Question 1

Group depreciation is applied to heterogeneous assets.

Accepted Answer

Group depreciation is applied to homogeneous assets that have similar use and lives, not to heterogeneous assets.

Question 2

Assets sold on or before the 15th are not considered owned for the month based on the nearest whole month convention.

Accepted Answer

The nearest whole month convention considers an asset as owned for the entire month if it is held for more than half of the month. If sold on or before the 15th, it is not considered owned for that month.

Question 3

Under the MACRS principles, the residual value of the asset is not included in the computation of depreciation.

Accepted Answer

Under MACRS (Modified Accelerated Cost Recovery System), the entire cost of the asset is depreciated over its useful life without subtracting any residual or salvage value.

Question 4

A company must include impairment disclosures in the year of an impairment write-down and the subsequent three years following to ensure comparability in reporting.

Accepted Answer

Impairment disclosures are required in the year of the impairment write-down, but there is no specific requirement to continue these disclosures for the subsequent three years solely for the purpose of comparability. Disclosure requirements in subsequent years depend on the accounting standards applied and the relevance of the impairment to the financial statements.

Question 5

The nearest whole year depreciation convention considers assets acquired during the last 6 months of the year to have been owned for the entire year.

Accepted Answer

The nearest whole year depreciation convention typically considers assets acquired during the last 6 months of the year to have been owned for only half the year, not the entire year.

Question 6

The depreciation base is computed as follows:
Estimated Residual Value = Depreciation Base - Asset Cost

Accepted Answer

The answer of The depreciation base is computed as follows:
Estimated...

Question 7

Development costs incurred for purchasing equipment can be included as part of the cost of a natural resource.

Accepted Answer

Development costs for purchasing equipment are not directly included as part of the cost of a natural resource; they are typically capitalized as part of the asset's carrying amount and may be depreciated over their useful life. The cost of a natural resource includes expenditures necessary to acquire and prepare the resource for extraction.

Question 8

Acquisition costs, exploration costs, development costs, and reclamation costs can all be added to the cost of obtaining the rights to natural resources.

Accepted Answer

These costs are capitalized as part of the asset's cost because they are necessary expenditures to acquire, discover, and prepare the natural resources for extraction, thus increasing the asset's value.

Question 9

A requirement of GAAP is that companies should review their assets to ensure they are not impaired, especially when a change dictates the book value may not be recoverable.

Accepted Answer

GAAP (Generally Accepted Accounting Principles) requires companies to review their assets for impairment to ensure that their carrying amount can be recovered. If circumstances indicate that the book value of an asset may not be recoverable, companies must assess the asset for impairment and, if necessary, write down its value to reflect its fair market value. This ensures that the financial statements present an accurate picture of the company's financial health.

Question 10

Since the purpose of depreciation is to match the total cost of the asset with the benefits to be derived from the asset, the costs of repairs and maintenance associated with the asset should be considered when choosing a depreciation method.

Accepted Answer

Depreciation is a method of allocating the cost of an asset over its useful life. The purpose of depreciation is to match the total cost of the asset with the benefits to be derived from the asset. The costs of repairs and maintenance associated with the asset are not considered when choosing a depreciation method because these costs are not part of the cost of the asset.

Question 11

The service life of an asset can only be measured in units of activity or output.

Accepted Answer

The service life of an asset can be measured in units of time (such as years or months) as well as in units of activity or output, depending on the nature of the asset and how its usage is best represented.

Question 12

The use of accelerated methods is appropriate when the asset will be used more in the later periods versus earlier periods.

Accepted Answer

Accelerated depreciation methods, like the double-declining balance method, are more appropriate when the asset will be used more and thus lose its value faster in the earlier periods rather than later periods.

Question 13

GAAP does not require companies to disclose the balances of depreciable assets by nature or function but by major classes.

Accepted Answer

The answer of GAAP does not require companies to disclose...

Question 14

The service life of an asset may be measured by all of the following except

Accepted Answer

The service life of an asset can be measured by units of output (how much the asset produces), units of activity (how often the asset is used), and units of time (how long the asset lasts). However, measuring service life by units of input (how much is invested in the asset) is not a common practice.

Question 15

Composite depreciation is applied to homogeneous assets which have similar service lives and residual values.

Accepted Answer

Composite depreciation is applied to a group of assets that are not similar, and it averages the service lives and residual values of a mixed group of assets, rather than applying to homogeneous assets with similar service lives and residual values.

Question 16

Which one of the following statements is not true?

Accepted Answer

The residual value of an asset is the expected value of the asset at the end of its service life, not the expected book value minus the costs of disposal.

Question 17

GAAP requires the general description of the methods used in the computation of depreciation regarding major classes of assets to be disclosed in the notes of the financial statements.

Accepted Answer

GAAP (Generally Accepted Accounting Principles) mandates that financial statements include disclosures of significant accounting policies, which encompass the methods used for computing depreciation on major classes of assets. This ensures transparency and consistency in how asset depreciation is reported.

Question 18

The purpose of depreciation is to allocate the asset's cost systematically and rationally over the life of the asset to ensure that the company has adequate capital for future replacement.

Accepted Answer

The purpose of depreciation is to allocate the cost of a tangible asset over its useful life, reflecting its consumption, wear and tear, or obsolescence, not to ensure capital for future replacement.

Question 19

Under the MACRS principles, the tax life of an asset is usually shorter than the asset's economic life.

Accepted Answer

MACRS (Modified Accelerated Cost Recovery System) allows for faster depreciation of assets for tax purposes, often resulting in a tax life that is shorter than the actual economic life of the asset.

Question 20

GAAP allows companies to choose between time-based, activity, group, or composite cost allocation methods, but once the method is chosen it must be applied consistently over time. This ensures that financial information is comparable.

Accepted Answer

GAAP (Generally Accepted Accounting Principles) requires consistency in the application of accounting methods, including cost allocation methods, to ensure comparability of financial information over time.

Quiz 11: Depreciation, Depletion, Impairment, and Disposal