Question 1

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 2

When a company disposes of an asset by abandonment the disclosure of the gain or loss equals the fair market value.

Accepted Answer

When a company disposes of an asset by abandonment, the disclosure of the gain or loss is calculated as the difference between the asset's carrying value (original cost less accumulated depreciation) and the fair market value at the time of abandonment. Therefore, the correct answer is B, false.

Question 3

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

Accepted Answer

Accelerated methods are appropriate when an asset is expected to be more productive or useful in its earlier years, not later periods.

Question 4

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

Accepted Answer

This is true, as per the nearest whole month convention for accounting purposes. Any assets sold on or before the 15th of a month are considered to not belong to that month, and any proceeds from the sale are not included in that month's revenue.

Question 5

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

Accepted Answer

Development costs for purchasing equipment are not included as part of the cost of the natural resource; they are capitalized separately as part of the equipment's cost.

Question 6

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

Acquisition costs, exploration costs, development costs, and reclamation costs are all considered part of the cost of obtaining the rights to natural resources.

Question 7

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 8

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 does allow for companies to choose between several cost allocation methods, but once a method is chosen it must be consistently applied to ensure comparability of financial information.

Question 9

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 10

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

Accepted Answer

Impairment disclosures are required in the year of the impairment write-down, but there is no specific requirement to include them for the subsequent three years.

Question 11

IFRS and GAAP use similar approaches when it comes to the disposal of assets and the subsequent gain or loss. The only difference is GAAP requires the use of the reevaluation method.

Accepted Answer

IFRS and GAAP approach the disposal of assets and the calculation of gain or loss in similar ways, but GAAP does not require the use of the reevaluation method. Instead, GAAP allows for either the cost or fair value method to be used.

Question 12

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 13

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

This is a requirement of GAAP as specified in ASC 360-10-50-2.

Question 14

When deciding on a depreciation method repair and maintenance costs associated with the asset should be a considering factor to ensure that the total costs are reported accurately in the financial statements.

Accepted Answer

This is because depreciation is a way to spread out the cost of an asset over its useful life, and repair and maintenance costs can affect the total cost of the asset. Including these costs in the calculation can help ensure that the depreciation expense accurately reflects the total cost of the asset over its useful life.

Question 15

The purpose of depreciation is to systematically and rationally depreciate the cost over the life of the asset to ensure appropriate capital for future replacement.

Accepted Answer

The answer of The purpose of depreciation is to systematically...

Question 16

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 also be measured in units of time or a combination of both time and activity/output. Other factors such as maintenance, repair, and obsolescence can also affect the service life of an asset.

Question 17

Under the MACRS principles the residual value is eliminated.

Accepted Answer

Under MACRS (Modified Accelerated Cost Recovery System), there is no provision for residual value. The asset is depreciated over a predetermined recovery period until the remaining book value equals zero.

Question 18

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

This statement is true. GAAP requires companies to regularly review their assets, including intangible assets, to determine whether any impairment has occurred, particularly if there has been a significant change in circumstance that may impact the recoverability of the asset's book value. This is to ensure that assets are not overstated on the balance sheet.

Question 19

Under the MACRS principles the tax life winds up being shorter in most cases compared to an assets economic life.

Accepted Answer

MACRS (Modified Accelerated Cost Recovery System) is a tax depreciation method in which tangible property is assigned to a specific recovery period based on its class life. The recovery period for tax purposes is generally shorter than the estimated useful life or economic life of an asset, which allows for faster tax deductions and depreciation benefits. Therefore, the statement is true.

Question 20

If a company purchases an asset within the last 6 months of the year, it is considered owned for the entire year based upon the nearest whole year convention.

Accepted Answer

The nearest whole year convention does not apply to asset ownership; instead, depreciation methods like the half-year convention might be used for tax purposes, where an asset is considered owned for half the year regardless of purchase date.

Quiz 11: Depreciation, Depletion, Impairment, and Disposal