Deck 11: Depreciation, Impairments, and Depletion

Question 1

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

Answer 1

False

Question 2

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.

Answer 2

True

Question 3

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

Answer 3

True

Question 4

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

Question 5

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

Question 6

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 7

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

Question 8

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

Question 9

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

Question 10

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

Question 11

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

Question 12

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

Question 13

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

Question 14

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 15

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.

Question 16

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 17

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

Question 18

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

Question 19

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 20

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.

Question 21

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

Question 22

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 23

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 24

The term "depreciable base," or "depreciation 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 fair value of the asset at the end of its useful life.
D)the acquisition cost of the asset.

Question 25

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

Question 26

Which of the following is a realistic assumption of the straight-line method of depreciation?

A)The asset's economic usefulness is the same each year.
B)The repair and maintenance expense is essentially the same each period.
C)The rate of return analysis is enhanced using the straight-line method.
D)Depreciation is a function of time rather than a function of usage.

Question 27

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 28

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

Question 29

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

Question 30

Economic factors that shorten the service life of an asset include

A)obsolescence.
B)supersession.
C)inadequacy.
D)All of these answer choices are correct.

Question 31

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

Question 32

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 answer choices are correct.

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 answer choicesare correct.

Question 34

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

Question 35

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

Question 36

Which of the following is not one of the basic questions that must be answered before the amount of depreciation charge can be computed?

A)What depreciable base is to be used for the asset?
B)What is the asset's useful life?
C)What method of cost apportionment is best for this asset?
D)What product or service is the asset related to?

Question 37

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

Question 38

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 residual value and service life requires the use of residual 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 39

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

Question 40

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

Question 41

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 42

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 answer choices are correct.

Question 43

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 44

When depreciation is computed for partial periods under a diminishing-charge depreciation method, it is necessary to

A)charge a full year's depreciation to the year of acquisition.
B)determine depreciation expense for the full year and then prorate the expense between the two periods involved.
C)use the straight-line method for the year in which the asset is sold or otherwise disposed of.
D)use a residual value equal to the first year's partial depreciation charge.

Question 45

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 46

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 47

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 48

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 49

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 50

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 51

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 52

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 53

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

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

Question 54

Of the following costs related to the development of mineral resources, which one is not a part of depletion cost?

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

Question 55

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 answer choices are correct.

Question 56

Myers Company acquired machinery on January 1, 2010 which it depreciated under the straight-line method with an estimated life of fifteen years and no residual value.On January 1, 2015, 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 2015
C)By setting future annual depreciation equal to one-sixth of the book value on January 1, 2015
D)By continuing to depreciate the machinery over the original fifteen year life

Question 57

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)The recoverable amount is calculated as the asset's value in use less costs to sell.
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 58

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 59

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 answer choices are correct.

Question 60

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 61

The return on total assets is computed by dividing

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

Question 62

The asset turnover 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.