Lesson 11

Question 1

Depreciation

Answer 1

is the accounting process of allocating the cost of tangible assets to expense in a systematic and rational manner to those periods expected to benefit from the use of the asset.

Question 2

What is depreciation

Answer 2

it is the means of cost allocation

Question 3

Depletion

Answer 3

is used to describe the reduction in the cost of natural resources (such as timber, gravel, oil, and coal) over a period of time.

Question 4

Amortization

Answer 4

is the expiration of intangible assets, such as patents or copyrights.

Question 5

What are the three basic questions to ask before establishing a depreciation schedule?

Answer 5

1. What depreciable base is to be used for the asset?
2. What is the asset’s useful life?
3. What method of cost apportionment is best for this asset?

Question 6

What are the two functions to establish the depreciation base?

Answer 6

1. the original cost
2. salvage or disposal value

Question 7

Salvage Value

Answer 7

is the estimated amount that a company will receive when it sells the asset or removes it for service.

Question 8

What are the two factors companies retire assets?

Answer 8

1. physical factors (such as casualty or expiration of physical life)
2. Economic factors (obsolescence)

Question 9

What are physical factors?

Answer 9

are wear and tear, decay, and casualties that make it difficult for the asset to perform indefinitely.

Question 10

What factor sets the outside limit of the service life of an asset?

Answer 10

The physical factors.

Question 11

What are the three categories of economic or functional factors?

Answer 11

1. inadequacy
2. supersession
3. obsolescence

Question 12

inadequacy

Answer 12

results when an assets ceases to be useful to a company because the demands of the firm have changed.

Question 13

Supersession

Answer 13

is the replacement of one asset for another more efficient asset.

Question 14

obsolescence

Answer 14

is the catchall situations that don’t fall into inadequacy and supersession

Question 15

What are the 4 methods of depreciation?

Answer 15

1. Activity method (units of use or production)
2. Straight line method
3. decreasing-charge methods (accelerated)
4. Special depreciation methods

Question 16

What are the two kinds of Decreasing charge method of depreciation?

Answer 16

1. Sum of the years’ digits
2. Declining balance method

Question 17

What are the two kinds of Special Depreciation methods?

Answer 17

1. Group and composite methods
2. hybrid or combination methods

Question 18

Activity Method

Answer 18

assumes that depreciation is a function of use or productivity instead of the passage of time.

A company considers the life of the asset in terms of either the output it provides (units it produces) or an input measure of machine hours.

Question 19

The activity method calculation formula?

Answer 19

(Cost less Salvage Value) X Hours this year = depreciation charge

Question 20

When would companies use the activity method?

Answer 20

When the company desire low depreciation during periods of low productivity and high depreciation during high productivity.

Question 21

straight line method

Answer 21

considers depreciation as a function of time rather than a function of usage.

Question 22

straight method calculation formula

Answer 22

Cost less Salvage Value / Estimated Service Life = Depreciation Charge

Question 23

What are the two main objectives to straight line method?

Answer 23

Because of the assumptions of:
1. the asset’s economic usefulness is the same each year
2. the maintenance and repair expense is essentially the same each period.

Question 24

What do decreasing charge methods do?

Answer 24

provide for a higher depreciation cost in the earlier years and lower charges in later periods.

Question 25

What is another name for Decreasing Charge Methods?

Answer 25

Accelerated Depreciation

Question 26

Why do companies choose decreasing charge methods?

Answer 26

Because companies should charge more depreciation in earlier years because the asset is most productive in its earlier years.

Question 27

Sum of the years’ digits method

Answer 27

results in a decreasing depreciation charge based on decreasing fraction of depreciable cost (cost- salvage value)

Question 28

Declining balance method

Answer 28

utilizes a depreciation rate (expressed as a percentage) that is some multiple of the straight line method.

Question 29

What method of depreciation does not deduct the salvage value?

Answer 29

Declining balance method

Question 30

What is the major difference between the service life and its physical life of an asset?

Answer 30

Service life refers to the time an asset will be used by a company and physical life refers to how long the asset will last.

Question 31

Dixon Company purchased a depreciable asset for $32,000. The estimated salvage value is $4,000, and the estimated useful life is 4 years. The double-declining balance method will be used for depreciation.

What is the depreciation expense for the second year on this asset?

Answer 31

$8,000
Correct. Double declining method ignores salvage value. It calculates depreciation at 200% of the straight-line rate each year and multiplies that by the book value of the asset at the beginning of the period. Since the asset in this case has a useful life of 4 years, the straight-line depreciation rate is 25% per year. The double-declining method rate, therefore is 50%. First year depreciation is $32,000 x 50% = $16,000. The book value at the beginning of the 2nd year is $16,000 ($32,000 - $16,000). The second year depreciation is $16,000 x 50% = $8,000.

Question 32

The term “depreciable base,” or “depreciation base,” as it is used in accounting, refers to which of the following?

Answer 32

The total amount to be charged to expense over an asset’s useful life
The depreciable base of an asset is the amount of the asset’s cost that will be deducted as depreciation expense over the life of the asset.