Question 1

Cutter Enterprises purchased equipment for $72,000 on January 1, 2018. The equipment is expected to have a five-year life and a residual value of $6,000.
- Using the straight-line method, the book value at December 31, 2018, would be:
A) $57,600.
B) $51,600.
C) $58,800.
D) $52,800.

Accepted Answer

($72,000 - 6,000) ÷ 5 = $13,200
$72,000 - 13,200 = $58,800

Question 2

Depreciation:
A) Is always considered a period cost.
B) Could be a product cost or a period cost depending on the use of the asset.
C) Is usually based on the declining-balance method.
D) Per books is usually higher than MACRS in the early years of an asset's life.

Accepted Answer

Depreciation could be classified as a product cost when it is included in the cost of goods sold and as a period cost when it is not related to production activities. The method used for depreciation can vary and may include the declining-balance method or straight-line method. MACRS (Modified Accelerated Cost Recovery System) is a tax-based depreciation method that may differ from depreciation per books. Therefore, it is not necessarily true that depreciation per books is higher than MACRS in the early years of an asset's life.

Question 3

An asset acquired January 1, 2018, for $15,000 with an estimated 10-year life and no residual value is being depreciated in an equipment group asset account that has an average service life of eight years. The asset is sold on December 31, 2019, for $6,000. The entry to record the sale would be:
A) $\begin{array}{|l|r|r|}
\hline \text { Cash } & 6,000 & \
\hline \text { Loss on sale of equipment } & 9,000 & \
\hline \text { Equipment } & & 15,000 \
\hline
\end{array}$
B) $\begin{array}{|l|r|r|}
\hline \text { Cash } & 6,000 & \
\hline \text { Equipment } & & 6,000 \
\hline
\end{array}$
C) $\begin{array}{|l|r|l|}
\hline \text { Cash } & 6,000 & \
\hline \text { Accumulated depreciation } & 3,750 & \
\hline \text { Loss on sale of equipment } & 5,250 & \
\hline \text { Equipment } & & 15,000 \
\hline
\end{array}$
D) $\begin{array}{|l|r|r|}
\hline \text { Cash } & 6,000 & \
\hline \text { Accumulated depreciation } & 9,000 & \
\hline \text { Equipment } & & 15,000 \
\hline
\end{array}$

Accepted Answer

Under the group depreciation method, it is assumed that the book value of a disposed item exactly equals any proceeds received, and no gain or loss is recorded.

Question 4

An asset that has an estimated physical life of six years and an estimated service life of four years should be depreciated over:
A) Four years.
B) Five years.
C) Six years.
D) Any of these choices can be chosen by management.

Accepted Answer

The asset should be depreciated over its estimated service life of four years, as depreciation is based on the period the asset is expected to be used in operations, not its physical life.

Question 5

The factors that need to be determined to compute depreciation are an asset's:
A) Cost, residual value, and physical life.
B) Cost, replacement value, and service life.
C) Fair value, residual value, and economic life.
D) Cost, residual value, and service life.

Accepted Answer

Depreciation is determined by an asset's cost, residual value (the expected value of the asset at the end of its useful life), and service life (the number of years or amount of usage expected from the asset before it becomes obsolete or unusable). Choice A is close but physical life is interchangeable with service life. Choice B is incorrect because replacement value is not a determining factor for computing depreciation. Choice C is incorrect because fair value and economic life are not factors used in calculating depreciation.

Question 6

Assuming an asset is used evenly over a four-year service life, which method of depreciation will always result in the largest amount of depreciation in the first year?
A) Straight-line.
B) Units-of-production.
C) Double-declining balance.
D) Sum-of-the-year's digits.

Accepted Answer

The double-declining balance method results in the largest amount of depreciation in the first year because it depreciates the asset at twice the rate of the straight-line method. This is because it calculates depreciation based on a declining book value, meaning that more depreciation is taken in the earlier years of the asset's life.

Question 7

Cutter Enterprises purchased equipment for $72,000 on January 1, 2018. The equipment is expected to have a five-year life and a residual value of $6,000.
- Using the straight-line method, depreciation for 2019 and the equipment's book value at December 31, 2019, would be:
A) $14,400 and $43,200 respectively.
B) $28,800 and $37,200 respectively.
C) $13,200 and $39,600 respectively.
D) $13,200 and $45,600 respectively.

Accepted Answer

Depreciation, 2019 = ($72,000 - 6,000) ÷ 5 = $13,200
Book value, 12/31/19 = $72,000 - (2 × 13,200) = $45,600

Question 8

The allocation base of an asset refers to which of the following?
A) The asset's initial capitalized cost.
B) The number of years over which the asset's cost will be allocated.
C) The asset's initial capitalized cost minus residual value.
D) The method used to allocate the asset's cost across years.

Accepted Answer

The allocation base of an asset refers to the asset's initial capitalized cost minus its residual value. This is the amount over which depreciation or amortization is spread over the asset's useful life.

Question 9

The overriding principle for all depreciation methods is that the method must be:
A) Conservative and economic.
B) Systematic and rational.
C) Consistent and conservative.
D) Significant and material.

Accepted Answer

The best choice is B because depreciation methods should be systematic and rational, meaning they should be based on a logical and consistent approach that reflects the decline in value of an asset over time. This principle ensures that the depreciation expense is calculated accurately and fairly over the useful life of the asset. While consistency and conservatism are also important principles in accounting, they are not as directly relevant to determining the most appropriate depreciation method to use. Significant and material are also important accounting principles, but they are not directly related to determining the most appropriate depreciation method.

Question 10

Which of the following typically would cause the service life of an asset to be less than its physical life?
A) The company no longer provides the products or services associated with the use of the asset.
B) Suppliers may develop new technologies that are more efficient.
C) The expected rate of technological change may shorten service life.
D) All of these answer choices are correct.

Accepted Answer

All of these factors can lead to an asset's service life being shorter than its physical life. When a company discontinues products or services related to an asset, when new, more efficient technologies are developed by suppliers, or when rapid technological changes occur, the usefulness or economic viability of an asset can diminish before its physical condition deteriorates.

Question 11

Which of the following typically refers to the process of allocating the cost of long-term intangible assets used in the business over future periods?
A) Depreciation.
B) Amortization.
C) Depletion.
D) Impairment.

Accepted Answer

Amortization typically refers to the process of allocating the cost of long-term intangible assets used in the business over future periods. Depreciation is used for tangible assets, depletion is used for natural resources, and impairment refers to a decline in the value of an asset that is not related to its use over time.

Question 12

By the replacement depreciation method, depreciation is recorded when assets are replaced.

Accepted Answer

The replacement depreciation method, also known as the 'revaluation model', involves recording depreciation when an asset is replaced or has a significant change in value. This is different from the traditional straight-line method where depreciation is recorded regularly over an asset's useful life.

Question 13

Depreciation, depletion, and amortization:
A) All refer to the process of allocating the cost of long-term assets used in the business over future periods.
B) All generally use the same methods of cost allocation.
C) Are all handled the same in arriving at taxable income.
D) All of these answer choices are correct.

Accepted Answer

Depreciation, depletion, and amortization all refer to the process of allocating the cost of long-term assets used in the business over future periods. While they may use similar methods of cost allocation, each relates to a specific type of asset and may have unique rules for calculation. Additionally, they may be handled differently for tax purposes.

Question 14

Cutter Enterprises purchased equipment for $72,000 on January 1, 2018. The equipment is expected to have a five-year life and a residual value of $6,000. 
-Using the straight-line method, depreciation for 2018 would be:
A) $13,200.
B) $14,400.
C) $72,000.
D) None of these answer choices are correct.

Accepted Answer

($72,000 - 6,000) ÷ 5 = $13,200

Question 15

The allocation base for an asset is:
A) Its service life.
B) The excess of its cost over residual value.
C) The difference between its replacement value and cost.
D) The amount allowable under MACRS.

Accepted Answer

The allocation base for an asset is the excess of its cost over its residual value. This amount represents the depreciable base of the asset, which is the total amount that will be allocated over the asset's useful life through depreciation.

Question 16

Cutter Enterprises purchased equipment for $72,000 on January 1, 2018. The equipment is expected to have a five-year life and a residual value of $6,000. 
-Using the double-declining balance method, depreciation for 2019 would be:
A) $28,800.
B) $18,240.
C) $17,280.
D) None of these answer choices are correct.

Accepted Answer

Depreciation, 2019 = [$72,000 - ($72,000 × 40%)] × 40% = $17,280

Question 17

Cutter Enterprises purchased equipment for $72,000 on January 1, 2018. The equipment is expected to have a five-year life and a residual value of $6,000. 
-Using the sum-of-the-years'-digits method, depreciation for 2018 and book value at December 31, 2018, would be:
A) $22,000 and $44,000 respectively.
B) $22,000 and $50,000 respectively.
C) $24,000 and $48,000 respectively.
D) $24,000 and $42,000 respectively.

Accepted Answer

Depreciation, 2018 = ($72,000 - 6,000) × 5/15 = $22,000
Book value, 12/31/2018 = $72,000 - 22,000 = $50,000

Question 18

In the first year of an asset's life, which of the following methods has the smallest depreciation?
A) Straight-line.
B) Declining balance.
C) Sum-of-the-years' digits.
D) Composite or group.

Accepted Answer

Straight-line depreciation evenly spreads the depreciation expense over the lifespan of the asset, resulting in the smallest depreciation amount in the first year. Other methods front-load the depreciation expense, resulting in a larger expense in the first year.

Question 19

Cutter Enterprises purchased equipment for $72,000 on January 1, 2018. The equipment is expected to have a five-year life and a residual value of $6,000. 
-Using the double-declining balance method, the book value at December 31, 2019, would be:
A) $14,400.
B) $24,960.
C) $27,360.
D) $25,920.

Accepted Answer

Depreciation, 2018 = $72,000 × 40% = $28,800
Depreciation, 2019 = [$72,000 - ($72,000 × 40%)] × 40% = $17,280
Book value, 12/31/2019 = $72,000 - 28,800 - 17,280 = $25,920

Question 20

Cutter Enterprises purchased equipment for $72,000 on January 1, 2018. The equipment is expected to have a five-year life and a residual value of $6,000.
- Using the double-declining balance method, depreciation for 2018 and the book value at December 31, 2018, would be:
A) $26,400 and $45,600 respectively.
B) $28,800 and $43,200 respectively.
C) $28,800 and $37,200 respectively.
D) $26,400 and $36,600 respectively.

Accepted Answer

Depreciation, 2018 = $72,000 × 40% = $28,800
Book value, 12/31/18 = $72,000 - 28,800 = $43,200

Quiz 11: Property, Plant, and Equipment and Intangible Assets: Utilization and Disposition

Cutter Enterprises purchased equipment for $72,000 on January 1, 2018. The equipment is expected to have a five-year life and a residual value of $6,000. - Using the straight-line method, the book value at December 31, 2018, would be:

Depreciation:

An asset acquired January 1, 2018, for $15,000 with an estimated 10-year life and no residual value is being depreciated in an equipment group asset account that has an average service life of eight years. The asset is sold on December 31, 2019, for $6,000. The entry to record the sale would be:

An asset that has an estimated physical life of six years and an estimated service life of four years should be depreciated over:

The factors that need to be determined to compute depreciation are an asset's:

Assuming an asset is used evenly over a four-year service life, which method of depreciation will always result in the largest amount of depreciation in the first year?

Cutter Enterprises purchased equipment for $72,000 on January 1, 2018. The equipment is expected to have a five-year life and a residual value of $6,000. - Using the straight-line method, depreciation for 2019 and the equipment's book value at December 31, 2019, would be:

The allocation base of an asset refers to which of the following?

The overriding principle for all depreciation methods is that the method must be:

Which of the following typically would cause the service life of an asset to be less than its physical life?

Which of the following typically refers to the process of allocating the cost of long-term intangible assets used in the business over future periods?

By the replacement depreciation method, depreciation is recorded when assets are replaced.

Depreciation, depletion, and amortization:

Cutter Enterprises purchased equipment for $72,000 on January 1, 2018. The equipment is expected to have a five-year life and a residual value of $6,000. -Using the straight-line method, depreciation for 2018 would be:

The allocation base for an asset is:

Cutter Enterprises purchased equipment for $72,000 on January 1, 2018. The equipment is expected to have a five-year life and a residual value of $6,000. -Using the double-declining balance method, depreciation for 2019 would be:

Cutter Enterprises purchased equipment for $72,000 on January 1, 2018. The equipment is expected to have a five-year life and a residual value of $6,000. -Using the sum-of-the-years'-digits method, depreciation for 2018 and book value at December 31, 2018, would be:

In the first year of an asset's life, which of the following methods has the smallest depreciation?

Cutter Enterprises purchased equipment for $72,000 on January 1, 2018. The equipment is expected to have a five-year life and a residual value of $6,000. -Using the double-declining balance method, the book value at December 31, 2019, would be:

Cutter Enterprises purchased equipment for $72,000 on January 1, 2018. The equipment is expected to have a five-year life and a residual value of $6,000. - Using the double-declining balance method, depreciation for 2018 and the book value at December 31, 2018, would be: