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38 Cards in this Set
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MODULE 3 LESSON 11 What is the major difference between the service life of an asset and its physical life? Physical life, which refers to how long the asset will be used by a company, is always longer than service life. 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. 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. Physical life is the life of an asset without consideration of salvage value, and service life requires the use of salvage value. |
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. Correct. 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. |
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MODULE 3 LESSON 11 Dixon Company purchased a depreciable asset for $32,000. The estimated salvage value is $4,000, and the estimated useful life is 4 years. The double-declining balance method will be used for depreciation. What is the depreciation expense for the second year on this asset? $8,000 $7,000 $16,000 $6,400 |
$8,000 Correct. Double declining method ignores salvage value. It calculates depreciation at 200% of the straight-line rate each year and multiplies that by the book value of the asset at the beginning of the period. Since the asset in this case has a useful life of 4 years, the straight-line depreciation rate is 25% per year. The double-declining method rate, therefore is 50%. First year depreciation is $32,000 x 50% = $16,000. The book value at the beginning of the 2nd year is $16,000 ($32,000 - $16,000). The second year depreciation is $16,000 x 50% = $8,000. |
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MODULE 3 LESSON 11 Which of the following principles best describes the conceptual rationale for the methods of matching depreciation expense with revenues? Immediate recognition Partial recognition Systematic and rational allocation Associating cause and effect |
Systematic and rational allocation Correct. Depreciation is the accounting 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. |
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MODULE 3 LESSON 11 Which of the following is a principal objection to the straight-line method of depreciation? It gives smaller periodic write-offs than decreasing charge methods. It tends to result in a constant rate of return on a diminishing investment base. It provides for the declining productivity of an aging asset. It assumes that the asset’s economic usefulness is the same each year. |
It assumes that the asset’s economic usefulness is the same each year. Correct. The major objection to the straight-line method is that it rests on two tenuous assumptions: (1) the asset’s economic usefulness is the same each year, and (2) the maintenance and repair expense is essentially the same each period. |
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MODULE 3 LESSON 11 The term "depreciable base," or "depreciation base," as it is used in accounting, refers to which of the following? The cost of the asset less the related depreciation recorded to date The estimated market value of the asset at the end of its useful life The acquisition cost of the asset regardless of its useful life The total amount to be charged to expense over an asset's useful life |
The total amount to be charged to expense over an asset's useful life Correct. The depreciable base of an asset is the amount of the asset's cost that will be deducted as depreciation expense over the life of the asset. |
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MODULE 3 LESSON 12 Chattanooga Company purchased a depreciable asset for $80,000 on January 1, 2015. The estimated salvage value is $20,000, and the estimated useful life is 5 years. The straight-line method is used for depreciation. On January 1, 2017, the company made a capital expenditure of $16,000 for an addition to the asset.What is depreciation expense for 2017? (Assume that salvage value remains unchanged.) $24,000 $17,333 $14,400 $25,333 |
$17,333 Correct. An addition to an asset does not extend the useful life of the asset. It is simply added to the asset and depreciation is recalculated. For 2015 & 2016 Chattanooga depreciations $12,000 per year [($80,000 - $20,000)/5]. The depreciable basis, before the addition, on January 1, 2017 is $36,000 ($80,000 - $20,000 - $12,000 - $12,000). The addition increases the depreciable basis to $52,000 ($36,000 + $16,000). The new annual depreciation for the remaining three years is calculated as $52,000/ 3 years = $17,333. |
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MODULE 3 LESSON 12 Unless otherwise stipulated, what is depreciation normally computed on the basis of? The nearest fraction of a year A full year’s depreciation in the period of acquisition, none in the period of disposal A half-year’s depreciation in the period of acquisition and in the period of disposal The nearest full month |
The nearest full month Correct. Unless otherwise stipulated, companies normally compute depreciation on the basis of the nearest full month. |
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MODULE 3 LESSON 12 Cambodian Import Company purchased a depreciable asset for $160,000 on April 1, 2014. The estimated salvage value is $40,000, and the estimated useful life is 5 years. The straight-line method is used for depreciation.What is the balance in accumulated depreciation on March 1, 2017 when the asset is sold? $70,000 $66,000 $186,667 $72,000 |
$70,000 Correct. Using the straight-line method of depreciation, salvage value is used to determine the depreciable basis of the asset. In this case, monthly depreciation is calculated as: ($160,000 - $40,000) / (5 years x 12 months) = $2,000 / month. Total months of depreciation = 9 (2014) + 12 (2015) + 12 (2016) + 2 (Jan & Feb 2017) = 35.The accumulated depreciation balance when the asset is sold on March 1, 2018 is $70,000 (35 months of depreciation at $2,000 per month). |
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MODULE 3 LESSON 12 When an asset being depreciated under the group method is disposed of, how is any resulting gain or loss recorded? Recorded as an extraordinary gain or loss Recorded as an ordinary gain or loss Recorded in the Depreciation Expense account Recorded in the Accumulated Depreciation account |
Recorded in the Accumulated Depreciation account Correct. Gains and losses are not reported during the group or composite methods. When an asset is disposed of using either the group or composite method, the gain or loss is recorded in the accumulated depreciation account. |
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MODULE 3 LESSON 12 How can the composite or group depreciation system be described? The years of useful life of the various assets in the group are added together and the total divided by the number of items A straight-line rate is computed by dividing the total of the annual depreciation expense for all assets in the group by the total cost of the assets The original cost of all items in a given group or class of assets is retained in the asset account and the cost of replacements is charged to expense when they are acquired The cost of individual units within an asset group is charged to expense in the year a unit is retired from service |
A straight-line rate is computed by dividing the total of the annual depreciation expense for all assets in the group by the total cost of the assets Correct. The group of composite methods calculate a straight-line rate that is computed by dividing the total of the annual depreciation expense for all assets in the group by the total cost of the assets. |
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MODULE 3 LESSON 13 Erie Corporation owns machinery with a book value of $2,200,000. It is estimated that the machinery will generate future cash flows of $1,995,000. The machinery has a fair value of $1,915,000. To record the impairment loss, what should be included in the journal entry? A reduction of income from continuing operations by $205,000 An extraordinary loss of $80,000 An increase in the asset’s Accumulated Depreciation account by $285,000 A $285,000 credit to the asset account |
An increase in the asset’s Accumulated Depreciation account by $285,000 Correct. An impairment is recorded when an asset fails the recoverability test. If the expected future cash flows is less than the carrying amount, the asset is impaired. The amount of the impairment is the fair value of the asset less the book value. If the fair value of the asset is not known, the present value of the expected cash flows can be used to determine the fair value. The journal entry to record the impairment is: Debit Loss on Impairment; Credit Accumulated Depreciation. The expected future cash flows is less than the book value of the asset, therefore, an impairment exists. Since the fair value of the asset is known, Erie Corporation will record an an impairment journal entry of: Debit Loss on Impairment $285,000 (2,200,000 - 1,915,000); Credit Accumulated Depreciation $285,000. |
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MODULE 3 LESSON 13 Flannery Corporation owns machinery with a book value of $520,000. It is estimated that the machinery will generate future cash flows of $465,000. The machinery has a fair value of $415,000. Which amount should Florence recognize as a loss on impairment? $0 $50,000 $105,000 $55,000 |
$105,000 orrect. An impairment is recorded when an asset fails the recoverability test. If the expected future cash flows is less than the carrying amount, the asset is impaired. The amount of the impairment is the fair value of the asset less the book value. If the fair value of the asset is not known, the present value of the expected cash flows can be used to determine the fair value. The journal entry to record the impairment is: Debit Loss on Impairment; Credit Accumulated Depreciation. An impairment exists on this asset since the expected future cash flows is less than the book value of the asset. Since the fair value of the asset is known, Flannery Corporation will record an an impairment journal entry of: Debit Loss on Impairment $105,000 ($520,000 - $415,000); Credit Accumulated Depreciation $105,000. |
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MODULE 3 LESSON 13 When is the restoration of an impairment loss permitted? On assets that have already been disposed On assets being held for disposal On assets held for use On all tangible assets whether held for use of disposal |
On assets being held for disposal Correct. After recording an impairment loss, the reduced carrying amount of an asset held for use becomes its new cost basis. A company does not change the new cost basis except for depreciation or amortization in future periods or for additional impairments. A company may not restore a previous impaiment on an asset held for use. Assets held for disposal are like inventory; companies should report them at the lower-of-cost-or net realizable value and any losses or gains should be reported as part of income from continuing operations. |
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MODULE 3 LESSON 13 An asset impairment occurs when the asset's carrying amount exceeds what amount? Asset's fair value Present value of expected future net cash flows Asset's book value Expected future net cash flows |
Expected future net cash flows Correct. An impairment is recorded when an asset fails the recoverability test. If the expected future cash flows are less than the carrying amount, the asset is impaired. |
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MODULE 3 LESSON 14 What is true about depletion expense? It excludes restoration costs from the depletion base. It includes tangible equipment costs in the depletion base. It excludes intangible development costs from the depletion base. It is usually part of cost of goods sold. |
It is usually part of cost of goods sold. Correct. The depletion cost is posted to inventory as the natural resource is extracted. When the inventory is sold, this depletion expense is included in cost of goods sold. |
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MODULE 3 LESSON 14 Usually, companies compute depletion for accounting purposes using which method? Percentage depletion method Units-of-production method Straight-line method Decreasing charge method |
Units-of-production method Correct. Companies compute depletion using the units-of-production method which is a function of the number of units extracted during the period. |
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MODULE 3 LESSON 14 Porter Resources Company acquired a tract of land containing an extractable natural resource. Porter is required by its purchase contract to restore the land to a condition suitable for recreational use after it has extracted the natural resource. Geological surveys estimate that the recoverable reserves will be 2,500,000 tons, and that the land will have a value of $1,000,000 after restoration. Relevant cost information includes: Land at $7,500,000 and Estimated restoration costs of $1,500,000. If Porter maintains no inventories of extracted material, what should be the charge to depletion expense per ton of extracted material? $3.0 $2.6 $3.6 $3.2 |
$3.2 Correct. Depletion is calculated using the units-of-production method. If applicable, acquisition, exploration, intangible development, and restoration costs are all included in the depletion base of an asset. Porter's depletion expense per ton is calculated as: [($7,500,000 + $1,500,000 - $1,000,000)/ 2,500,000 tons] = $3.20 per ton. |
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MODULE 3 LESSON 15 In 2020, Bargain Shop reported net income of $5.7 billion, net sales of $175 billion, and average total assets of $75 billion.What is Bargain shop's asset turnover? 0.29 times 13.2 times 2.33 times 0.08 times |
2.33 times Correct. The asset turnover ratio is calculated by dividing the net sales by the average total assets for the period. Bargain's asset turnover is $175 / $75 = 2.33 times. |
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MODULE 3 LESSON 15 For 2020, Hammer Company reports beginning of the year total assets of $900,000, end of the year total assets of $1,100,000, net sales of $1,000,000, and net income of $200,000.What is Hammer's return on assets for 2020? 18.2% 22.20% 16.0% 20.0% |
20.0% Correct. The return on total assets is calculated as net income divided by average total assets. Hammer's return on assets is calculated as: $200,000 ÷ [($900,000 + $1,100,000) ÷ 2] = 20%. |
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MODULE 3 LESSON 15 In its 2017 annual report, Crane Manufacturing Company reports beginning-of-the-year total assets of $2,682,000, end-of-the-year total assets of $2,883,000, total sales of $4,726,000, and net income of $785,000.What is Crane's Profit Margin on Sales? 28.21% 28.20% 16.61% 40.13% |
16.61% Correct. The profit margin on sales ratio is calculated as Net Income / Net Sales. Crane's profit margin is calculated as: $785,000 / $4,726,000 = 16.61%. |
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MODULE 3 LESSON 15 What is true regarding a general description of the depreciation methods applicable to major classes of depreciable assets? It is not essential to a fair presentation of financial position to report depreciation. It is not a current practice in financial reporting to report depreciation. It is necessary to report depreciation in financial reporting only when company policy differs from income tax policy. It is necessary to include depreciation in corporate financial statements or notes thereto. |
It is necessary to include depreciation in corporate financial statements or notes thereto. Correct! Because of the significant impact that depreciation has on the financial statements, the depreciation methods, regardless of which methods are used, need to be included in the financial statements or the notes attached thereto. |
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MODULE 3 LESSON 15 How do you calculate the asset turnover ratio? Net sales/average total assets Net income/ending total assets Net income/average total assets Net sale/ending total assets |
Net sales/average total assets Correct. The asset turnover ratio is calculated by dividing the net sales by the average total assets for the period. |
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MODULE 3 LESSON 15 What is the book value of a plant asset equal to? The assessed value of the asset for property tax purposes The asset's acquisition cost less the total related depreciation recorded to date The fair market value of the asset at a balance sheet date The balance of the related accumulated depreciation account |
The asset's acquisition cost less the total related depreciation recorded to date Correct. The book value of an asset is equal to the asset's acquisition cost less the total related depreciation recorded to date (accumulated depreciation). |
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MODULE 3 QUIZ Lundy Company purchased a depreciable asset for $99,000 on January 1. The estimated salvage value is $18,000, and the estimated useful life is 9 years. The double-declining balance method will be used for depreciation. What is the depreciation expense for the second year on this asset? (Please round the double-declining balance rate to 2 decimal places, e.g. 0.35 or 35% in your intermediate calculations.) $13,900 $16,988 $11,000 $17,820 |
$16,988 Correct. Double declining method ignores salvage value. It calculates depreciation at 200% of the straight-line rate each year and multiplies that by the book value of the asset at the beginning of the period. Since the asset in this case has a useful life of 9 years, the straight-line depreciation rate is 11% per year. The double-declining method rate, therefore is 22%. First year depreciation is $99,000 x 22% = $21,780. The book value at the beginning of the 2nd year is $77,220 ($99,000 - $21,780). The second year depreciation is $77,220 x 22% = $16,988. |
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MODULE 3 QUIZ For 2017, Lassiter Company reports beginning of the year total assets of $900,000, end of the year total assets of $1,100,000, net sales of $1,250,000, and net income of $250,000. What is Lassiter’s 2017 asset turnover ratio? 23 times 14 times 125 times 25 times |
125 times Correct. The asset turnover ratio is calculated by dividing the net sales by the average total assets for the period. Lassiter's asset turnover ratio is calculated as: $1,250,000/[($900,000 + $1,100,000)/2] = 1.25 or 125 times. |
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MODULE 3 QUIZ Mains Corporation owns equipment with a cost of $290,000 and accumulated depreciation at December 31, 2017 of $150,000. It is estimated that the machinery will generate future cash flows of $165,000. The machinery has a fair value of $115,000. Which of the following should be recognized as a a loss on impairment? $15,000 $25,000 $35,000 $0 |
$0 Correct. An impairment is recorded when an asset fails the recoverability test. If the expected future cash flows is less than the carrying amount, the asset is impaired. The amount of the impairment is the fair value of the asset is less the book value. If the fair value of the asset is not known, the present value of the expected cash flows can be used to determine the fair value. In this case, the future cash flows of $165,000 is greater than the book value of $140,000 ($290,000 - $150,000). Therefore, no impairment exists. |
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MODULE 3 QUIZ McDonald Company acquired machinery on January 1, 2015 which it depreciated under the straight-line method with an estimated life of fifteen years and no salvage value. On January 1, 2020, McDonald estimated that the remaining life of this machinery was six years with no salvage value. How should this change be accounted for by McDonald? By setting future annual depreciation equal to one-sixth of the book value on January 1, 2020 As the cumulative effect of a change in accounting principle in 2020 By continuing to depreciate the machinery over the original fifteen year life As a prior period adjustment |
By setting future annual depreciation equal to one-sixth of the book value on January 1, 2020 Correct. No entry is made at the time the change in estimate occurs, however, future charges for depreciation in subsequent periods are determined by dividing the remaining book value less any salvage value by the remaining estimated life. In this case, McDonald's Company should set future annual depreciation equal to one-sixth of the book value of the asset on the date that the estimated life of the asset changed. |
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MODULE 3 QUIZ How do you compute the return on total assets? Divide net income by ending total assets Divide net income by average total assets Divide net sales by ending total assets Divide net sales by average total assets |
Divide net income by average total assets Correct. The return on total assets is calculated as net income divided by average total assets. |
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UNIT 4 TEST Recent, negative events in an operating division have caused a company to believe that it is possible that it will not be able to fully recover the book value of a group of assets. What is the first step the company should take in reviewing the assets? Determine if an impairment exists because the assets' expected future cash flows (undiscounted) are greater than their book value Measure the amount of impairment as the excess of the assets' fair value over their book value Determine if an impairment exists because the assets' book value is greater than the expected future cash flows (undiscounted) Measure the amount of impairment as the excess of the assets' book value over their fair value |
Determine if an impairment exists because the assets' book value is greater than the expected future cash flows (undiscounted) Correct! The first step when events or circumstances suggest an asset's book value may not be fully recoverable is to perform a recoverability test, comparing the assets' book value and expected future cash flows (undiscounted). If the expected future cash flows (undiscounted) are less than the book value, the asset is considered to be impaired. |
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UNIT 4 TEST A company placed an asset into service on Day 1 of Year 1 with the following data related to the purchase: Cost of machinery $225,000 Estimated salvage value $75,000 Product life hours 75,000 hours Useful life 5 years Hours used in Year 1 5,000 hours Which amount of annual depreciation expense should be recorded in the first year using the straight-line method? $10,000 $45,000 $90,000 $30,000 |
$30,000 Correct! $30,000 = ($225,000-$75,000) / 5. The formula for straight line depreciation is cost minus salvage value divided by the useful life. |
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UNIT 4 TEST A company purchased a plot of land for $550,000 in July 2015, which included $500,000 for the land and $50,000 for attorney's fees. In December 2019, the company paid $100,000 to clear debris off the land. The company believes the fair market value of the land is $700,000 as of December 2019. Which depletion base should the company use when it begins to harvest timber from this land? $600,000 $700,000 $500,000 $650,000 |
$650,000 Correct! $650,000 = $500,000 + $50,000 + $100,000. The depletion base should include all historical costs required to prepare for timber to be harvested. |
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UNIT 4 TEST A company purchased a plot of land for $140,000 for the purposes of harvesting timber for resale. The company estimates that it will be able to sell the land for $40,000 after it harvests all the timber and believes it will harvest 50,000 board-feet of lumber from the land over the next 10 years. Which depletion rate should the company use? $10,000 per year $14,000 per year $2.00 per board-foot $2.80 per board-foot |
$2.00 per board-foot Correct! $2.00 = ($140,000 - $40,000) / 50,000. The company should select an activity-based method. This choice reflects the $100,000 depletion base divided by the expected quantity of timber to be harvested. |
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UNIT 4 TEST A company placed an asset into service on Day 1 of Year 1 with the following data related to the purchase: Cost of machinery $225,000 Estimated salvage value $75,000 Product life hours 75,000 hours Useful life 5 years Hours used in Year 1 5,000 hours What is the book value of the machinery at the end of Year 1 after recording annual depreciation using the double-declining balance method? $135,000 $225,000 $180,000 $195,000 |
$135,000 Correct! $225,000 - ($225,000 X 0.4). The 40% rate is calculated by taking double the straight-line rate of .4 = (1/5) x 2. |
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UNIT 4 TEST The selected financial statement information for a company includes the following items: total assets of $300,000 at the end of the current year total assets of $500,000 at the end of the prior year net sales of $3,000,000 in the current year net income of $1,200,000 in the current year What is the asset turnover for the current year? 7.5 3.04.010.0 |
7.5 Correct! Asset turnover calculates as net sales divided by simple average of total assets. $3,000,000 / (($300,000 + $500,000)/2) |
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UNIT 4 TEST A company spends $180,000,000 to purchase and prepare a quarry to mine granite and expects to mine 400,000 tons of granite. The salvage value of the property is $15,000,000, and the expected useful life of the property is 15 years. What is the proper journal entry to record depletion if the company extracts 80,000 tons in the first year? Debit depreciation expense for $36,000,000; credit accumulated depreciation for $36,000,000 Debit inventory for $33,000,000; credit granite quarry for $33,000,000 Debit inventory for $36,000,000; credit granite quarry for $36,000,000 Debit depreciation expense for $33,000,000; credit accumulated depreciation for $33,000,000 |
Debit inventory for $33,000,000; credit granite quarry for $33,000,000 Correct! $33,000,000 = (($180,000,000 - $15,000,000)/400,000) x 80,000. The journal entry to record depletion expense would include a debit to inventory and a credit to Granite Quarry. |
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UNIT 4 TEST A company invests $50,000,000 into a coal mine estimated to have 20 million tons of coal. The company estimates that it can sell the coal mine for $3,000,000 after it spends $1,000,000 to restore the property after extraction. In Year 1, the company extracted and sold 4,000,000 tons of coal. How much depletion expense is incurred in Year 1? $10,000,000 $10,200,000 $9,400,000 $9,600,000 |
$9,600,000 Correct! $9,600,000 = ($50,000,000 + $1,000,000 - $3,000,000) x (4,000,000 / 20,000,000). The salvage value and restoration costs need to be considered in the calculation of depletion. |
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UNIT 4 TEST A company has a policy of calculating depreciation using the nearest fraction of a year policy. On May 10, the company purchased and placed in service an asset costing $50,000 with a five-year useful life. Which prorated fraction was used to calculate the depreciation expense on December 31? 8.00/12 7.67/12 7.00/12 7.33/12 |
7.67/12 Correct! The nearest fraction of a year policy states that the depreciation expense is prorated by the time the asset is actually in service: (7.67/12) x ($50,000/5). |
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UNIT 4 TEST A company reported the following information in its annual report: Net sales $ 750,000 Total assets at the end of year 2 $ 500,000 Total assets at the end of year 1 $ 450,000 Net income $ 120,000 What is the company's asset turnover ratio at the end of year 2? 1.58 0.24 0.25 1.67 |
1.58 Correct! 1.58 = $750,000 / (($500,000 + $450,000) / 2). Asset turnover is calculated by taking net sales and dividing it by the average total assets. |
