Deck 11: Depreciation, Impairments, and Depletion

Question 1

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

Answer 1

True

Question 2

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

Answer 2

True

Question 3

Under component depreciation, each component of an item of property, plant and equipment whose cost is significant relative to the total cost of the asset must be depreciated separately.

Answer 3

True

Question 4

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

Question 5

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

Question 6

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

Question 7

After an impairment loss is recorded, the recoverable amount becomes the basis for the impaired asset and is used to calculate depreciation in future periods.

Question 8

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

Question 9

Component depreciation must be calculated using the straight-line method.

Question 10

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

Question 11

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

Question 12

An asset's value in use is defined as the present value of the cash flows expected from its future use and eventual sale at the end its useful life.

Question 13

A recovery of impairment for a tangible long-lived asset is limited to the carrying value that would have been reported had the impairment not occurred.

Question 14

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

Question 15

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

Question 16

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

Question 17

The recoverable amount used to impairment test a long-lived tangible asset is defined as the asset's fair value less costs to sell.

Question 18

Recoveries of impairment for tangible long-lived assets are reported as components of other comprehensive income.

Question 19

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

Question 20

The first step in determining an impairment loss is to identify whether impairment indicators are present.

Question 21

Which of 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 22

Economic factors that shorten the service life of an asset include

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

Question 23

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 24

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

Question 25

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 26

Although IFRS allows it, most companies do not use revaluation accounting.

Question 27

Recoverable amount is defined as the higher of fair value less costs to sell or value-in-use.

Question 28

Use of the double-declining balance method

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

Question 29

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

Question 30

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

Question 31

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 32

The Accumulated Other Comprehensive Income account related to revaluations cannot have a negative balance.

Question 33

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 34

Revaluation surplus is a temporary account which is closed to Retained Earnings at the end of an accounting period.

Question 35

The recoverability test is the first step in impairment testing under both IFRS and U.S.GAAP.

Question 36

Myers Company acquired machinery on January 1, 2005 which it depreciated under the straight-line method with an estimated life of fifteen years and no residual value.On January 1, 2010, Myers estimated that the remaining life of this machinery was six years with no residual value.How should this change be accounted for by Myers?

A)As a prior period adjustment
B)As the cumulative effect of a change in accounting principle in 2010
C)By setting future annual depreciation equal to one-sixth of the book value on January 1, 2010
D)By continuing to depreciate the machinery over the original fifteen year life

Question 37

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 38

Unrealized gains from revaluations do not increase net income but are instead reported as components of other comprehensive income.

Question 39

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

A)results in residual 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 residual value.
D)all of these.

Question 40

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

Question 41

Jamar Company purchased a depreciable asset for $150,000.The estimated residual 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 42

Gardner Corporation purchased a truck at the beginning of 2010 for $75,000.The truck is estimated to have a residual value of $3,000 and a useful life of 120,000 miles.It was driven 18,000 miles in 2010 and 32,000 miles in 2011.What is the depreciation expense for 2010?

A)$11,250
B)$10,800
C)$18,000
D)$30,000

Question 43

Solar Products purchased a computer for $13,000 on July 1, 2010.The company intends to depreciate it over 4 years using the double-declining balance method.Residual value is $1,000.Depreciation for 2010 is

A)$6,500
B)$3,250
C)$4,875
D)$3,000

Question 44

Solar Products purchased a computer for $13,000 on July 1, 2010.The company intends to depreciate it over 4 years using the double-declining balance method.Residual value is $1,000.Depreciation for 2011 is

A)$6,500
B)$3,250
C)$4,875
D)$3,000

Question 45

All of the following are true of the recoverable amount used in the impairment test of a long-lived asset except:

A)An asset's recoverable amount is the lower of its value-in-use and its fair value less cost to sell.
B)An asset's recoverable amount is the higher of its fair value less cost to sell and its value-in-use.
C)If the recoverable amount is higher than the carrying value, an impairment loss will be recorded.
D)If an asset's recoverable amount is higher than the carrying amount, no impairment loss will be reported on the period's income statement.

Question 46

IFRS and U.S.GAAP differ with regard to accounting for impairment on property, plant and equipment in all of the following ways except

A)U.S.GAAP requires the recoverability test to determine whether impairment has occurred but IFRS does not.
B)Under IFRS, impairment testing is performed at each reporting date.Under U.S.GAAP impairment testing is done only when management has reason to believe that the asset may be impaired.
C)IFRS but not U.S.GAAP, allows for recovery of impairment in assets held for use.
D)U.S.GAAP requires assets held for sale or disposal to be reported at the lower-of-cost or net realizable value.IFRS requires that these assets be reported at the higher of fair value less cost to sell and value-in-use.

Question 47

Hamilton Company purchased a depreciable asset for $200,000.The estimated residual 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 48

Which of following is not a similarity in the accounting treatment for depreciation and cost depletion?

A)The estimated life is based on economic or productive life.
B)Assets subject to either are reported in the same classification on the statement of financial position.
C)The rates may be changed upon revision of the estimated productive life used in the original rate computations.
D)Both depreciation and depletion are based on time.

Question 49

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 50

Which of the following is not a difference between the accounting treatment for depreciation and cost depletion?

A)Depletion applies to natural resources while depreciation applies to plant and equipment.
B)Depletion refers to the physical exhaustion or consumption of the asset while depreciation refers to the wear, tear, and obsolescence of the asset.
C)Many formulas are used in computing depreciation but only one is used to any extent in computing depletion.
D)The cost of the asset is the starting point from which computation of the amount of the periodic charge is made to operations for depreciation, but the fair value reassessed each year as the starting point for the periodic charge for depletion.

Question 51

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

A)recognize extra depreciation expense 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 52

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 53

All of the following are true with regard to impairment testing of long-lived assets except:

A)If impairment indicators are present, the company must conduct an impairment test.
B)The impairment test compares the asset's carrying value with the lower of its fair value less cost to sell and its value-in-use.
C)If the recoverable amount is lower than the carrying value, an impairment loss will be reported on the period's income statement.
D)If either the fair value less cost to sell or the value-in-use is higher than the carrying amount, no impairment loss will be recorded.

Question 54

Under IFRS, how is the account revaluation surplus reported?

A)As "other revenues and expenses" on the income statement.
B)As part of other comprehensive income which can be reported presented in separate statement, combined with income statement, or in changes in stockholders' equity statement.
C)It is included with Reserves in the stockholders' equity section of the Statement of Financial Position.
D)The account is not reported in the financial statements.

Question 55

Ferguson Company purchased a depreciable asset for $100,000.The estimated residual 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 56

Dividends representing a return of capital to shareholders 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 57

Engels Company purchased a depreciable asset for $600,000.The estimated residual value is $30,000, and the estimated useful life is 10,000 hours.Engels 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 58

Gardner Corporation purchased a truck at the beginning of 2010 for $75,000.The truck is estimated to have a residual value of $3,000 and a useful life of 120,000 miles.It was driven 18,000 miles in 2010 and 32,000 miles in 2011.What is the depreciation expense for 2011?

A)$20,000
B)$53,333
C)$19,200
D)$32,000

Question 59

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 60

Kinder Company purchased a depreciable asset for $200,000.The estimated residual value is $10,000, and the estimated useful life is 10,000 hours.Kinder 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 61

On September 19, 2010, McCoy Co.purchased machinery for $190,000.Residual 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, McCoy should record depreciation expense for 2011 on this machinery of

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

Question 62

On January 3, 2009, Munoz Co.purchased machinery.The machinery has an estimated useful life of eight years and an estimated residual value of $30,000.The depreciation applicable to this machinery was $65,000 for 2011, 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 63

Rollins Company purchased a depreciable asset for $300,000 on April 1, 2008.The estimated residual 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, 2011 when the asset is sold?

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

Question 64

On January 1, 2004, Forbes Company purchased equipment at a cost of $50,000.The equipment was estimated to have a residual 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, 2011?

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

Question 65

On January 1, 2005, Fleming Company purchased equipment at a cost of CHF650,000.The equipment was estimated to have a salvage value of CHF55,000 and it is being depreciated over seven years under the sum-of-the-year's-digits method.What should be the charge for the depreciation of this equipment for the year ended December 31, 2011?

A)CHF21,250
B)CHF23,214.
C)CHF85,000
D)CHF148,750

Question 66

Orton Corporation, which has a calendar year accounting period, purchased a new machine for $40,000 on April 1, 2006.At that time Orton 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, 2011.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 67

During 2010, Noller 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, 2010, and $310,000 on December 31.No other equipment was disposed of during 2010.Depreciation expense for 2010 was

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

Question 68

On July 1, 2010, Gonzalez Corporation purchased factory equipment for $150,000.Residual 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 2011 on this equipment of

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

Question 69

Matile Co.purchased machinery that was installed and ready for use on January 3, 2010, at a total cost of $69,000.Residual value was estimated at $9,000.The machinery will be depreciated over five years using the double-declining balance method.For the year 2011, Matile should record depreciation expense on this machinery of

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

Question 70

A plant asset has a cost of $24,000 and a residual 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 71

On January 1, 2010, Graham Company purchased a new machine for $2,100,000.The new machine has an estimated useful life of nine years and the residual value was estimated to be $75,000.Depreciation was computed on the sum-of-the-years'-digits method.What amount should be shown in Graham's balance sheet at December 31, 2011, net of accumulated depreciation, for this machine?

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

Question 72

Stevenson Company purchased a depreciable asset for $250,000 on April 1, 2008.The estimated residual 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, 2011 when the asset is sold?

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

Question 73

On January 2, 2008, Stacy Company acquired equipment to be used in its manufacturing operations.The equipment has an estimated useful life of 10 years and an estimated residual value of $15,000.The depreciation applicable to this equipment was $70,000 for 2011, 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 74

Williamson Corporation purchased a depreciable asset for $300,000 on January 1, 2008.The estimated residual value is $30,000, and the estimated useful life is 9 years.The straight-line method is used for depreciation.In 2011, Williamson changed its estimates to a total useful life of 5 years with a salvage value of $50,000.What is 2011 depreciation expense?

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

Question 75

Kleinschmidt Company purchased a depreciable asset for €2,000,000.The estimated salvage value is €150,000, and the estimated useful life is 400,000 hours.Kleinschmidt used the asset for 35,000 hours in the current year.The activity method will be used for depreciation.What is the depreciation expense on this asset?

A)€160,870
B)€161,875
C)€175,000
D)€350,000

Question 76

Hart Company purchased a depreciable asset for $360,000.The estimated residual 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 77

On April 13, 2010, Neill Co.purchased machinery for $120,000.Residual 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, Neill should record depreciation expense for 2011 on this machinery of

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

Question 78

Lloyd Company purchased a depreciable asset for £1,360,000.The estimated salvage value is £360,000, 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)£125,000
B)£170,000
C)£187,000
D)£255,000

Question 79

Krause Corporation purchased factory equipment that was installed and put into service January 2, 2010, at a total cost of $60,000.Residual value was estimated at $4,000.The equipment is being depreciated over four years using the double-declining balance method.For the year 2011, Krause should record depreciation expense on this equipment of

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

Question 80

On January 1, 2010, the Accumulated Depreciation-Machinery account of a particular company showed a balance of $370,000.At the end of 2010, after the adjusting entries were posted, it showed a balance of $395,000.During 2010, 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 2010?

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