Question 1

Under MACRS, an asset which originally cost $100,000, incurred installation costs of $10,000, and has an estimated salvage value of $25,000, is being depreciated using a 5-year normal recovery period. What is the depreciation expense in year 1?
A) $15,000
B) $12,750
C) $11,250
D) $22,000

Accepted Answer

Under MACRS, the depreciation expense is calculated using the asset's full cost (including installation) and the applicable percentage from the MACRS table for a 5-year property. In year 1, the percentage is 20%, so the depreciation expense is 20% of $110,000, which is $22,000.

Question 2

For tax purposes, using MACRS recovery periods, assets in the first four property classes are depreciated by the double-declining balance method using the half-year convention and switching to straight line when advantageous.

Accepted Answer

This statement is true. According to MACRS (Modified Accelerated Cost Recovery System), assets in the first four property classes (which include most tangible business property) are depreciated using the double-declining balance method with the half-year convention. This means that the asset's value is reduced by a percentage (usually 200%) of the remaining value each year. However, when the straight-line method results in a higher depreciation expense, it is used instead.

Question 3

Under MACRS, an asset which originally cost $100,000 is being depreciated using a 10-year normal recovery period. The depreciation expense in year 11 is ________.
A) $3,000
B) $4,000
C) $0
D) $6,000

Accepted Answer

B

Question 4

The depreciable value of an asset, under MACRS, is the ________.
A) current cost
B) current cost minus salvage value
C) the original cost plus installation
D) the original cost plus installation costs, minus salvage value

Accepted Answer

Under the Modified Accelerated Cost Recovery System (MACRS), the depreciable value of an asset is its original cost plus any costs associated with its installation. Salvage value is not subtracted under MACRS.

Question 5

The MACRS depreciation method requires use of the half-year convention. Assets are assumed to be acquired in the middle of the year and only one-half of the first year's depreciation is recovered in the first year.

Accepted Answer

The statement is true. The MACRS depreciation method does require the use of the half-year convention, which assumes that assets are acquired in the middle of the year and only one-half of the first year's depreciation is recovered in the first year.

Question 6

Depreciation deductions, like any other business expenses, reduce the income that a firm reports on its income statement.

Accepted Answer

Depreciation is considered an expense and is subtracted from revenues on the income statement to determine a firm's net income.

Question 7

Business firms are permitted to systematically charge a portion of the market value of fixed assets as depreciation against annual revenues.

Accepted Answer

Depreciation is charged based on the historical cost of the asset, not its market value.

Question 8

Under MACRS, an asset which originally cost $10,000 is being depreciated using a 5-year normal recovery period. What is the depreciation expense in year 3?
A) $1,900
B) $1,200
C) $1,500
D) $2,100

Accepted Answer

Under MACRS for a 5-year property, the depreciation rate for year 3 is 19.20%. Therefore, the depreciation expense in year 3 is $10,000 * 19.20% = $1,920, which is closest to $1,900.

Question 9

In the statement of cash flows, the cash flows from financing activities result from debt and equity financing transactions; including incurrence and repayment of debt, cash inflow from the sale of stock, and cash outflows to repurchase stock or pay cash dividends.

Accepted Answer

This statement is accurate and reflects the definition of cash flows from financing activities as per generally accepted accounting principles (GAAP).

Question 10

Given a financial manager's preference for faster receipt of cash flows, ________.
A) a longer depreciable life is preferred to a shorter one
B) a shorter depreciable life is preferred to a longer one
C) the manager is not concerned with depreciable life, because depreciation is a noncash expense
D) the manager is not concerned with depreciable life, because once purchased, depreciation is considered a sunk cost

Accepted Answer

A shorter depreciable life means that more of the asset's cost is expensed each year, resulting in a larger tax deduction and a lower tax bill, which leads to faster receipt of cash flows. Therefore, a financial manager's preference for faster receipt of cash flows will lead to a preference for a shorter depreciable life.

Question 11

Given a financial manager's preference for faster receipt of cash flows, a longer depreciable life is preferred to a shorter one.

Accepted Answer

A longer depreciable life means that the useful life of the asset is longer and therefore the company will receive less cash flows in the earlier years. Thus, a shorter depreciable life is preferred for faster receipt of cash flows.

Question 12

The Modified Accelerated Cost Recovery System (MACRS) is a depreciation method used for ________ purposes.
A) tax
B) financial reporting
C) budget
D) cost accounting

Accepted Answer

MACRS is a tax depreciation method used for calculating the deductible costs of tangible property for tax purposes. It determines the depreciation deductions for most types of tangible depreciable property.

Question 13

A corporation ________.
A) must use the straight-line depreciation method for tax purposes and double declining depreciation method financial reporting purposes
B) can use straight-line depreciation method for tax purposes and MACRS depreciation method financial reporting purposes
C) can use different depreciation methods for tax and financial reporting purposes
D) must use different depreciation method for tax purposes, but strictly mandated depreciation methods for financial reporting purposes

Accepted Answer

A corporation can use different depreciation methods for tax and financial reporting purposes. This is because tax laws and accounting standards often have different rules for calculating depreciation. For tax purposes, corporations may use methods such as the Modified Accelerated Cost Recovery System (MACRS) or bonus depreciation, while for financial reporting purposes they may use methods such as straight-line depreciation or double declining balance depreciation.

Question 14

In general, ________.
A) a longer depreciable life is preferred, because it will result in a faster receipt of cash flows
B) a shorter depreciable life is preferred, because it will result in a faster receipt of cash flows
C) a shorter depreciable life is preferred, because management can then purchase new assets, as the old assets are written off
D) a longer depreciable life is preferred, because management can postpone purchasing new assets, since the old assets still have a useful life

Accepted Answer

A shorter depreciable life is preferred because it allows for faster depreciation expenses, which can lead to tax savings and thus faster receipt of cash flows.

Question 15

Under MACRS, an asset which originally cost $100,000 is being depreciated using a 10-year normal recovery period. The depreciation expense in year 5 is ________.
A) $10,000
B) $12,000
C) $21,000
D) $ 9,000

Accepted Answer

The answer of Under MACRS, an asset which originally cost...

Question 16

Darling Paper Container, Inc. purchased several machines at a total cost of $300,000. The installation cost for this equipment was $25,000. The firm plans to depreciate the equipment using the MACRS 5-year normal recovery period. Prepare a depreciation schedule showing the depreciation expense for each year.

Accepted Answer

The answer of Darling Paper Container, Inc. purchased several machines...

Question 17

The depreciable value of an asset, under MACRS, is ________.
A) the full cost excluding installation costs
B) the full cost minus salvage value
C) the full cost including installation costs
D) the full cost including installation costs adjusted for the salvage value

Accepted Answer

The depreciable value of an asset under MACRS is the full cost including installation costs.

Question 18

Non-cash charges are expenses that involve an actual outlay of cash during the period but are not deducted on the income statement.

Accepted Answer

Non-cash charges include expenses that do not involve actual cash outlays, such as depreciation and amortization. These expenses are deducted on the income statement but do not involve an actual reduction in cash during the period.

Question 19

Allocation of the historic costs of fixed assets against the annual revenue they generate is called ________.
A) arbitraging
B) securitization
C) depreciation
D) amortization

Accepted Answer

Depreciation is the allocation of the historical cost of a fixed asset over its useful life against the annual revenue it generates. Amortization applies to the allocation of the cost of intangible assets, while arbitraging refers to the process of taking advantage of price differences in different markets, and securitization is the process of pooling assets and selling the cash flows to investors.

Question 20

Under the basic MACRS procedures, the depreciable value of an asset is its full cost, including outlays for installation.

Accepted Answer

Under MACRS, the depreciable value of an asset is its full cost, including outlays for installation.

Quiz 4: Cash Flow and Financial Planning

Under MACRS, an asset which originally cost $100,000, incurred installation costs of $10,000, and has an estimated salvage value of $25,000, is being depreciated using a 5-year normal recovery period. What is the depreciation expense in year 1?

For tax purposes, using MACRS recovery periods, assets in the first four property classes are depreciated by the double-declining balance method using the half-year convention and switching to straight line when advantageous.

Under MACRS, an asset which originally cost $100,000 is being depreciated using a 10-year normal recovery period. The depreciation expense in year 11 is ________.

The depreciable value of an asset, under MACRS, is the ________.

The MACRS depreciation method requires use of the half-year convention. Assets are assumed to be acquired in the middle of the year and only one-half of the first year's depreciation is recovered in the first year.

Depreciation deductions, like any other business expenses, reduce the income that a firm reports on its income statement.

Business firms are permitted to systematically charge a portion of the market value of fixed assets as depreciation against annual revenues.

Under MACRS, an asset which originally cost $10,000 is being depreciated using a 5-year normal recovery period. What is the depreciation expense in year 3?

In the statement of cash flows, the cash flows from financing activities result from debt and equity financing transactions; including incurrence and repayment of debt, cash inflow from the sale of stock, and cash outflows to repurchase stock or pay cash dividends.

Given a financial manager's preference for faster receipt of cash flows, ________.

Given a financial manager's preference for faster receipt of cash flows, a longer depreciable life is preferred to a shorter one.

The Modified Accelerated Cost Recovery System (MACRS) is a depreciation method used for ________ purposes.

A corporation ________.

In general, ________.

Under MACRS, an asset which originally cost $100,000 is being depreciated using a 10-year normal recovery period. The depreciation expense in year 5 is ________.

The depreciable value of an asset, under MACRS, is ________.

Non-cash charges are expenses that involve an actual outlay of cash during the period but are not deducted on the income statement.

Allocation of the historic costs of fixed assets against the annual revenue they generate is called ________.

Under the basic MACRS procedures, the depreciable value of an asset is its full cost, including outlays for installation.