Question 1

Depreciation is a process of

Accepted Answer

Depreciation is the process of allocating the cost of an asset over its useful life. This allocation is necessary to match the expense of the asset with the revenue it generates. Depreciation is not a process of asset devaluation or asset valuation, although the result may be a decrease in the asset's value over time.

Question 2

A company purchased factory equipment on June 1, 2014 for $48,000. It is estimated that the equipment will have a $6,000 residual value at the end of its 10-year useful life. Using the straight-line method of depreciation, the amount to be recorded as depreciation expense at December 31, 2014 is

Accepted Answer

The straight-line depreciation method calculates equal depreciation expenses each year over the useful life of the equipment. The formula is: (Cost - Residual Value) / Useful Life. For this equipment, the annual depreciation is ($48,000 - $6,000) / 10 = $4,200. Since the equipment was purchased on June 1, only 7 months of depreciation should be recorded for 2014. Therefore, the depreciation expense for 2014 is $4,200 * (7/12) = $2,450.

Question 3

A company purchased office equipment for $10,000 and estimated a residual value of $2,000 at the end of its 4-year useful life. The constant percentage to be applied against carrying amount each year if the double diminishing-balance method is used is

Accepted Answer

The double diminishing-balance method uses double the straight-line rate. The straight-line rate is 1/4 (25%) for a 4-year life, so double that is 50%.

Question 4

Which of the following is NOT a characteristic of property, plant, and equipment?

Accepted Answer

Property, plant, and equipment are tangible assets used in the operations of a business and are not intended for sale, making option D (held for sale) incorrect as it does not describe these types of assets.

Question 5

Which of the following items should NOT be capitalized?

Accepted Answer

Truck license fees are considered operating expenses and should not be capitalized, unlike the other items which are capitalized as part of the asset's cost.

Question 6

Which of the following items should NOT be included in the cost of land?

Accepted Answer

Structural additions to land are not included in the cost of land; they are considered improvements and are capitalized separately.

Question 7

Which of the following items is considered an operating expenditure?

Accepted Answer

Insurance on equipment in use is considered an operating expenditure as it is a recurring cost necessary for the day-to-day operations of a business.

Question 8

The carrying amount of an asset is equal to the

Accepted Answer

The carrying amount of an asset is calculated as the asset's cost less its accumulated depreciation. This reflects the asset's book value over time as it depreciates.

Question 9

A truck was purchased for $15,000, and it was estimated to have a $3,000 residual value at the end of its useful life. Monthly depreciation expense of $250 was recorded using the straight-line method. The annual depreciation rate is

Accepted Answer

The answer of A truck was purchased for $15,000, and...

Question 10

When an asset is fully depreciated, the carrying amount of the asset will be

Accepted Answer

When an asset is fully depreciated, its carrying amount (book value) equals the residual value, which is the estimated salvage value at the end of its useful life. This is the amount expected to be recovered upon disposal of the asset after all depreciation has been charged.

Question 11

The balance in the accumulated depreciation account represents the

Accepted Answer

The balance in the accumulated depreciation account represents the total amount charged to expense for the depreciation of a long-lived asset since its acquisition. This amount is used to reduce the book value of the asset on the balance sheet.

Question 12

Equipment was purchased for $15,000. Freight charges amounted to $700, and there was a cost of $2,000 for building a foundation and installing the equipment. It is estimated that the equipment will have a $3,000 residual value at the end of its 5-year useful life. Depreciation expense each year using the straight-line method will be

Accepted Answer

The total cost of the equipment is the purchase price plus freight charges plus installation costs, which equals $15,000 + $700 + $2,000 = $17,700. The depreciable base is the total cost minus the residual value, or $17,700 - $3,000 = $14,700. Using the straight-line method, the annual depreciation expense is the depreciable base divided by the useful life, or $14,700 / 5 = $2,940.

Question 13

Which of the following items qualify as land improvements?

Accepted Answer

Land improvements are enhancements made to a piece of land to make it more usable, such as installing an underground sprinkler system.

Question 14

In calculating depreciation, residual value is

Accepted Answer

Residual value is an estimate of the amount that an asset can be sold for at the end of its useful life. It is considered in the calculation of depreciation to determine the total amount that will be depreciated over the asset's useful life.

Question 15

Which one of the following items is NOT a consideration when recording periodic depreciation expense on long-lived assets?

Accepted Answer

The cash needed to replace the long-lived asset is not a consideration when recording periodic depreciation expense. Depreciation is calculated based on the asset's cost, its estimated useful life, and its residual value, not on the future costs associated with its replacement.

Question 16

When estimating the useful life of an asset, accountants do NOT consider

Accepted Answer

The cost to replace the asset at the end of its useful life is not considered when estimating the useful life of an asset. Instead, factors like obsolescence, expected repairs and maintenance, and the intended use of the asset are taken into account to determine how long the asset will be useful before it needs to be replaced or significantly overhauled.

Question 17

A company purchased property for $300,000. The property included an acre of land valued at $50,000, a building valued at $150,000, and equipment valued at $125,000.
-The above transaction may be referred to as a

Accepted Answer

The transaction is referred to as a basket purchase because multiple assets (land, building, equipment) are acquired together for a single purchase price, requiring the allocation of the total cost among the individual assets based on their relative fair values.

Question 18

Which is NOT a method of depreciation?

Accepted Answer

Perpetual-identification is not a method of depreciation; it relates to inventory management systems, not the calculation of depreciation for assets.

Question 19

Depreciation is the process of allocating the cost of a long-lived asset (such as property, plant, and equipment) over its service life in a(n)

Accepted Answer

Depreciation is the allocation of the cost of a tangible asset over its useful life in a systematic and rational manner, reflecting the asset's consumption or wear and tear over time.

Question 20

The cost of property, plant, and equipment includes all of the following items EXCEPT

Accepted Answer

The cost of property, plant, and equipment capitalizes all costs necessary to acquire the asset and prepare it for its intended use, which includes purchase price, installation fees, and freight charges. Annual maintenance costs are considered operating expenses and are not capitalized.

Quiz 9: Long-Lived Assets