Question 1

Depreciation accounting

Accepted Answer

C

Question 2

If an industrial firm uses the units-of-production method for calculating depreciation on its only plant asset, factory machinery, the credit to accumulated depreciation from period to period during the life of the firm will

Accepted Answer

The units-of-production method calculates depreciation based on the usage or production of the asset, which means that the credit to accumulated depreciation will vary with the level of production. Therefore, option D is the best choice. Options A, B, and C do not accurately reflect the way depreciation is calculated using the units-of-production method.

Question 3

Long-lived assets that are held for sale

Accepted Answer

Long-lived assets that are held for sale are not depreciated and must be reported separately. Additionally, they must be re-measured at each balance sheet date to reflect their fair value less costs to sell. Therefore, all of the above choices are correct.

Question 4

Use of the double declining-balance method

Accepted Answer

The double declining-balance method results in a decreasing charge to depreciation expense, residual value is not deducted in calculating the depreciation base, and the book value should not be reduced below residual value.

Question 5

Which of the following best describes the concept of cash-generating units (CGU)?

Accepted Answer

A cash-generating unit (CGU) is a group of assets that generates cash inflows that are independent of the cash inflows from other groups of assets. Therefore, option A is partially correct. Additionally, the assets included in the CGU may not generate cash inflows on their own, but when combined with other assets, they do generate cash inflows as part of the CGU. Therefore, option B is also partially correct. Hence, the best choice is C, which combines both options A and B. Option D is incorrect because CGUs are expected to generate cash inflows independently.

Question 6

Which of the following does not describe the cost recovery model?

Accepted Answer

The cost recovery model is not used in IFRS; IFRS uses the revaluation model or the cost model. Additionally, IFRS does not allow the reversal of impairment losses for goodwill, which is a key aspect of the cost recovery model.

Question 7

Hopper Company acquired machinery on January 1, 2005 which it amortized under the straight-line method with an estimated life of fifteen years and no residual value.On January 1, 2010, Hopper estimated that the remaining life of this machinery was six years with no residual value.How should this change be accounted for by Hopper?

Accepted Answer

The change in estimate should be accounted for prospectively by adjusting the depreciation expense for future years. Therefore, Hopper should set future annual depreciation equal to one-sixth of the book value on January 1, 2010, over the remaining expected life of the machinery (i.e. six years). This method will result in a higher depreciation expense over the remaining life of the machinery compared to the straight-line method used previously. Choices A and B are incorrect because this is not a correction of an error or a change in accounting principle, but rather a change in estimate. Choice D is incorrect because it does not reflect the change in estimate and would result in a lower depreciation expense over the remaining life of the machinery compared to the new estimate.

Question 8

A graph is set up with "yearly depreciation expense" on the vertical axis and "time" on the horizontal axis.Assuming linear relationships, how would the graphs for straight-line and declining-balance depreciation, respectively, be drawn?

Accepted Answer

In straight-line depreciation, the yearly expense is constant, so the graph is a horizontal line. In declining-balance depreciation, the expense decreases over time, so the graph slopes down to the right.

Question 9

Dividends representing a return of capital to shareholders are not uncommon among companies which

Accepted Answer

Dividends representing a return of capital are not directly related to the method of depreciation a company uses.

Question 10

For income statement purposes, depreciation is a variable expense if the depreciation method used is

Accepted Answer

Under units-of-production method, the depreciation charges vary with the production output. Hence, depreciation is treated as a variable expense in the income statement. In contrast, straight-line, increasing charge, and declining-balance methods are considered as fixed expenses because they allocate an equal amount of depreciation expense over the asset's useful life.

Question 11

Which of the following principles best describes the conceptual rationale for the methods of matching depreciation expense with revenues?

Accepted Answer

The principle of systematic and rational allocation best describes the rationale for matching depreciation expense with revenues. This principle states that the cost of an asset should be allocated over the period in which it provides benefits (i.e. generates revenues). Depreciation is a method of allocating the cost of an asset over its useful life, which is the period in which it generates revenues. By matching the depreciation expense with the revenues generated by the asset, the company can more accurately reflect the true cost of generating those revenues in each period.

Question 12

An asset's useful life

Accepted Answer

An asset's useful life is influenced by both physical factors (like wear and tear) and economic factors (such as obsolescence or changes in market demand).

Question 13

The following is true of depreciation accounting.

Accepted Answer

Depreciation accounting is not a matter of valuation, as it is a method of allocating the cost of a tangible asset over its useful life. It is also part of the matching principle in accounting, as it matches the cost of the asset with the revenue it generates over time. Depreciation can help retain funds by reducing income taxes and dividends because it reduces taxable income and increases retained earnings.

Question 14

A principal objection to the straight-line method of depreciation is that it

Accepted Answer

The straight-line method of depreciation spreads the cost of an asset evenly over its useful life, ignoring variations in how much the asset is used from one period to another. This can lead to inaccuracies in reflecting the actual wear and tear on the asset.

Question 15

Which of the following does not describe the rational entity model?

Accepted Answer

The rational entity model is not specific to private entity GAAP, so choice B is incorrect. Choices A and C both describe features of the model. Therefore, the correct answer is B.

Question 16

Depletion expense

Accepted Answer

Depletion expense is typically included in the cost of goods sold because it reflects the consumption of natural resources, which are part of the cost of producing the goods sold by a company.

Question 17

Disclosures relating to PP&E assets

Accepted Answer

Disclosures relating to PP&E assets are generally less extensive under private entity GAAP compared to IFRS, which often requires more detailed disclosures.

Question 18

Changes in the depreciation rate are accounted for

Accepted Answer

Changes in the depreciation rate are accounted for as an adjustment to current and future periods because they affect the calculations of depreciation expense for future periods, not just the current period.

Question 19

A general description of the depreciation methods applicable to major classes of depreciable assets

Accepted Answer

The general description of depreciation methods applicable to major classes of depreciable assets should be included in corporate financial statements or notes thereto in order to provide transparency and clarity to financial statement users. This helps them understand how depreciation expense is calculated and allocated.

Question 20

The activity method of depreciation

Accepted Answer

The answer of The activity method of depreciation
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Quiz 11: Depreciation, Impairment, and Disposition