Question 1

Recording depreciation:
A) decreases net income and cash flows.
B) decreases net income but has no effect on cash flows.
C) decreases net income, fixed assets, and cash flows.
D) decreases net income but has no effect on fixed assets and cash flows.

Accepted Answer

Recording depreciation decreases net income because it is an expense, but it does not affect cash flows because it is a non-cash expense. Therefore, it has no effect on fixed assets or cash flows.

Question 2

On September 1, a machine was purchased for $47,000 with a useful life of 8 years, and a residual value of $3,000. What is the depreciation expense in the year of purchase under straight-line method, assuming a December 31 year-end?
A) $3,917
B) $3,667
C) $1,958
D) $1,833

Accepted Answer

The answer of On September 1, a machine was purchased...

Question 3

A company purchased an oil well for $25 million. It is estimated that 10 million barrels can be extracted from the well. Determine depletion expense assuming 3 million barrels are extracted and sold during the year.
A) $7,350,000
B) $7,500,000
C) $5,000,000
D) $7,650,000

Accepted Answer

The answer of A company purchased an oil well for...

Question 4

The accounting term depreciation measures:
A) the decline in an asset's market value.
B) the amount of cash a company sets aside for asset replacement.
C) the amount of asset cost allocated to expense over periods benefited.
D) the anticipated loss if asset is sold in the used-asset market.

Accepted Answer

Depreciation is the allocation of the cost of a long-lived asset over the periods benefited by its use. It is not a measure of the asset's market value (A), nor is it an amount set aside for replacement (B) or an anticipated loss (D).

Question 5

The depreciation calculated using Modified Accelerated Cost Recovery System is primarily used for:
A) financial statement reporting by large companies.
B) income tax purposes.
C) financial statement reporting by small companies.
D) comparing the performance of two companies in the same industry.

Accepted Answer

The Modified Accelerated Cost Recovery System (MACRS) is a method of calculating depreciation for income tax purposes. It is used to determine the amount of depreciation expense that can be claimed over the useful life of an asset, which reduces taxable income and therefore reduces tax liability. MACRS is not typically used for financial statement reporting, as different methods of depreciation (such as straight-line depreciation) may be more appropriate for that purpose. MACRS is also not typically used for comparing the performance of two companies, as different companies may have different tax circumstances and may therefore use different methods of depreciation.

Question 6

A computer equipment was acquired at the beginning of the year at a cost of $56,000 with an estimated residual value of $5,000, and an estimated useful life of 5 years. Determine the second year's depreciation expense using the straight-line method.
A) $10,200
B) $22,400
C) $11,200
D) $12,200

Accepted Answer

The answer of A computer equipment was acquired at the...

Question 7

A fixed asset with a cost of $30,000 and accumulated depreciation of $25,000 is sold for $3,500. What is the amount of gain or loss on disposal of the fixed asset?
A) $2,500 loss
B) $1,500 loss
C) $2,500 gain
D) $1,500 gain

Accepted Answer

To calculate the gain or loss on disposal of a fixed asset, you need to subtract the accumulated depreciation from the cost to get the asset's book value. In this case: $30,000 - $25,000 = $5,000. Then, you subtract the sale price from the book value: $5,000 - $3,500 = $1,500 loss. Therefore, the correct answer is B, $1,500 loss.

Question 8

To measure depreciation, all of the following must be known except:
A) market value of asset.
B) residual value of asset.
C) cost of asset.
D) estimated life of asset.

Accepted Answer

While market value of the asset can be helpful in determining the amount of depreciation, it is not strictly necessary. The other options - residual value, cost of asset, and estimated life of asset - are all essential factors in measuring depreciation.

Question 9

If a fixed asset with an original cost of $18,000 and accumulated depreciation of $2,000 is sold for $15,000, the company must:
A) recognize a loss on the income statement under other expenses.
B) recognize a loss on the income statement under operating expenses.
C) recognize a gain on the income statement under other revenues.
D) recognize a gain on the income statement under revenues.

Accepted Answer

Since the asset was sold for less than the original cost minus accumulated depreciation (i.e. $18,000 - $2,000 = $16,000), the company will recognize a loss on the income statement under other expenses.

Question 10

A company sold a delivery truck for $18,000 cash. The truck cost $47,500 and had accumulated depreciation of $36,000 as of the date of sale. The entry to record the sale would include:
A) an increase in accumulated depreciation for $36,000.
B) a total decrease in delivery truck for $11,500.
C) a loss for $6,500.
D) a gain for $6,500.

Accepted Answer

The company received $18,000 cash for selling the truck, which is higher than the net book value of the truck (cost of $47,500 - accumulated depreciation of $36,000 = $11,500). Therefore, the company has a gain on the sale of the truck. The entry to record the sale would include a debit to cash for $18,000, a credit to delivery truck for $47,500, a credit to accumulated depreciation for $36,000, and a credit to gain on sale of truck for $6,500 ($18,000 - $11,500).

Question 11

If a fixed asset is sold and the book value of the asset is less than its selling price, the company must:
A) recognize a loss on the income statement under other expenses.
B) recognize a loss on the income statement under operating expenses.
C) recognize a gain on the income statement under other revenues.
D) recognize a gain on the income statement under revenues.

Accepted Answer

The answer of If a fixed asset is sold and...

Question 12

An equipment was purchased for $30,000. It has a useful life of 5 years, and a residual value of $4,000. Compute the depreciation expense for the second year using the double-declining-balance method.
A) $5,200
B) $6,000
C) $6,240
D) $7,200

Accepted Answer

The answer of An equipment was purchased for $30,000. It...

Question 13

A gain is recorded on the sale of fixed assets when:
A) the asset is sold for a price less than its book value.
B) the asset is sold for a price more than its book value.
C) accumulated depreciation on asset is less than its selling price.
D) accumulated depreciation on asset is more than its selling price.

Accepted Answer

A gain is recorded on the sale of fixed assets when the asset is sold for a price more than its book value. In other words, if the selling price is greater than the book value (cost of asset less accumulated depreciation), a gain is realized.

Question 14

An equipment was purchased for $18,000. It has a useful life of 5 years and a residual value of $2,000. Determine the depreciation expense for the first year using the double-declining-balance method?
A) $6,400
B) $3,200
C) $7,200
D) $3,600

Accepted Answer

To use the double-declining-balance method, we need to follow these steps:

1. Calculate the straight-line depreciation rate:

Straight-line depreciation rate = 1 / Useful life
Straight-line depreciation rate = 1 / 5 years
Straight-line depreciation rate = 0.2 or 20%

2. Calculate the double-declining-balance depreciation rate:

Double-declining-balance depreciation rate = 2 * Straight-line depreciation rate
Double-declining-balance depreciation rate = 2 * 0.2
Double-declining-balance depreciation rate = 0.4 or 40%

3. Calculate the depreciation expense for the first year:

Depreciation expense = Beginning book value * Double-declining-balance depreciation rate
Beginning book value = Cost of equipment - Residual value
Beginning book value = $18,000 - $2,000
Beginning book value = $16,000

Depreciation expense = $16,000 * 0.4
Depreciation expense = $6,400

However, with the double-declining-balance method, we need to make sure that the depreciation expense does not reduce the book value of the asset below its residual value. If that happens, we need to adjust the depreciation expense.

In this case, the book value after the first year would be:

Book value = Beginning book value - Depreciation expense
Book value = $16,000 - $6,400
Book value = $9,600

Since $9,600 is below the residual value of $2,000, we need to adjust the depreciation expense.

Adjusted depreciation expense = Beginning book value - Residual value / Useful life
Adjusted depreciation expense = ($18,000 - $2,000) / 5 years
Adjusted depreciation expense = $16,000 / 5 years
Adjusted depreciation expense = $3,200

Therefore, the depreciation expense for the first year using the double-declining-balance method would be $3,200, which is answer choice B. However, we need to be careful with this method and make sure we always check for the residual value and adjust the depreciation expense if necessary. Therefore, answer choice C, $7,200, is not the best choice.

Question 15

A machine was purchased for $60,000. It has a useful life of 5 years and a residual value of $6,000. Determine the annual depreciation expense using the straight-line method?
A) $13,200
B) $12,000
C) $11,000
D) $10,800

Accepted Answer

The answer of A machine was purchased for $60,000. It...

Question 16

A drilling company purchased a mining site for $500,000 on July 1, 2012. The company expects to mine ore for the next 10 years and anticipates that a total of 100,000 tons will be recovered. During 2012 the company extracted 6,500 tons of ore. The depletion expense for the year 2012 is:
A) $37,700.
B) $42,000.
C) $32,500.
D) $27,300.

Accepted Answer

Depletion expense per unit = ($500,000 / 100,000 tons) = $5 per ton

Depletion expense for 2012 = (6,500 tons * $5 per ton) = $32,500

Question 17

A company sold office furniture costing $16,500 with accumulated depreciation of $14,000 for $1,800 cash. The entry to record the sale would include:
A) a loss for $700.
B) an increase in accumulated depreciation for $14,000.
C) a total decrease in office furniture for $2,500.
D) a decrease in cash for $1,800.

Accepted Answer

The company sold the office furniture for $1,800, but the furniture had a total cost of $16,500 and accumulated depreciation of $14,000, resulting in a loss of $700. Therefore, the entry to record the sale would include a loss for $700.

Question 18

The process of transferring the cost of metal ores and other minerals removed from the earth to an expense account is called:
A) depletion.
B) deferral.
C) amortization.
D) depreciation.

Accepted Answer

Depletion is the process of transferring the cost of metal ores and other minerals removed from the earth to an expense account.

Question 19

A machine was purchased for $30,000, having a useful life of 10 years, and a residual value of $4,000. Compute the annual depreciation expense using the straight-line method.
A) $3,000
B) $3,400
C) $2,600
D) $5,200

Accepted Answer

The answer of A machine was purchased for $30,000, having...

Question 20

A fully depreciated asset must be:
A) removed from the books.
B) kept on the books until sold or discarded.
C) disclosed only in the notes to the financial statements.
D) recognized on the income statement as a loss.

Accepted Answer

A fully depreciated asset should be kept on the books until it is either sold or discarded. This is because the asset may still have some residual value or use, and removing it from the books prematurely could result in an inaccurate representation of the company's assets and financial position.

Quiz 7: Fixed Assets and Intangible Assets

Recording depreciation:

On September 1, a machine was purchased for $47,000 with a useful life of 8 years, and a residual value of $3,000. What is the depreciation expense in the year of purchase under straight-line method, assuming a December 31 year-end?

A company purchased an oil well for $25 million. It is estimated that 10 million barrels can be extracted from the well. Determine depletion expense assuming 3 million barrels are extracted and sold during the year.

The accounting term depreciation measures:

The depreciation calculated using Modified Accelerated Cost Recovery System is primarily used for:

A computer equipment was acquired at the beginning of the year at a cost of $56,000 with an estimated residual value of $5,000, and an estimated useful life of 5 years. Determine the second year's depreciation expense using the straight-line method.

A fixed asset with a cost of $30,000 and accumulated depreciation of $25,000 is sold for $3,500. What is the amount of gain or loss on disposal of the fixed asset?

To measure depreciation, all of the following must be known except:

If a fixed asset with an original cost of $18,000 and accumulated depreciation of $2,000 is sold for $15,000, the company must:

A company sold a delivery truck for $18,000 cash. The truck cost $47,500 and had accumulated depreciation of $36,000 as of the date of sale. The entry to record the sale would include:

If a fixed asset is sold and the book value of the asset is less than its selling price, the company must:

An equipment was purchased for $30,000. It has a useful life of 5 years, and a residual value of $4,000. Compute the depreciation expense for the second year using the double-declining-balance method.

A gain is recorded on the sale of fixed assets when:

An equipment was purchased for $18,000. It has a useful life of 5 years and a residual value of $2,000. Determine the depreciation expense for the first year using the double-declining-balance method?

A machine was purchased for $60,000. It has a useful life of 5 years and a residual value of $6,000. Determine the annual depreciation expense using the straight-line method?

A drilling company purchased a mining site for $500,000 on July 1, 2012. The company expects to mine ore for the next 10 years and anticipates that a total of 100,000 tons will be recovered. During 2012 the company extracted 6,500 tons of ore. The depletion expense for the year 2012 is:

A company sold office furniture costing $16,500 with accumulated depreciation of $14,000 for $1,800 cash. The entry to record the sale would include:

The process of transferring the cost of metal ores and other minerals removed from the earth to an expense account is called:

A machine was purchased for $30,000, having a useful life of 10 years, and a residual value of $4,000. Compute the annual depreciation expense using the straight-line method.

A fully depreciated asset must be: