Question 1

Sure Company purchased a machine on January 1, 20X1, at a cash cost of $12,000. The estimated useful life is 10 years, and the estimated residual value is $3,000. The company will use the declining-balance method based on a 150 percent acceleration rate. What will be the depreciation expense for the second year?

Accepted Answer

Calculation: [$12,000 - ($12,000 × 1.5 × 10%)] × 1.5 × 10% = $1,530.

Question 2

Recording depreciation expense does which of the following?

Accepted Answer

Recording depreciation expense reduces profit because it is an expense that is deducted from revenue to arrive at net income. However, it is a non-cash expense, meaning it does not directly affect the amount of cash generated by a company.

Question 3

Trumble Company purchased a machine on January 1, 20X2, for $10,000. The company bookkeeper incorrectly used a six-year life instead of a ﬁve-year life to depreciate the machine. What would be the effect of this error on the 20X2 ﬁnancial statements?

Accepted Answer

Using a longer depreciation period than appropriate would result in less depreciation expense being recognized in the year, leading to an overstatement of assets (since the asset is not being depreciated as quickly), an overstatement of profit (because expenses are lower), and consequently, an overstatement of shareholders' equity (as retained earnings, part of shareholders' equity, would be higher due to higher profits).

Question 4

A machine, acquired for a cash cost of $6,000, is being depreciated on a straight-line basis of $900 per year. The residual value was estimated to be 10% of cost. What is the estimated useful life?

Accepted Answer

Calculation: ($6,000 × 90%) ÷ $900 = 6.

Question 5

What is the book value of a tangible operating asset?

Accepted Answer

The book value of a tangible operating asset is calculated as the acquisition cost minus the balance in accumulated depreciation. This reflects the original purchase price adjusted for the depreciation expense recognized over the asset's useful life, providing a current book value.

Question 6

On September 1, 20X3, Sitco Limited purchased an asset for $9,000, with a $1,500 estimated residual value, and an 8-year useful life. The 20X3 depreciation expense using the double- declining-balance method would be:

Accepted Answer

Calculation: [$9,000 × (2 ÷ 8) × (4 ÷ 12)] = $750.

Question 7

Angstrom Corporation purchased a truck at a cost of $60,000. It has an estimated useful life of five years and estimated residual value of $5,000. At the beginning of year three, Angstrom's managers concluded that the total useful life would be four years, rather than five. There was no change in the estimated residual value. What is the amount of depreciation that Angstrom should record for year 3 under the straight-line method?

Accepted Answer

Calculation: ($60,000 - {[($60,000 - $5,000) ÷ 5] × 2} - $5,000) ÷ 2 = $16,500.

Question 8

Helm Corporation purchased a machine with an initial cost of $80,000, a residual value of $5,000, and an estimated useful life of 10 years. At the beginning of the fifth year, Helm spent $10,000 for an extraordinary repair. Following the repair, Helm estimated that the machine had a remaining useful life of 8 years, and that the residual value was unchanged. Calculate depreciation expense on the machine for the fifth year, assuming that Helm uses the straight-line method.

Accepted Answer

Calculation: ($80,000 - $5,000) ÷ 10 = $7,500; $80,000 - ($7,500 × 4) = $50,000; ($50,000 + $10,000 - $5,000) ÷ 8 = $6,875.

Question 9

A depreciable asset that cost $100,000 had an estimated useful life of 5 years and estimated residual value of $10,000. What is the first year for which depreciation would be greater under the straight-line method than under the declining-balance method with an acceleration rate of 200%?

Accepted Answer

Calculation: Straight-line: ($100,000 - $10,000) ÷ 5 = $18,000 per year; declining-balance: $100,000 × 2 × 20% = $40,000 ?rst year; $60,000 × 2 × 20% = $24,000 second year; $36,000 × 2 × 20% = $14,400 third year.

Question 10

On January 1, 20X3, a machine with a useful life of five years and a residual value of $2,500 was purchased for $25,000. Using the double-declining-balance method, the depreciation expense for the year ending December 31, 20X4 would be

Accepted Answer

Calculation: [$25,000 × (2 ÷ 5)] = $10,000 First year [($25,000 - $10,000) × (2 ÷ 5)] = $6,000 Second year .

Question 11

Most companies keep separate sets of accounting records for ﬁnancial reporting and for income tax computations. Which of the following statements is true?

Accepted Answer

DC) Financial reporting rules and income tax regulations often have different objectives and requirements, leading to differences in how transactions are recorded and reported. For example, financial reporting aims to provide a fair view of the financial position and performance of a company to its stakeholders, while tax regulations are concerned with calculating the correct amount of tax payable to the government.D) Keeping separate sets of records allows companies to reconcile taxable income with reported profit. This reconciliation is necessary because the differences in accounting for certain transactions under financial reporting standards and tax regulations can lead to different profit figures. The reconciliation helps in explaining these differences to stakeholders and tax authorities.

Question 12

Belton Corporation uses straight-line depreciation and, for assets acquired during the fiscal year, follows the policy of recording a full month's depreciation for all assets acquired on or before the 15th of the month. No depreciation is recorded for the month if an asset is acquired after the 15th. On May 22, 20X1, Belton purchased a car that cost $22,000 which had an estimated residual value of $2,000 and an estimated useful life of five years. To the nearest dollar, what is the amount of depreciation that should be recorded on the car for 20X1?

Accepted Answer

Calculation: [($22,000 - $2,000) ÷ 5] × 7/12 = $2,333.

Question 13

Eastern Fisheries Co. purchased equipment on January 1, 20X1 for $22,500. The equipment had an estimated useful life of 10 years and an estimated residual value of $2,500. The company uses double-declining-balance depreciation.

-Assuming Eastern uses double-declining-balance depreciation, what would be the depreciation expense for 20X1?

Accepted Answer

The double-declining-balance depreciation rate is 2 divided by the useful life, which is 2/10 or 20%. The depreciation expense for the first year is calculated on the initial cost of $22,500. Thus, $22,500 * 20% = $4,500.

Question 14

Newson's Courier Service recently purchased a new delivery van for $29,000. The van is estimated to have a useful life of 8 years or 250,000 kilometers. The van will have a residual value of $1,000. The company uses the units-of-production method of depreciation. Assuming the van travelled 36,000 kilometers. during the first year, what is the depreciation expense for the van in year 1?

Accepted Answer

Calculation: (($29,000 - $1,000) ÷ 250,000) × 36,000 = $4,032.

Question 15

Eastern Fisheries Co. purchased equipment on January 1, 20X1 for $22,500. The equipment had an estimated useful life of 10 years and an estimated residual value of $2,500. The company uses double-declining-balance depreciation.

-Assuming Eastern uses straight-line depreciation, what would be the book value of the machine ten years later, on December 31

Accepted Answer

The straight-line depreciation method spreads the cost of the asset evenly over its useful life. The annual depreciation expense is calculated as (Cost - Residual Value) / Useful Life. For this equipment, it's ($22,500 - $2,500) / 10 = $2,000 per year. Over 10 years, the total depreciation would be $20,000, leaving a book value of $2,500 ($22,500 - $20,000).

Question 16

A machine that cost $72,000 has an estimated residual value of $6,000 and an estimated useful life of 5 years or 30,000 hours. Using the units-of-production method, the depreciation expense for the second year, during which the machine was used 5,000 hours, would be

Accepted Answer

Calculation: (($72,000 - $6,000) ÷ 30,000) × 5,000 = $11,000.

Question 17

Eastern Fisheries Co. purchased equipment on January 1, 20X1 for $22,500. The equipment had an estimated useful life of 10 years and an estimated residual value of $2,500. The company uses double-declining-balance depreciation.

-Assuming Eastern uses double- declining-balance depreciation, what would be the book value of the machine on December 31 20X2?

Accepted Answer

The double-declining-balance depreciation rate is 2/10 or 20% per year. The first year's depreciation is 20% of $22,500, which is $4,500, leaving a book value of $18,000 at the end of 20X1. The second year's depreciation is 20% of $18,000, which is $3,600, leaving a book value of $14,400 at the end of 20X2.

Question 18

Bangor Industries purchased a car for $22,000 on January 1, 20X1. The car had an estimated useful life of 80,000 kilometers and an estimated residual value of $4,000. In the second year of ownership (20X2), the car was driven 25,000 kilometers. Using the units-of-production method, what was the amount of depreciation expense for 20X2?

Accepted Answer

Calculation: ($22,000 - $4,000) ÷ 80,000 × 25,000 = $5,625.

Question 19

A company decided to use the units-of-production method to calculate depreciation on a car to be driven by the sales manager. The amount of annual depreciation will vary with which of the following?

Accepted Answer

The units-of-production method calculates depreciation based on the actual usage of the asset, in this case, the number of kilometers the car is driven.

Question 20

An asset being amortized with the straight-line method has a residual value of $20,000 and amortization expense of $25,000 in its second year. What was the original cost of the asset if its useful life was 10 years?

Accepted Answer

Calculation: ($25,000 × 10) + $20,000 = $270,000.

Quiz 8: Receivables, Bad Debt Expense, and Interest Revenue

Recording depreciation expense does which of the following?

Trumble Company purchased a machine on January 1, 20X2, for $10,000. The company bookkeeper incorrectly used a six-year life instead of a ﬁve-year life to depreciate the machine. What would be the effect of this error on the 20X2 ﬁnancial statements?

A machine, acquired for a cash cost of $6,000, is being depreciated on a straight-line basis of $900 per year. The residual value was estimated to be 10% of cost. What is the estimated useful life?

What is the book value of a tangible operating asset?

On September 1, 20X3, Sitco Limited purchased an asset for $9,000, with a $1,500 estimated residual value, and an 8-year useful life. The 20X3 depreciation expense using the double- declining-balance method would be:

A depreciable asset that cost $100,000 had an estimated useful life of 5 years and estimated residual value of $10,000. What is the first year for which depreciation would be greater under the straight-line method than under the declining-balance method with an acceleration rate of 200%?

On January 1, 20X3, a machine with a useful life of five years and a residual value of $2,500 was purchased for $25,000. Using the double-declining-balance method, the depreciation expense for the year ending December 31, 20X4 would be

Most companies keep separate sets of accounting records for ﬁnancial reporting and for income tax computations. Which of the following statements is true?

A machine that cost $72,000 has an estimated residual value of $6,000 and an estimated useful life of 5 years or 30,000 hours. Using the units-of-production method, the depreciation expense for the second year, during which the machine was used 5,000 hours, would be

A company decided to use the units-of-production method to calculate depreciation on a car to be driven by the sales manager. The amount of annual depreciation will vary with which of the following?

An asset being amortized with the straight-line method has a residual value of $20,000 and amortization expense of $25,000 in its second year. What was the original cost of the asset if its useful life was 10 years?