Question 1

The entry to record the disposal of a worn out machine with cost of $8,000 and accumulated depreciation of $7,200 includes a debit of $800 to the Loss on Disposal account.

Accepted Answer

When a machine is disposed of, its book value (cost minus accumulated depreciation) is compared to the amount received from its sale or salvage value. If the book value is greater than the sale/salvage value, it results in a loss on disposal that needs to be recorded. The loss on disposal is calculated as the difference between the book value and the sale/salvage value. In this case, the book value of the machine is $800 (=$8,000 cost - $7,200 accumulated depreciation), which means that if the machine is sold for less than $800, a loss on disposal will occur. Therefore, the entry to record the disposal of the machine would include a debit of $800 to the Loss on Disposal account (which is an expense account) to reflect the loss. The corresponding credit would go to the Accumulated Depreciation account (to remove the balance related to the machine) and the cost of the machine account (to remove its value from the books).

Question 2

The balance of an Accumulated Depletion account is subtracted from the related natural resource account to determine the book value of the natural resource.

Accepted Answer

This statement is true. Accumulated Depletion account is used to record the depletion of a natural resource over time, and its balance represents the total amount of depletion expenses incurred. To determine the book value of the natural resource, the balance of Accumulated Depletion account is subtracted from the related natural resource account, which reduces the recorded cost of the resource to its net book value.

Question 3

Gains and losses on the disposal of long term assets are considered routine operating activities.

Accepted Answer

Gains and losses on the disposal of long term assets are not considered routine operating activities. They are classified as non-operating activities and are reported separately in the income statement.

Question 4

The sale of a depreciable asset for an amount less than its cost always requires the recognition of a loss in the financial records of the company.

Accepted Answer

A sale of a depreciable asset for less than its cost does not always result in a loss; it depends on the asset's book value, which is the cost minus accumulated depreciation. If the sale price is less than the book value, a loss is recognized.

Question 5

In computing the current period expense associated with the depletion of a natural resource, the depletion per unit is calculated by dividing the cost of the natural resource by the total estimated amount of the resource to be extracted and then multiplying by the units extracted.

Accepted Answer

This is the correct formula for calculating depletion expense per unit. It takes into account the total cost of the resource and how much of it has been extracted, which are both important factors in determining the current period expense.

Question 6

Under federal income tax rules, neither gains or losses are recognized on trade-ins.

Accepted Answer

Under federal income tax rules, when a taxpayer trades in a property, neither gains nor losses are recognized. The value of the property traded in is simply used to reduce the basis of the property received in the trade.

Question 7

Depletion is the process of allocating the cost of natural resources to expense over the period in which the resource produces revenue.

Accepted Answer

Depletion is a commonly used accounting method for natural resources such as oil, gas, minerals, timber, and other assets that have a limited useful life. The purpose of depletion is to spread the cost of the resource over the period in which it is expected to generate revenue. This way, the company can accurately reflect the true cost of producing the revenue and avoid overstating its profits in any one year.

Question 8

Patents, land held for investment and copyrights are intangible assets.

Accepted Answer

Patents and copyrights are intangible assets because they represent legal rights and intellectual property, but land held for investment is a tangible asset because it is a physical piece of property.

Question 9

The Haznot Company acquired a machine for a net cost of $21,600 in September of the current year. It is expected to have no salvage value after 5 years of intensive use. Under the
Sum-of-the-Years'-Digits method, the depreciation recorded in year two would be $6,720.

Accepted Answer

The Sum-of-the-Years'-Digits method allocates more depreciation expense to the earlier years of an asset's life. In this case, the depreciation expense in year two would be $6,720, which is correct.

Question 10

The Modified Accelerated Cost Recovery System (MACRS)was designed to encourage taxpayers to invest in business property by providing them with an accelerated depreciation method that lowered or postponed payment of income tax.

Accepted Answer

This is a true statement. The MACRS method allows taxpayers to depreciate their business property over a shorter period of time, thus lowering their taxable income and postponing the payment of income tax. This serves as an incentive for businesses to invest in new property and equipment, which can stimulate economic growth.

Question 11

The Modified Accelerated Cost Recovery System (MACRS)utilizes a half-year convention in calculating depreciation expense regardless of the asset purchase date.

Accepted Answer

The statement is true. MACRS uses the half-year convention, which assumes that an asset is placed in service halfway through the year it was purchased in, regardless of its actual purchase date. This means that the depreciation expense is calculated based on a half-year, even if the asset was purchased on the first or last day of the year.

Question 12

The adjusting entry to record depletion for the period includes a credit to the Depletion Expense account.

Accepted Answer

The adjusting entry to record depletion for the period includes a debit to the Depletion Expense account and a credit to the Accumulated Depletion account or directly to the natural resource asset account, not a credit to the Depletion Expense account.

Question 13

Before an asset is sold, the depreciation must be updated to the date of sale.

Accepted Answer

This statement is true as the depreciation expense for an asset must be recognized up to the date of sale in order to properly calculate the gain or loss on the sale.

Question 14

Percentage depletion for tax purposes provides a business deduction even when the cost basis has been reduced to zero.

Accepted Answer

Percentage depletion allows taxpayers to deduct a percentage of gross income derived from the sale of certain natural resources, such as oil, gas, and minerals, regardless of the cost basis or the depletion taken in prior years. Therefore, it may provide a deduction even when the cost basis has been reduced to zero.

Question 15

The modified accelerated cost recovery system (MACRS)is acceptable for financial accounting purposes because it matches the costs of assets with the revenues produced by those assets.

Accepted Answer

MACRS is a method of depreciation used for tax purposes in the United States to recover the cost of assets over a specified life. It does not focus on matching the costs of assets with the revenues they produce, which is a principle more closely associated with financial accounting purposes.

Question 16

Depletion is the name given to the periodic allocation of the cost extracted natural resources over the period in which the resource produces revenues.

Accepted Answer

Depletion is the periodic allocation of the cost of natural resources over the period in which the resource produces revenues. This process is used for accounting and tax purposes.

Question 17

When the units-of-output method is used to compute depreciation, the useful life of an asset is the total estimated number of units of output the asset will perform.

Accepted Answer

The units-of-output method bases the computation of depreciation on the estimated number of units of output the asset will produce over its useful life. Therefore, the useful life of the asset is determined by the total estimated number of units of output it will perform.

Question 18

For financial accounting purposes, when an asset is traded in for a similar asset, a gain is reported if the trade-in allowance exceeds the book value of the asset traded in.

Accepted Answer

A gain is typically recognized when the trade-in allowance (i.e. the value of the new asset received in exchange for the old asset) exceeds the book value (i.e. the net carrying value) of the asset traded in. This is because the company has received a larger value in exchange for an asset that had a lower recorded value on its books, resulting in a financial gain for the company. Therefore, the statement is true.

Question 19

The acquisition cost of an intangible asset should be charged to expense over the shorter of its legal or useful life, whichever is shorter.

Accepted Answer

The acquisition cost of an intangible asset is amortized over its useful life, which is the shorter period between its legal life and its estimated useful life to the company, reflecting the pattern in which the asset's economic benefits are consumed or used up.

Question 20

Under GAAP and the conservatism principle, losses on trade-ins are recognized and recorded but gains on trade-ins are not allowed.

Accepted Answer

Under GAAP, both gains and losses on trade-ins are recognized and recorded. The conservatism principle does not prohibit recognizing gains; it requires that they be realized and verifiable.

Quiz 18: Property, Plant, and Equipment