Deck 11: Depreciation, Impairments, and Depletion

Question 1

Depreciation is a means of cost allocation, not a matter of valuation.

Answer 1

True

Question 2

The asset turnover ratio is computed by dividing net sales by ending total assets.

Answer 2

False

Question 3

An accelerated depreciation method is appropriate when the asset's economic usefulness is the same each year.

Answer 3

False

Question 4

The three factors involved in the depreciation process are the depreciation base, the useful life, and the risk of obsolescence.

Question 5

The cost of an asset less its salvage value is its depreciation base.

Question 6

Intangible development costs and restoration costs are part of the depletion base.

Question 7

Companies frequently use the composite approach when the assets are similar in nature and have approximately the same useful lives.

Question 8

An impairment loss is the amount by which the carrying amount of the asset exceeds the sum of the expected future net cash flows from the use of that asset.

Question 9

The units-of-production approach to depreciation is appropriate when depreciation is a function of time instead of activity.

Question 10

The profit margin on sales ratio is a measure for analyzing the use of property, plant, and equipment.

Question 11

Normally, companies compute depletion on a straight-line basis.

Question 12

Impaired assets held for disposal should be reported at the lower of cost or net realizable value.

Question 13

The first step in determining whether an impairment has occurred is to estimate the future net cash flows expected from the use of that asset and its eventual disposition.

Question 14

The declining-balance method does not deduct the salvage value in computing the depreciation base.

Question 15

Depreciation is based on the decline in the fair market value of the asset.

Question 16

Changes in estimates are handled prospectively by dividing the asset's book value less any salvage value by the remaining estimated life.

Question 17

The major objection to the straight-line method is that it assumes the asset's economic usefulness and repair expense is the same each year.

Question 18

Depreciation, depletion, and amortization all involve the allocation of the cost of a long-lived asset to expense.

Question 19

Inadequacy is the replacement of one asset with another more efficient and economical asset.

Question 20

Gains or losses on disposals of assets do not distort periodic income when the group or composite method is used to compute depreciation.

Question 21

Depreciation accounting

A)provides funds.
B)funds replacements.
C)retains funds.
D)all of these.

Question 22

Each year a company has been investing an increasingly greater amount in machinery.Since there is a large number of small items with relatively similar useful lives, the company has been applying straight-line depreciation at a uniform rate to the machinery as a group.The ratio of this group's total accumulated depreciation to the total cost of the machinery has been steadily increasing and now stands at .75 to 1.00.The most likely explanation for this increasing ratio is the

A)company should have been using one of the accelerated methods of depreciation.
B)estimated average life of the machinery is less than the actual average useful life.
C)estimated average life of the machinery is greater than the actual average useful life.
D)company has been retiring fully depreciated machinery that should have remained in service.

Question 23

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

A)provides for the declining productivity of an aging asset.
B)ignores variations in the rate of asset use.
C)tends to result in a constant rate of return on a diminishing investment base.
D)gives smaller periodic write-offs than decreasing charge methods.

Question 24

Use of the double-declining balance method

A)results in a decreasing charge to depreciation expense.
B)means salvage value is not deducted in computing the depreciation base.
C)means the book value should not be reduced below salvage value.
D)all of these.

Question 25

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

A)units-of-production.
B)straight-line.
C)sum-of-the-years'-digits.
D)declining-balance.

Question 26

Depreciation is normally computed on the basis of the nearest

A)full month and to the nearest cent.
B)full month and to the nearest dollar.
C)day and to the nearest cent.
D)day and to the nearest dollar.

Question 27

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

A)Associating cause and effect
B)Systematic and rational allocation
C)Immediate recognition
D)Partial recognition

Question 28

The following is true of depreciation accounting.

A)It is not a matter of valuation.
B)It is part of the matching of revenues and expenses.
C)It retains funds by reducing income taxes and dividends.
D)All of these.

Question 29

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

A)results in salvage value being ignored.
B)means the denominator is the years remaining at the beginning of the year.
C)means the book value should not be reduced below salvage value.
D)all of these.

Question 30

Composite or group depreciation is a depreciation system whereby

A)the years of useful life of the various assets in the group are added together and the total divided by the number of items.
B)the cost of individual units within an asset group is charged to expense in the year a unit is retired from service.
C)a straight-line rate is computed by dividing the total of the annual depreciation expense for all assets in the group by the total cost of the assets.
D)the original cost of all items in a given group or class of assets is retained in the asset account and the cost of replace?ments is charged to expense when they are acquired.

Question 31

The activity method of depreciation

A)is a variable charge approach.
B)assumes that depreciation is a function of the passage of time.
C)conceptually associates cost in terms of input measures.
D)all of these.

Question 32

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

A)service life refers to the time an asset will be used by a company and physical life refers to how long the asset will last.
B)physical life is the life of an asset without consideration of salvage value and service life requires the use of salvage value.
C)physical life is always longer than service life.
D)service life refers to the length of time an asset is of use to its original owner, while physical life refers to how long the asset will be used by all owners.

Question 33

If an industrial firm uses the units-of-production method for computing depreciation on its only plant asset, factory machinery, the credit to accumulated depreciation from period to period during the life of the firm will

A)be constant.
B)vary with unit sales.
C)vary with sales revenue.
D)vary with production.

Question 34

Roberts Truck Rental uses the group depreciation method for its fleet of trucks.When it retires one of its trucks and receives cash from a salvage company, the carrying value of property, plant, and equipment will be decreased by the

A)original cost of the truck.
B)original cost of the truck less the cash proceeds.
C)cash proceeds received.
D)cash proceeds received and original cost of the truck.

Question 35

A graph is set up with "yearly depreciation expense" on the vertical axis and "time" on the horizontal axis.Assuming linear relationships, how would the graphs for straight-line and sum-of-the-years'-digits depreciation, respectively, be drawn?

A)Vertically and sloping down to the right
B)Vertically and sloping up to the right
C)Horizontally and sloping down to the right
D)Horizontally and sloping up to the right

Question 36

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

A)the total amount to be charged (debited) to expense over an asset's useful life.
B)the cost of the asset less the related depreciation recorded to date.
C)the estimated market value of the asset at the end of its useful life.
D)the acquisition cost of the asset.

Question 37

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

A)The process of charging the decline in value of an economic resource to income in the period in which the benefit occurred.
B)The process of allocating the cost of tangible assets to expense in a systematic and rational manner to those periods expected to benefit from the use of the asset.
C)A method of allocating asset cost to an expense account in a manner which closely matches the physical deterioration of the tangible asset involved.
D)An accounting concept that allocates the portion of an asset used up during the year to the contra asset account for the purpose of properly recording the fair market value of tangible assets.

Question 38

Economic factors that shorten the service life of an asset include

A)obsolescence.
B)supersession.
C)inadequacy.
D)all of these.

Question 39

Quayle Company acquired machinery on January 1, 2002 which it depreciated under the straight-line method with an estimated life of fifteen years and no salvage value.On January 1, 2007, Quayle estimated that the remaining life of this machinery was six years with no salvage value.How should this change be accounted for by Quayle?

A)As a prior period adjustment
B)As the cumulative effect of a change in accounting principle in 2007
C)By setting future annual depreciation equal to one-sixth of the book value on January 1, 2007
D)By continuing to depreciate the machinery over the original fifteen year life

Question 40

For the composite method, the composite

A)rate is the total cost divided by the total annual depreciation.
B)rate is the total annual depreciation divided by the total depreciable cost.
C)life is the total cost divided by the total annual depreciation.
D)life is the total depreciable cost divided by the total annual depreciation.

Question 41

The asset turnover ratio is computed by dividing

A)net income by ending total assets.
B)net income by average total assets.
C)net sales by ending total assets.
D)net sales by average total assets.

Question 42

The book value of a plant asset is

A)the fair market value of the asset at a balance sheet date.
B)the asset's acquisition cost less the total related depreciation recorded to date.
C)equal to the balance of the related accumulated depreciation account.
D)the assessed value of the asset for property tax purposes.

Question 43

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

A)use accelerated depreciation methods.
B)use straight-line depreciation methods.
C)recognize both functional and physical factors in depreciation.
D)none of these.

Question 44

Starr Company purchased a depreciable asset for $150,000.The estimated salvage value is $10,000, and the estimated useful life is 8 years.The double-declining balance method will be used for depreciation.What is the depreciation expense for the second year on this asset?

A)$17,500
B)$26,250
C)$28,125
D)$37,500

Question 45

Lennon Company purchased a depreciable asset for $200,000.The estimated salvage value is $10,000, and the estimated useful life is 10,000 hours.Lennon used the asset for 1,100 hours in the current year.The activity method will be used for depreciation.What is the depreciation expense on this asset?

A)$19,000
B)$20,900
C)$22,000
D)$190,000

Question 46

Harrison Company purchased a depreciable asset for $100,000.The estimated salvage value is $10,000, and the estimated useful life is 10 years.The straight-line method will be used for depreciation.What is the depreciation base of this asset?

A)$9,000
B)$10,000
C)$90,000
D)$100,000

Question 47

Reserve recognition accounting

A)is presently the generally accepted accounting method for financial reporting of oil and gas reserves.
B)is a historical cost method similar to the full cost approach and the successful efforts approach.
C)is used for reporting of oil and gas reserves for federal income tax purposes.
D)requires estimates of future production costs, the appropriate discount rate, and the expected selling price of oil and gas reserves.

Question 48

A change in estimate should

A)result in restatement of prior period statements.
B)be handled in current and future periods.
C)be handled in future periods only.
D)be handled retroactively.

Question 49

Depletion expense

A)is usually part of cost of goods sold.
B)includes tangible equipment costs in the depletion base.
C)excludes intangible development costs from the depletion base.
D)excludes restoration costs from the depletion base.

Question 50

Bigbie Company purchased a depreciable asset for $600,000.The estimated salvage value is $30,000, and the estimated useful life is 10,000 hours.Bigbie used the asset for 1,100 hours in the current year.The activity method will be used for depreciation.What is the depreciation expense on this asset?

A)$57,000
B)$62,700
C)$66,000
D)$570,000

Question 51

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

A)percentage depletion method.
B)decreasing charge method.
C)straight-line method.
D)units-of-production method.

Question 52

Pine Company purchased a depreciable asset for $360,000.The estimated salvage value is $24,000, and the estimated useful life is 8 years.The double-declining balance method will be used for depreciation.What is the depreciation expense for the second year on this asset?

A)$42,000
B)$63,000
C)$67,500
D)$90,000

Question 53

White Printing Company determines that a printing press used in its operations has suffered a permanent impairment in value because of technological changes.An entry to record the impairment should

A)recognize an extraordinary loss for the period.
B)include a credit to the equipment accumulated depreciation account.
C)include a credit to the equipment account.
D)not be made if the equipment is still being used.

Question 54

Prentice Company purchased a depreciable asset for $200,000.The estimated salvage value is $20,000, and the estimated useful life is 10 years.The straight-line method will be used for depreciation.What is the depreciation base of this asset?

A)$18,000
B)$20,000
C)$180,000
D)$200,000

Question 55

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

A)Acquisition cost of the natural resource deposit
B)Exploration costs
C)Tangible equipment costs associated with machinery used to extract the natural resource
D)Intangible development costs such as drilling costs, tunnels, and shafts

Question 56

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

A)is not a current practice in financial reporting.
B)is not essential to a fair presentation of financial position.
C)is needed in financial reporting when company policy differs from income tax policy.
D)should be included in corporate financial statements or notes thereto.

Question 57

On July 1, 2006, Rodriguez Corporation purchased factory equipment for $150,000.Salvage value was estimated to be $4,000.The equipment will be depreciated over ten years using the double-declining balance method.Counting the year of acquisition as one-half year, Gonzalez should record depreciation expense for 2007 on this equipment of

A)$30,000.
B)$27,000.
C)$26,280.
D)$24,000.

Question 58

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

A)Accumulated depreciation, either by major classes of depreciable assets or in total.
B)Details demonstrating how depreciation was calculated.
C)Depreciation expense for the period.
D)Balances of major classes of depreciable assets, by nature and function.

Question 59

Norris Corporation purchased factory equipment that was installed and put into service January 2, 2006, at a total cost of $60,000.Salvage value was estimated at $4,000.The equipment is being depreciated over four years using the double-declining balance method.For the year 2007, Norris should record depreciation expense on this equipment of

A)$14,000.
B)$15,000.
C)$28,000.
D)$30,000.

Question 60

On April 13, 2006, Foley Co.purchased machinery for $120,000.Salvage value was estimated to be $5,000.The machinery will be depreciated over ten years using the double-declining balance method.If depreciation is computed on the basis of the nearest full month, Foley should record depreciation expense for 2007 on this machinery of

A)$20,800.
B)$20,400.
C)$20,550.
D)$20,933.

Question 61

Use the following information for questions
A schedule of machinery owned by Dougan Co.is presented below: $$\begin{array} { l c c c } & \text { Total Cost } & \begin{array} { c } \text { Estimated } \\\text { Salvage Value }\end{array} & \begin{array} { c } \text { Estimated } \\\text { Life in Years }\end{array} \\\hline \text { Machine A } & \$ 320,000 & \$ 20,000 & 12 \\\text { Machine C } & 390,000 & 30,000 & 10 \\\text { Machine M } & 225,000 & 15,000 & 6\end{array}$$ Dougan computes depreciation by the composite method.

-The composite rate of depreciation (in percent) for these assets is

A)10.27.
B)10.72.
C)11.03.
D)11.67.

Question 62

Vinson Co.purchased machinery that was installed and ready for use on January 3, 2006, at a total cost of $69,000.Salvage value was estimated at $9,000.The machinery will be depreciated over five years using the double-declining balance method.For the year 2007, Vinson should record depreciation expense on this machinery of

A)$14,400.
B)$16,560.
C)$18,000.
D)$27,600.

Question 63

Jantz Corporation purchased a machine on July 1, 2004, for $750,000.The machine was estimated to have a useful life of 10 years with an estimated salvage value of $42,000.During 2007, it became apparent that the machine would become uneconomical after December 31, 2011, and that the machine would have no scrap value.Accumulated depreciation on this machine as of December 31, 2006, was $177,000.What should be the charge for depreciation in 2007 under generally accepted accounting principles?

A)$106,200
B)$114,600
C)$123,000
D)$143,250

Question 64

Weston Company purchased a tooling machine on January 3, 2000 for $500,000.The machine was being depreciated on the straight-line method over an estimated useful life of 10 years, with no salvage value.At the beginning of 2007, the company paid $125,000 to overhaul the machine.As a result of this improvement, the company estimated that the useful life of the machine would be extended an additional 5 years (15 years total).What should be the depreciation expense recorded for the machine in 2007?

A)$34,375
B)$41,667
C)$50,000
D)$55,000

Question 65

On September 19, 2006, Rosen Co.purchased machinery for $190,000.Salvage value was estimated to be $10,000.The machinery will be depreciated over eight years using the sum-of-the-years'-digits method.If depreciation is computed on the basis of the nearest full month, Rosen should record depreciation expense for 2007 on this machinery of

A)$40,903.
B)$38,845.
C)$38,750.
D)$35,000.

Question 66

During 2007, Geiger Co.sold equipment that had cost $98,000 for $58,800.This resulted in a gain of $4,300.The balance in Accumulated Depreciation-Equipment was $325,000 on January 1, 2007, and $310,000 on December 31.No other equipment was disposed of during 2007.Depreciation expense for 2007 was

A)$15,000.
B)$19,300.
C)$28,500.
D)$58,500.

Question 67

McCartney Company purchased a depreciable asset for $250,000 on April 1, 2005.The estimated salvage value is $25,000, and the estimated useful life is 5 years.The straight-line method is used for depreciation.What is the balance in accumulated depreciation on May 1, 2008 when the asset is sold?

A)$90,000
B)$105,000
C)$123,750
D)$138,750

Question 68

On January 1, 2006, Carson Company purchased a new machine for $2,100,000.The new machine has an estimated useful life of nine years and the salvage value was estimated to be $75,000.Depreciation was computed on the sum-of-the-years'-digits method.What amount should be shown in Carson's balance sheet at December 31, 2007, net of accumulated depreciation, for this machine?

A)$1,695,000
B)$1,335,000
C)$1,306,666
D)$1,244,250

Question 69

A plant asset has a cost of $24,000 and a salvage value of $6,000.The asset has a three-year life.If depreciation in the third year amounted to $3,000, which depreciation method was used?

A)Straight-line
B)Declining-balance
C)Sum-of-the-years'-digits
D)Cannot tell from information given

Question 70

Windsor Company purchased a depreciable asset for $300,000 on April 1, 2005.The estimated salvage value is $30,000, and the estimated total useful life is 5 years.The straight-line method is used for depreciation.What is the balance in accumulated depreciation on May 1, 2008 when the asset is sold?

A)$118,000
B)$126,000
C)$148,500
D)$166,500

Question 71

On January 1, 2000, Barnes Company purchased equipment at a cost of $50,000.The equipment was estimated to have a salvage value of $5,000 and it is being depreciated over eight years under the sum-of-the-years'-digits method.What should be the charge for depreciation of this equipment for the year ended December 31, 2007?

A)$1,250
B)$1,389
C)$2,500
D)$5,625

Question 72

Peppers Corporation owns machinery with a book value of $190,000.It is estimated that the machinery will generate future cash flows of $200,000.The machinery has a fair value of $140,000.Peppers should recognize a loss on impairment of

A)$ -0-.
B)$10,000.
C)$50,000.
D)$60,000.

Question 73

Sears Corporation, which has a calendar year accounting period, purchased a new machine for $40,000 on April 1, 2002.At that time Sears expected to use the machine for nine years and then sell it for $4,000.The machine was sold for $22,000 on Sept.30, 2007.Assuming straight-line depreciation, no depreciation in the year of acquisition, and a full year of depreciation in the year of retirement, the gain to be recognized at the time of sale would be

A)$4,000.
B)$3,000.
C)$2,000.
D)$0.

Question 74

Use the following information for questions
A schedule of machinery owned by Dougan Co.is presented below: $$\begin{array} { l c c c } & \text { Total Cost } & \begin{array} { c } \text { Estimated } \\\text { Salvage Value }\end{array} & \begin{array} { c } \text { Estimated } \\\text { Life in Years }\end{array} \\\hline \text { Machine A } & \$ 320,000 & \$ 20,000 & 12 \\\text { Machine C } & 390,000 & 30,000 & 10 \\\text { Machine M } & 225,000 & 15,000 & 6\end{array}$$ Dougan computes depreciation by the composite method.

-The composite life (in years) for these assets is

A)9.1.
B)9.3.
C)9.7.
D)10.0.

Question 75

On January 3, 2006, Lopez Co.purchased machinery.The machinery has an estimated useful life of eight years and an estimated salvage value of $30,000.The depreciation applicable to this machinery was $65,000 for 2008, computed by the sum-of-the-years'-digits method.The acquisition cost of the machinery was

A)$360,000.
B)$390,000.
C)$420,000.
D)$468,000.

Question 76

On January 1, 2007, the Accumulated Depreciation-Machinery account of a particular company showed a balance of $370,000.At the end of 2007, after the adjusting entries were posted, it showed a balance of $395,000.During 2007, one of the machines which cost $125,000 was sold for $60,500 cash.This resulted in a loss of $4,000.Assuming that no other assets were disposed of during the year, how much was depreciation expense for 2007?

A)$85,500
B)$93,500
C)$25,000
D)$60,500

Question 77

On January 2, 2005, Payne Company acquired equipment to be used in its manufacturing operations.The equipment has an estimated useful life of 10 years and an estimated salvage value of $15,000.The depreciation applicable to this equipment was $70,000 for 2008, computed under the sum-of-the-years'-digits method.What was the acquisition cost of the equipment?

A)$535,000
B)$565,000
C)$550,000
D)$541,667

Question 78

George Martin Corporation purchased a depreciable asset for $300,000 on January 1, 2005.The estimated salvage value is $30,000, and the estimated useful life is 9 years.The straight-line method is used for depreciation.In 2008, George Martin changed its estimates to a total useful life of 5 years with a salvage value of $50,000.What is 2008 depreciation expense?

A)$30,000
B)$50,000
C)$80,000
D)$90,000

Question 79

Garrison Corporation purchased a depreciable asset for $420,000 on January 1, 2005.The estimated salvage value is $42,000, and the estimated total useful life is 9 years.The straight-line method is used for depreciation.In 2008, Garrison changed its estimates to a useful life of 5 years with a salvage value of $70,000.What is 2008 depreciation expense?

A)$42,000
B)$70,000
C)$112,000
D)$126,000

Question 80

Dillman Corporation owns machinery with a book value of $190,000.It is estimated that the machinery will generate future cash flows of $175,000.The machinery has a fair value of $140,000.Dillman should recognize a loss on impairment of

A)$ -0-.
B)$15,000.
C)$50,000.
D)$35,000.