Question 1

How is the matching principle related to the recording of depreciation on tangible operational assets?

Accepted Answer

The matching principle states that expenses should be recorded in the same period as the revenues they helped to generate. Depreciation expense is the allocation of the cost of the asset over its estimated useful life, and it helps the business to earn revenue during that period. Therefore, a portion of the cost of the asset should be allocated as an expense for the periods in which the asset helps the business to earn revenue, which is in line with the matching principle. Choice A is incorrect because the matching principle does not require a company to use the same depreciation method. Choice B is incorrect because the assumption of the company's continuation in business is not related to the matching principle. Choice D is incorrect because the company can change the depreciation method as allowed by accounting standards.

Question 2

Operational assets do not include which of the following kinds of assets?

Accepted Answer

Operational assets are assets that are necessary to continue the ongoing business operations. Land held for resale is not an operational asset as it is not used in day-to-day operations but rather held for future sale. Plant and equipment, patents, and mineral deposits being mined are all examples of operational assets.

Question 3

Which of the following statements is false?

Accepted Answer

A change in estimate does NOT require the company to recalculate and restate all the prior years' estimates of depreciation and adjust the impact on the statement of financial position and income statement. Instead, the change in estimate is only applied prospectively, meaning it affects future financial statements and is not retroactively adjusted.

Question 4

Which of the following costs would normally not be included in the cost of equipment?

Accepted Answer

Insurance for equipment after it has started being used is a recurring cost and would not be included in the cost of the equipment. The other costs listed are all related to the acquisition and setup of the equipment, and would be included in its cost.

Question 5

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

The annual depreciation is $900.
The residual value is 10% of the cost, which is $600.
So the depreciable cost is $6,000 - $600 = $5,400.

The estimated useful life can be calculated as:
Depreciable cost / Annual Depreciation = Useful Life
$5,400 / $900 = 6 years.

Therefore, the estimated useful life of the machine is 6 years. The best choice is D.

Question 6

Depletion is recorded for which of the following?

Accepted Answer

Depletion is recorded for natural resources such as minerals, oil, and gas. It represents the allocation of the cost of the asset to the periods in which it is consumed or extracted.

Question 7

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 kilometres. 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 kms. during the first year, what is the depreciation expense for the van in year 1?

Accepted Answer

First, calculate the total estimated production for the van:
250,000 km - $1,000 (residual value) = $28,000 total depreciation

Next, calculate the depreciation rate per unit of production:
$28,000 / 250,000 km = $0.112 per km

Finally, calculate the depreciation expense for year 1 based on the distance travelled:
36,000 km x $0.112/km = $4,032

Therefore, the depreciation expense for the van in year 1 is $4,032. Therefore, choice C is the correct answer.

Question 8

On January 1, 2013, 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, 2014 would be

Accepted Answer

Step 1: Calculate the depreciation rate
Depreciation rate = 2 / useful life (in years)
Depreciation rate = 2 / 5 = 0.4 or 40%

Step 2: Calculate the annual depreciation expense using double-declining-balance method
First year depreciation expense = (Cost of the asset - Accumulated depreciation) x Depreciation rate
First year depreciation expense = ($25,000 - $0) x 40%
First year depreciation expense = $10,000

Second year depreciation expense = (Cost of the asset - Accumulated depreciation) x Depreciation rate
Second year depreciation expense = ($25,000 - $10,000) x 40%
Second year depreciation expense = $6,000

Therefore, the depreciation expense for the year ending December 31, 2014 would be $6,000 (Option D).

Question 9

Which of the following statements is false?

Accepted Answer

Depreciation expense is not included in the investing activities section of the cash flow statement as it is a non-cash expense that does not involve any investing activities. Instead, it is included in the operating activities section as it affects the calculation of net income.

Question 10

Kovacic Company purchased a computer that cost $10,000. It had an estimated useful life of five years and residual value of $0. The computer was depreciated by the straight-line method and was sold at the end of the fourth year of use for $3,000 cash. What should Kovacic record?

Accepted Answer

The computer was sold for $3,000, which is $1,000 more than its book value of $2,000. Therefore, Kovacic should record a gain of $1,000.

Question 11

What is the book value of a tangible operating asset?

Accepted Answer

The book value of a tangible operating asset is the acquisition cost minus the balance in accumulated depreciation. This is because accumulated depreciation represents the portion of the asset's cost that has been allocated as an expense over its useful life, leaving only the remaining carrying value or book value on the balance sheet.

Question 12

On January 1, 2013, Enid Corporation purchased a patent from another company for $190,000. The estimated useful life of the patent is 10 years, and its remaining legal life is 15 years. The Amortization Expense for 2013 is:

Accepted Answer

The amortization expense is calculated by dividing the cost of the patent by its useful life. $190,000 / 10 years = $19,000 per year.

Question 13

The Land account would include all of the following costs except

Accepted Answer

The cost of building a fence is not included in the Land account; it is typically recorded as a separate asset under improvements or land improvements.

Question 14

Fraser Ltd. has decided to change the estimate of the useful life of an asset that has been in service for two years. Which of the following statements describes the proper way to revise a useful life estimate?

Accepted Answer

The revision of an estimate, such as the useful life of an asset, affects both the current and future periods. Past depreciation is not adjusted retroactively.

Question 15

To which account should the amount of sales tax paid on the purchase of new machinery be debited?

Accepted Answer

The answer of To which account should the amount of...

Question 16

On September 1, 2013, Sitco Limited purchased an asset for $9,000, with a $1,500 estimated residual value, and an 8-year useful life. The 2013 depreciation expense using the double-declining-balance method would be:

Accepted Answer

Step 1: Calculate the depreciation rate
Depreciation rate using double-declining-balance method = 2 x (100% / useful life)
Depreciation rate = 2 x (100% / 8) = 25%

Step 2: Calculate the 2013 depreciation expense
Year 1 depreciation expense = Beginning book value x depreciation rate
Beginning book value = Cost - Accumulated Depreciation
Accumulated Depreciation = $0 (First year of ownership)

Year 1 depreciation expense = ($9,000 - $0 - $1,500) x 25% = $1,125
However, since double-declining-balance method depreciates more in the early years, we need to limit the depreciation expense to the maximum amount that will reduce the book value to the estimated residual value.

Maximum depreciation for Year 1 = Beginning book value - Estimated residual value
Maximum depreciation for Year 1 = $9,000 - $1,500 = $7,500

Since $1,125 exceeds $750, which will bring the book value down to $7,500, the maximum depreciation for Year 1 using double-declining-balance method is $750.

Question 17

Tangible assets include which of the following?

Accepted Answer

Tangible assets are physical assets that can be seen and touched. Land, buildings, and equipment are all examples of tangible assets. Licenses and trademarks are intangible assets, and natural resources and franchises may be tangible or intangible depending on the specific asset.

Question 18

In accounting for tangible operational assets, the continuity assumption is important because of which of the following?

Accepted Answer

The continuity assumption assumes that a business will continue to operate in the foreseeable future. This justifies depreciating an asset over its expected useful life, without anticipating that the business will liquidate in the near future. Choices A, B, and C are not directly related to the continuity assumption.

Question 19

If a company classifies an expenditure as a capital expenditure instead of a revenue expenditure, which of the following will be false?

Accepted Answer

If a company classifies an expenditure as a capital expenditure instead of a revenue expenditure, it will be capitalized and expensed over the life of the asset through depreciation. This means that the initial cost basis of the asset will be higher, and the depreciation expense will be higher over the asset's life. However, it will not be expensed in the year in which the expenditure takes place, as it will be capitalized and expensed gradually through depreciation. Profit for the year of acquisition may or may not be affected, as it depends on other factors.

Question 20

Which of the following would most likely not be a revenue expenditure?

Accepted Answer

Putting a hydraulic lift on the delivery truck would be considered a capital expenditure as it would enhance the company's ability to generate revenue over a longer period of time. The rest of the options involve necessary maintenance or improvements to the company's property and would be considered revenue expenditures.

Quiz 9: Reporting and Interpreting Liabilities

How is the matching principle related to the recording of depreciation on tangible operational assets?

Operational assets do not include which of the following kinds of assets?

Which of the following statements is false?

Which of the following costs would normally not be included in the cost of equipment?

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?

Depletion is recorded for which of the following?

On January 1, 2013, 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, 2014 would be

Which of the following statements is false?

Kovacic Company purchased a computer that cost $10,000. It had an estimated useful life of five years and residual value of $0. The computer was depreciated by the straight-line method and was sold at the end of the fourth year of use for $3,000 cash. What should Kovacic record?

What is the book value of a tangible operating asset?

On January 1, 2013, Enid Corporation purchased a patent from another company for $190,000. The estimated useful life of the patent is 10 years, and its remaining legal life is 15 years. The Amortization Expense for 2013 is:

The Land account would include all of the following costs except

Fraser Ltd. has decided to change the estimate of the useful life of an asset that has been in service for two years. Which of the following statements describes the proper way to revise a useful life estimate?

To which account should the amount of sales tax paid on the purchase of new machinery be debited?

On September 1, 2013, Sitco Limited purchased an asset for $9,000, with a $1,500 estimated residual value, and an 8-year useful life. The 2013 depreciation expense using the double-declining-balance method would be:

Tangible assets include which of the following?

In accounting for tangible operational assets, the continuity assumption is important because of which of the following?

If a company classifies an expenditure as a capital expenditure instead of a revenue expenditure, which of the following will be false?

Which of the following would most likely not be a revenue expenditure?