5,000 - $1,000) = $800.
    Therefore, the book value at the beginning of 2015 would be $5,000 - $1,000 - $800 = $3,200.

    Finally, to calculate depreciation expense for 2015, we use the formula (2 / 10) * $3,200 = $640.

    Therefore, the correct answer is 640.

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  • 7. 

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

    • The accumulated depreciation for each major class of depreciable asset

    • The useful life of each major class of depreciable asset

    • The balances of major classes of depreciable assets

    • A general description of the method(s) used for depreciation

    Correct Answer
    A. The useful life of each major class of depreciable asset
    Explanation
    The useful life of each major class of depreciable asset is not a disclosure requirement for depreciation. Disclosure requirements for depreciation typically include the accumulated depreciation for each major class of depreciable asset, the balances of major classes of depreciable assets, and a general description of the method(s) used for depreciation. The useful life of each major class of depreciable asset is important for calculating depreciation expense, but it is not typically disclosed in financial statements.

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  • 8. 

    The depreciation base is calculated as

    • Asset Cost * Estimated Residual Value = Depreciation Base

    • Asset Cost / Estimated Residual Value = Depreciation Base

    • Asset Cost - Estimated Residual Value = Depreciation Base

    • Asset Cost + Estimated Residual Value = Depreciation Base

    Correct Answer
    A. Asset Cost - Estimated Residual Value = Depreciation Base
    Explanation
    The depreciation base is calculated by subtracting the estimated residual value from the asset cost. This is because the depreciation base represents the portion of the asset's cost that will be depreciated over its useful life. By subtracting the estimated residual value, which is the expected value of the asset at the end of its useful life, from the asset cost, we can determine the amount that will be depreciated.

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  • 9. 

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

    • Record keeping is simplified

    • Losses are not recognized in the period in which they occur

    • Faulty estimates are concealed for long periods

    • Gains are deferred beyond the point in which they actually occurred

    Correct Answer
    A. Record keeping is simplified
    Explanation
    The advantage of the group and composite methods of depreciation is that record keeping is simplified. This means that instead of tracking individual assets separately, these methods allow for grouping assets together and depreciating them as a whole. This can save time and effort in maintaining records and calculations for each individual asset, making the depreciation process more efficient.

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  • 10. 

    Isaiah Business Services purchased three assets with the following characteristics:Asset         cost             Residual Value           LifeA             12,000            2,000                        10 yrB             6,800              1,200                          4 yrC             1,500              250                             5 yrAssuming Isaiah uses straight line depreciation, the composite depreciation rate is

    • 13.1%

    • 10.1%

    • 15.7%

    • 18.2%

    Correct Answer
    A. 13.1%
    Explanation
    The composite depreciation rate is calculated by dividing the total depreciation expense by the total cost of the assets. In this case, the total cost of the assets is $20,300 ($12,000 + $6,800 + $1,500) and the total depreciation expense is $2,660 ($12,000 - $2,000 + $6,800 - $1,200 + $1,500 - $250). Therefore, the composite depreciation rate is 13.1% ($2,660 / $20,300).

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  • 11. 

    What type of cost allocation must a company use?

    • Systematic

    • Rational

    • Systematic an rational

    • Systematic, rational, and reliable

    Correct Answer
    A. Systematic an rational
    Explanation
    A company must use a systematic and rational cost allocation method. This means that the company should have a structured and consistent approach to allocating costs to different departments or products. The allocation method should also be based on logical reasoning and objective criteria, ensuring fairness and accuracy in the allocation process. By using a systematic and rational cost allocation method, the company can effectively distribute costs and make informed decisions regarding resource allocation and pricing strategies.

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  • 12. 

    Depreciation is a process of 

    • Increasing gains

    • Asset valuation

    • Cost allocation

    • Increasing net income

    Correct Answer
    A. Cost allocation
    Explanation
    Depreciation is a process of cost allocation. It involves allocating the cost of an asset over its useful life. This is done to match the expense of the asset with the revenue it generates. By spreading the cost over time, depreciation helps in accurately reflecting the decrease in value of the asset due to wear and tear, obsolescence, or other factors. This cost allocation allows businesses to properly account for the use of the asset and accurately calculate their net income.

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  • 13. 

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

    • Units of input

    • Units of time

    • Units of output

    • Units of activity

    Correct Answer
    A. Units of input
    Explanation
    The service life of an asset refers to the duration for which the asset remains functional and productive. It can be measured in various ways, such as units of time, units of output, and units of activity. However, units of input do not provide a direct measure of the service life of an asset. Units of input typically refer to the quantity of resources or materials used in the production process, which may not necessarily correlate with the lifespan of the asset. Therefore, units of input are not a suitable measure for determining the service life of an asset.

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  • 14. 

    The net amount that a company expects to obtain from disposing of an asset at the end of its service life is

    • The present value

    • The historical cost

    • The residual value

    • The depreciable value

    Correct Answer
    A. The residual value
    Explanation
    The residual value refers to the net amount that a company expects to obtain from disposing of an asset at the end of its service life. This value is determined based on factors such as market conditions, expected salvage value, and any remaining useful life of the asset. It is important for companies to estimate the residual value accurately as it affects the calculation of depreciation expense and the overall financial statements of the company.

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  • 15. 

    If an asset meets certain criteria, the asset is considered 'held for sale' and 

    • No further depreciation is taken

    • Regular depreciation is taken

    • The asset is removed from the balance sheet

    • The asset is written down to the residual value

    Correct Answer
    A. No further depreciation is taken
    Explanation
    When an asset meets certain criteria and is considered "held for sale," no further depreciation is taken. This means that the asset's value is not further reduced over time due to wear and tear or obsolescence. This is because the asset is expected to be sold in the near future, and its value will be recovered through the sale rather than through its use. Therefore, it is not necessary to continue recording depreciation expense for the asset.

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  • 16. 

    On January 1, 2014, Kaden, Inc. purchased an asset for 32,000.  It was estimated that the assets usefule life was 7 years, after which it would have a residual value of 2,100. Assuming the use of the sum of the years' digits methods, depreciation expense

    • 7,475

    • 4,271

    • 8,000

    • 8,543

    Correct Answer
    A. 7,475
    Explanation
    According to the sum of the years' digits method, depreciation expense is calculated by adding up the digits of the useful life of the asset (in this case, 7 years) and then assigning a fraction to each year. The fraction for each year is calculated by dividing the remaining useful life by the sum of the digits. In this case, the sum of the digits is 1+2+3+4+5+6+7 = 28. Therefore, the fraction for year 1 is 7/28, for year 2 is 6/28, for year 3 is 5/28, and so on. Multiplying the fraction by the cost of the asset gives the depreciation expense for each year. Adding up the depreciation expenses for all 7 years gives a total of 7,475.

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  • 17. 

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

    • Debit accumulated depreciation for 8,800

    • Debit cash for 8,500

    • Credit delivery vans for 17,300

    • Credit loss on sale for 2,700

    Correct Answer
    A. Debit cash for 8,500
    Explanation
    When recording the subsequent sale of an individual van for 8,500, the correct action would be to debit cash for 8,500. This is because cash is being received from the sale of the van. Debiting accumulated depreciation for 8,800 is incorrect because the sale of the van does not affect the accumulated depreciation account. Crediting delivery vans for 17,300 is incorrect because the sale of the van reduces the value of the delivery vans account. Crediting loss on sale for 2,700 is also incorrect because there is no loss on the sale in this scenario.

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  • 18. 

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

    • Units of output

    • Units of activity

    • Units of input

    • Units of time

    Correct Answer
    A. Units of input
    Explanation
    The service life of an asset refers to the period of time that the asset remains in productive use. It can be measured using various factors such as units of output, units of activity, and units of time. However, units of input do not directly measure the service life of an asset. Units of input typically refer to the resources or materials used in the production process, rather than the duration of the asset's usefulness. Therefore, units of input are not a suitable measure for determining the service life of an asset.

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  • 19. 

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

    • Operational use

    • Adequacy

    • Deterioration as a function of time

    • Obsolescence

    Correct Answer
    A. Adequacy
    Explanation
    Adequacy is not a factor that limits the service life of an asset. Adequacy refers to the extent to which an asset meets the requirements or expectations of its users. While adequacy can affect the usefulness and value of an asset, it does not directly impact its service life. Factors such as operational use, deterioration over time, and obsolescence are more likely to limit the service life of an asset.

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  • 20. 

    On January 1, 2014, Jacob Corporation purchased equipment for $200,000.  The equipment had an estimated useful life of ten years and an estimated residual value of $40,000.  Using the double declining balance method, how much depreciation expense should Jacob Corp. report on the company's balance sheet at December 31, 2015?

    • 20,000

    • 16,000

    • 32,000

    • 40,000

    Correct Answer
    A. 32,000
    Explanation
    The double declining balance method is an accelerated depreciation method that allows for a larger depreciation expense in the early years of an asset's life. To calculate the depreciation expense, we need to determine the asset's depreciable base, which is the cost of the asset minus its estimated residual value. In this case, the depreciable base is $200,000 - $40,000 = $160,000.

    Next, we need to determine the depreciation rate, which is calculated by dividing 1 by the estimated useful life of the asset. In this case, the depreciation rate is 1/10 = 0.1.

    Finally, we multiply the depreciable base by the depreciation rate to find the depreciation expense. $160,000 * 0.1 = $16,000.

    Since the question asks for the depreciation expense at December 31, 2015, which is the end of the second year, we need to multiply the depreciation expense by 2. $16,000 * 2 = $32,000.

    Therefore, Jacob Corp. should report $32,000 as the depreciation expense on the company's balance sheet at December 31, 2015.

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  • 21. 

    PP&E must be reviewed for impairment when which one of the following events occurs?

    • A current period operating loss occurs

    • Investing activities produce a negative cash flow

    • A significant change in the asset's estimated useful life occurs

    • The cost of constructing the asset are determined to be less than the budgeted amount

    Correct Answer
    A. A current period operating loss occurs
    Explanation
    When a current period operating loss occurs, it indicates that the company is not generating enough revenue to cover its expenses. This could potentially affect the value of the PP&E (Property, Plant, and Equipment) assets, as the company may need to sell or dispose of some assets to cover the losses. Therefore, it is necessary to review the PP&E for impairment to determine if the carrying value of the assets exceeds their recoverable amount.

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  • 22. 

    Involuntary disposals of assets includes all fo the following except

    • Flood

    • Fire

    • Expropriated by a governmental unit

    • Sale at a loss

    Correct Answer
    A. Sale at a loss
    Explanation
    Involuntary disposals of assets refer to situations where assets are disposed of without the owner's choice or control. This typically includes events like floods, fires, and expropriation by a governmental unit. However, "sale at a loss" is not considered an involuntary disposal as it is a voluntary decision made by the owner to sell the asset at a price lower than its original cost.

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  • 23. 

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

    • Sum of the years' digits method

    • Double declining balance method

    • Composite method

    • Compound interest method

    Correct Answer
    A. Double declining balance method
    Explanation
    The double declining balance method is a depreciation method that ignores residual value when computing the depreciable base of an asset. This method assumes that the asset will have no residual value at the end of its useful life. It calculates depreciation by applying a fixed rate to the asset's book value, which decreases over time. This method is commonly used for assets that have a higher rate of depreciation in the early years of their useful life.

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  • 24. 

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

    • Double declining balance method

    • Sum of the years' digits method

    • Inventory systems method

    • Group method

    Correct Answer
    A. Double declining balance method
    Explanation
    The double declining balance method calculates annual depreciation expense based on the book value of an asset. This method is an accelerated depreciation method that assumes an asset loses more value in its early years and less value in later years. It calculates depreciation by multiplying the asset's book value by a fixed percentage, which is typically double the straight-line depreciation rate. This method is commonly used for assets that have a higher rate of obsolescence or wear and tear in their early years.

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  • 25. 

    Kylie's Kupcake Co. computes depreciation to the nearest whole month and uses the straight line method.  On April 2, 2013, the company purchased an oven for $14,000 with a four year life and a 2,000 residual value.  On November 6, Kylie also sold a delivery van with a cost of 34,500 that had been purchased in 2011.  The delivery van had been estimated to have a five year life and no residual value when it was purchased.  The total depreciation expense on these two assets for 2013 is

    • 7,200

    • 8,000

    • 7,800

    • 7,600

    Correct Answer
    A. 8,000
    Explanation
    The total depreciation expense on these two assets for 2013 is $8,000. This can be calculated by finding the annual depreciation for each asset and adding them together. For the oven, the annual depreciation is ($14,000 - $2,000) / 4 = $3,000. For the delivery van, the annual depreciation is $34,500 / 5 = $6,900. Adding these two amounts gives a total depreciation expense of $3,000 + $6,900 = $9,900. However, since the oven was purchased on April 2, 2013, only 9 months of depreciation should be considered for that year, which is $3,000 * (9/12) = $2,250. Therefore, the total depreciation expense for 2013 is $2,250 + $6,900 = $8,150, which is closest to the given answer of $8,000.

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  • 26. 

    The four factors that are considered in the computation of depreciation are

    • A length of loan, useful life, salvage value, and method of cost allocation

    • Useful life, length of loan, asset cost, and salvage

    • Asset cost, service life, residual value, and method of cost allocation

    • Asset cost, length of the loan, service life, and residual value

    Correct Answer
    A. Asset cost, service life, residual value, and method of cost allocation
    Explanation
    The correct answer is asset cost, service life, residual value, and method of cost allocation. These four factors are considered in the computation of depreciation. The asset cost refers to the initial cost of the asset, the service life is the estimated duration of usefulness of the asset, the residual value is the estimated value of the asset at the end of its useful life, and the method of cost allocation determines how the cost of the asset is spread over its useful life. These factors help determine the amount of depreciation to be recorded each accounting period.

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  • 27. 

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

    • 25%

    • 29%

    • 20%

    • 21.5%

    Correct Answer
    A. 21.5%
    Explanation
    The depreciation rate for the assets can be calculated using the formula: (Cost - Residual Value) / (Expected Service Life). In this case, the cost of each heating unit is $5,000 and the residual value is $700. The expected service life is four years. Plugging these values into the formula, we get (5000 - 700) / 4 = 4300 / 4 = 1075. The depreciation rate is then 1075 / 5000 = 0.215, which is equivalent to 21.5%.

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  • 28. 

    Weatherly Corporation purchased a new production machine July 1, 2014, for $140,000.  The estimated salvage value is $10,000.  The company uses units of production depreciation and estimates the machine will produce 100,000 units during its useful life.  In 2014, the company manufactures 5,000 units after acquiring the machine.  Depreciation expense for 2014 will be

    • $7,000

    • $13,000

    • $0

    • $6,500

    Correct Answer
    A. $6,500
    Explanation
    The depreciation expense for 2014 will be $6,500. This is calculated by taking the cost of the machine ($140,000) minus the estimated salvage value ($10,000), divided by the estimated number of units the machine will produce during its useful life (100,000). Then, this result is multiplied by the number of units produced in 2014 (5,000). So, ($140,000 - $10,000) / 100,000 * 5,000 = $6,500.

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  • 29. 

    Which of the following statements is true?

    • GAAP Requires the use of either straight-line or decline balance depreciation

    • One objective of depreciating an asset is to provide funds for replacement

    • Straight-line results in a decreasing amount of depreciation on total assets

    • Typically, the sum of the years' digits methods will result in less depreciation expense in the year of acquisition than will the double declining balance method

    Correct Answer
    A. Typically, the sum of the years' digits methods will result in less depreciation expense in the year of acquisition than will the double declining balance method
    Explanation
    The answer is true because the sum of the years' digits method allocates more depreciation expense to the earlier years of an asset's useful life, resulting in less depreciation expense in the year of acquisition compared to the double declining balance method. This is because the double declining balance method applies a higher depreciation rate to the asset's book value, resulting in higher depreciation expense in the early years of the asset's life.

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  • 30. 

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

    • Method of cost allocation

    • Service life

    • Present value

    • Residual value

    Correct Answer
    A. Present value
    Explanation
    The present value is not a factor in computing depreciation for a period. Depreciation is calculated based on factors such as the method of cost allocation, service life, and residual value. The present value refers to the current worth of an asset, which is not directly related to the calculation of depreciation.

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  • 31. 

    How can service life be measured?

    • Units of time

    • Units of activity

    • Units of output

    • All of the above can measure service life

    Correct Answer
    A. All of the above can measure service life
    Explanation
    Service life can be measured in units of time, such as hours or years, as it indicates the duration for which a product or equipment remains functional. It can also be measured in units of activity, which refers to the number of operations or tasks performed by the product or equipment. Additionally, service life can be measured in units of output, which quantifies the amount of work or production achieved by the product or equipment. Therefore, all of these options can be used to measure service life.

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  • 32. 

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

    • Straight line method

    • Units of production method

    • Sum of the years' digits method

    • Compound interest method

    Correct Answer
    A. Sum of the years' digits method
    Explanation
    The sum of the years' digits method should be used when the expected benefits to be received from an asset will decline each period. This method allocates a higher depreciation expense in the earlier years of an asset's life and a lower expense in the later years, reflecting the declining benefits. It is based on the assumption that assets are more productive and efficient in the earlier years and become less so over time.

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  • 33. 

    Devon Manufacturing Company purchased a new canning machine on July 1, 2013, 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 2013, the company manufactured 5,000 units after acquiring the machine.  Depreciation expense for 2013 will be

    • 7,600

    • 6,500

    • 7,000

    • 14,000

    Correct Answer
    A. 7,000
    Explanation
    The depreciation expense for 2013 will be 7,000. This is calculated by taking the cost of the machine ($190,000) minus the estimated salvage value ($15,000), and then dividing that by the estimated number of units the machine will produce during its useful life (125,000). The result is $1.40 per unit. Since the company manufactured 5,000 units in 2013, the depreciation expense for that year would be 5,000 multiplied by $1.40, which equals $7,000.

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  • 34. 

    Brian's Inc. purchased a piece of equipment for $30,000 with a useful life of nine years and a residual value of $6,000 on January 2, 2014.  If Brian's used the sum-of-the-years'-digit depreciation method with the half year convention, depreciation expense for 2014 was

    • $2,666.67

    • $3,000

    • $3,333.33

    • $2,400

    Correct Answer
    A. $2,400
    Explanation
    The sum-of-the-years'-digits depreciation method is calculated by adding the digits of the useful life of the asset (9 + 8 + 7 + 6 + 5 + 4 + 3 + 2 + 1 = 45). Then, for each year, the fraction of the remaining useful life is calculated (9/45, 8/45, 7/45, etc.). In this case, since the half-year convention is used, the first year's fraction is halved (9/45 * 1/2 = 1/10). Finally, the depreciation expense for each year is calculated by multiplying the fraction by the cost of the asset minus the residual value ($30,000 - $6,000). For the year 2014, the depreciation expense is 1/10 * ($30,000 - $6,000) = $2,400.

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  • 35. 

    Which of the following statements is not true?

    • A change in the depreciation method for currently owned assets is accounted for prospectively

    • Correction of an error in depreciation is accounted for as a prior period adjustment

    • A company may revise its estimate of service life and residual value as new or additional information becomres available

    • A company may never revise its estimated depreciation, the deprecation method originally selected, or correct an error

    Correct Answer
    A. A company may never revise its estimated depreciation, the deprecation method originally selected, or correct an error
    Explanation
    The given answer is correct because it states that a company may never revise its estimated depreciation, the depreciation method originally selected, or correct an error. However, this statement is not true. A company is allowed to revise its estimated depreciation, the depreciation method, or correct an error if necessary. This is because new information or circumstances may arise that require adjustments to be made in order to accurately reflect the financial position of the company.

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  • 36. 

    A company may dispose of PP&E by all of the following except

    • Abandonment

    • Purchase

    • Sale

    • Involuntary conversion

    Correct Answer
    A. Purchase
    Explanation
    The correct answer is purchase. A company may dispose of PP&E (Property, Plant, and Equipment) through various methods such as abandonment, sale, or involuntary conversion. However, purchasing PP&E is not a method of disposal, as it involves acquiring assets rather than disposing of them.

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  • 37. 

    An impairment loss must be recognized when as asset's

    • Present value is lower than its fair value

    • Present value is higher than its fair value

    • Book value is lower than its fair value

    • Book value is higher than its fair value

    Correct Answer
    A. Book value is higher than its fair value
    Explanation
    When the book value of an asset is higher than its fair value, it means that the asset is overvalued on the company's balance sheet. This can occur when the asset has suffered a significant decline in value or when market conditions have changed. Recognizing an impairment loss in this situation allows the company to adjust the value of the asset to its fair value, ensuring that the financial statements reflect the true economic value of the asset.

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  • 38. 

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

    • Method of cost allocation

    • Current value of the asset

    • Service life

    • Residual value of the asset

    Correct Answer
    A. Current value of the asset
    Explanation
    The factors involved in computing periodic depreciation charges for an asset include the method of cost allocation, service life, and residual value of the asset. However, the current value of the asset is not considered when calculating depreciation charges. Depreciation is based on the initial cost of the asset, its estimated useful life, and the expected residual value at the end of its useful life. The current value of the asset may fluctuate over time, but it does not affect the calculation of periodic depreciation charges.

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  • 39. 

    What determines residual value?

    • Company policy

    • GAAP for each class of asset

    • IRFS

    • FASB

    Correct Answer
    A. Company policy
    Explanation
    Residual value refers to the estimated value of an asset at the end of its useful life. It is determined by company policy, which may consider factors such as market conditions, technological advancements, and the anticipated future value of the asset. Company policy allows organizations to have flexibility in determining the residual value based on their specific circumstances and objectives. This ensures that the residual value accurately reflects the asset's expected worth and helps in making informed financial decisions.

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  • 40. 

    Which of the following statements is true?

    • The activity method of computing depreciation could result in zero depreciation expense in some periods of time

    • If the activity method is in use, residual value should not be subtracted from cost to determine the depreciation base

    • The activity method produces a constant total cost of depreciation each period

    • The activity method should be used when the service life of the asset is affected mostly by the passage of time

    Correct Answer
    A. The activity method of computing depreciation could result in zero depreciation expense in some periods of time
    Explanation
    The activity method of computing depreciation could result in zero depreciation expense in some periods of time. This is because the activity method calculates depreciation based on the level of activity or usage of the asset. If there is no activity or usage in a particular period, then there would be no depreciation expense. This is different from other methods, such as straight-line depreciation, where depreciation is spread evenly over the useful life of the asset.

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  • 41. 

    When a company writes-down an asset, it must disclose this information

    • In the year of the write-down and the following year

    • In the year of the write down

    • In the year of the write-down and the following two years

    • In the following three years but not in the year of the write down

    Correct Answer
    A. In the year of the write-down and the following two years
    Explanation
    When a company writes-down an asset, it must disclose this information in the year of the write-down and the following two years. This means that the company is required to report the asset write-down in its financial statements for the year in which it occurred, as well as in the subsequent two years. This disclosure is important for transparency and to provide stakeholders with information about the impact of the write-down on the company's financial position.

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  • 42. 

    Accounting principles require that a company use a method of cost allocation that is 'systematic and rational.'  Three general approaches are used frequently in practice.  Which of the following is not one of the three methods?

    • Activity methods

    • Time based methods

    • Group methods

    • Cost methods

    Correct Answer
    A. Cost methods
    Explanation
    The question asks for the method that is not one of the three frequently used methods of cost allocation. The three methods mentioned in the question are activity methods, time-based methods, and group methods. The correct answer, cost methods, is not one of the three methods. This suggests that cost methods are not commonly used in practice for cost allocation.

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  • 43. 

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

    • Time based method

    • Accelerated method

    • Replacement method

    • Activity based method

    Correct Answer
    A. Activity based method
    Explanation
    The correct answer is activity based method. This method of depreciation is based on the actual usage or activity level of an asset. It takes into account the number of hours or units of production that the asset is expected to contribute. This method is useful when the asset's value or usefulness is directly related to the level of activity it is used for. It provides a more accurate and fair representation of the asset's depreciation over time.

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  • 44. 

    Once an asset is impaired, 

    • Accumulated depreciation needs to be adjusted

    • Annual depreciation expense is the same

    • Subsequent years' depreciation expense is based upon annual changes in the asset's fair value

    • The reduced book value is used to compute future years' depreciation

    Correct Answer
    A. The reduced book value is used to compute future years' depreciation
    Explanation
    When an asset is impaired, its book value is reduced to reflect the decrease in its value. This reduced book value is then used to calculate the asset's depreciation in future years. The reason for using the reduced book value is that it accurately reflects the current value of the asset after impairment. By using this reduced value, the depreciation expense is aligned with the asset's actual worth, ensuring that it is properly accounted for in the company's financial statements.

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  • 45. 

    Which one of the following disclosures is not required by GAAP?

    • Balances of major classes of depreciable assets by nature or function

    • Depreciation expense for each major class of asset

    • Accumulated Depreciation on each depreciable asset

    • An explanation of why the depreciation method used was selected by management

    Correct Answer
    A. An explanation of why the depreciation method used was selected by management
    Explanation
    An explanation of why the depreciation method used was selected by management is not required by GAAP. GAAP (Generally Accepted Accounting Principles) provides guidelines for financial reporting, but it does not require companies to disclose the rationale behind their choice of depreciation method. The other options listed, such as balances of depreciable assets, depreciation expense, and accumulated depreciation, are all required disclosures under GAAP to provide transparency and accuracy in financial reporting.

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  • 46. 

    Which one of the following statements is NOT true?

    • 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

    • The cost of an asset includes all acquisition costs necessary to obtain the benefits to be derived from the asset

    • The service life of an asset is the measure of the number of years of service expected from the asset before its disposal

    • 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

    Correct Answer
    A. 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
    Explanation
    The residual value of an asset is not the difference between the expected book value of the asset at the end of its service and the costs of disposal. The residual value is the estimated value of an asset at the end of its useful life, after depreciation has been subtracted. It is the amount that the asset is expected to be worth after it has been used and is ready to be disposed of.

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  • 47. 

    Many companies that use the declining balance method of depreciation switch to the straight line method at what point in the life of a depreciable asset?

    • Never, as one method must be applied consistently throughout the life of an asset

    • In the last quarter of the life of the asset

    • When the accelerated depreciation exceeds the straight line depreciation

    • Midpoint in the life of the asset

    Correct Answer
    A. Midpoint in the life of the asset
    Explanation
    Companies that use the declining balance method of depreciation switch to the straight line method at the midpoint in the life of a depreciable asset. This is because the declining balance method allows for larger depreciation expenses in the earlier years of an asset's life and smaller expenses in the later years. However, as the asset ages, the declining balance method may not accurately reflect the asset's true value. Therefore, switching to the straight line method at the midpoint ensures a more consistent and accurate depreciation expense over the remaining life of the asset.

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  • 48. 

    On January 1, 2013, Morgantown Co. purchased five machines at a price of $10,000 per machine.  Because the estimated life was 5 years and no salvage value was expected, a group depreciation rate of 20% was used.  On January 1, 2015, one of the machines was sold for $5,000.  The correct entry to record the sale of the machine is

    • Cash 5,000 Accumulated Depreciation 4,000 Loss on Sale of Machine 1,000 Machines 10,000

    • Cash 5,000 Machines 5,000

    • Cash 5,000 Loss on Sale of Machine 5,000 Machines 10,000

    • Cash 5,000 Accumulated Depreciation 5,000 Machines 10,000

    Correct Answer
    A. Cash 5,000 Accumulated Depreciation 5,000 Machines 10,000
    Explanation
    The correct entry to record the sale of the machine is to debit Cash for $5,000, debit Accumulated Depreciation for $5,000, and credit Machines for $10,000. This entry reflects the sale of the machine for $5,000, the accumulated depreciation of $5,000 that has been recorded over the years, and the original cost of the machine at $10,000. This entry properly reflects the decrease in assets and the recognition of the loss on the sale of the machine.

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Our quizzes are rigorously reviewed, monitored and continuously updated by our expert board to maintain accuracy, relevance, and timeliness.

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  • Mar 21, 2023
    Quiz Edited by
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  • Feb 08, 2016
    Quiz Created by
    Rocketgirl8_23
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