Question 1

When Ford Motor Company expenses a $200 tool used in manufacturing, instead of capitalizing its cost as an asset, it does so because of the conservatism convention.

Accepted Answer

When a company expenses a tool used in manufacturing, they are treating it as a regular expense rather than an asset that can be depreciated over time. This is typically done for smaller purchases that do not have a significant impact on the company's financial statements. The conservatism convention would dictate that a company should err on the side of caution when reporting financial results, but in this case, expensing the tool may not necessarily be more conservative than capitalizing it as an asset.

Question 2

An impairment loss is credited to accumulated depreciation.

Accepted Answer

An impairment loss is recognized as a direct reduction to the carrying amount of the asset and is not credited to accumulated depreciation.

Question 3

Ordinary repairs and maintenance of operational assets should be capitalized and depreciated over the remaining useful life of the related asset.

Accepted Answer

Ordinary repairs and maintenance of operational assets are expenses that should be recognized in the current period and not capitalized. Only material replacements or upgrades that extend the useful life or enhance the asset's capacity would be capitalized and depreciated over their remaining useful life.

Question 4

Depreciation expense and impairment losses are presented in the operating section of the income statement.

Accepted Answer

Both depreciation expense and impairment losses are considered operating expenses and are presented in the operating section of the income statement.

Question 5

One example of a capital expenditure is ordinary maintenance cost such as an oil change for a company truck.

Accepted Answer

A capital expenditure is a cost incurred to acquire or improve a long-term asset, such as buying a new truck, building renovations, or purchasing new equipment. Ordinary maintenance costs, such as an oil change, are considered a regular operating expense and are not categorized as capital expenditures.

Question 6

Only the actual acquisition cost, the estimated useful life, and the method of depreciation of an operational asset are required to compute the depreciation expense for a period.

Accepted Answer

Other factors such as salvage value and depreciation adjustments for partial years or improvements also affect the computation of depreciation expense for a period.

Question 7

An item of property, plant, and equipment is considered to be impaired if its carrying amount exceeds its recoverable amount.

Accepted Answer

This statement is true. According to accounting standards, an asset is considered impaired if its carrying amount (the amount at which it is recorded on the balance sheet) is higher than its recoverable amount (the higher of its fair value less costs to sell and its value in use). When an asset is impaired, its carrying amount must be reduced to its recoverable amount and the impairment loss must be recognized in the income statement.

Question 8

No clear line distinguishes capital expenditures (assets) from revenue expenditures (expenses); therefore, it requires managers to exercise judgment in making a subjective decision.

Accepted Answer

This statement is true. There is no objective criteria to distinguish between capital expenditures (which are recorded as assets on the balance sheet) and revenue expenditures (which are recorded as expenses on the income statement). As a result, managers must use their own judgment to determine how to classify expenditures.

Question 9

Depreciation and depletion conceptually are different because they apply to different kinds of operational assets.

Accepted Answer

The answer of Depreciation and depletion conceptually are different because...

Question 10

When using the declining-balance method of depreciation, a declining percentage is applied to a constant book value.

Accepted Answer

In the declining-balance method of depreciation, a constant percentage is applied to a declining book value each year, not a constant book value.

Question 11

Carrying amount (or net book value) is always the same as fair value.

Accepted Answer

Carrying amount (or net book value) is the value of an asset or liability as recorded in the company's accounting records, which may not always be the same as fair value. Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.

Question 12

When a change in estimate is made, there is no correction of previously recorded depreciation expense.

Accepted Answer

When a change in estimate is made, there is no correction of previously recorded depreciation expense. Instead, the change is reflected in future depreciation expense calculations.

Question 13

Amortization is about valuation rather than allocation.

Accepted Answer

Amortization is about the allocation of the cost of an intangible asset over its useful life, not about valuing the asset itself.

Question 14

Regardless of the method of depreciation used under international ﬁnancial reporting standards, the ending book value will be the same at the end of the asset's economic life.

Accepted Answer

Regardless of the depreciation method used, the total depreciation expense over the asset's lifespan should be the same, leading to the same ending book value.

Question 15

The straight-line depreciation method assumes an approximately equal decline in the economic usefulness of the asset each period and provides greater tax beneﬁts early in the useful life of the asset.

Accepted Answer

The straight-line depreciation method spreads the cost evenly over the useful life of the asset, but it does not provide greater tax benefits early in the asset's life. Accelerated depreciation methods, like declining balance, offer greater tax benefits early on.

Question 16

If an accountant calculates depreciation expense on an asset without taking into account the asset's residual value of $5,000, depreciation expense for the periods will be lower than it should have been.

Accepted Answer

Depreciation expense will be higher than it should have been because not accounting for the residual value means the entire cost of the asset is spread over its useful life, ignoring that a portion of its cost (the residual value) should not be depreciated.

Question 17

Accelerated depreciation methods are not desirable from the income tax point of view because the asset will produce a greater proﬁt when it is new (the early years) than when it is older (the later years).

Accepted Answer

Accelerated depreciation methods are actually desirable from the income tax point of view because they allow for larger deductions in the early years, reducing taxable income and tax liability. This results in greater cash flow for the taxpayer in the early years of the asset's life.

Question 18

The book value of an operational asset initially declines less rapidly under the straight-line method than under the declining-balance method.

Accepted Answer

The straight-line method evenly spreads the depreciation over the asset's useful life, whereas the declining-balance method accelerates depreciation in the earlier years. Therefore, the book value declines more rapidly under the declining-balance method in the early years, and less rapidly in the later years.

Question 19

A change in the estimated residual value of property, plant, and equipment requires a restatement of prior years' depreciation.

Accepted Answer

A change in the estimated residual value of property, plant, and equipment is accounted for prospectively, by adjusting the depreciation expense in the current and future periods, not by restating prior years' depreciation.

Question 20

The declining-balance method of depreciation is appropriate for companies that expect their equipment or other assets to become obsolete rapidly.

Accepted Answer

The declining-balance method of depreciation accelerates the depreciation expense in the early years of the asset's life, making it a suitable method for assets that become obsolete quickly. This method matches the higher early expense with the higher early benefit, allowing for a more accurate representation of the asset's value and use over time.

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