Lesson 12

Question 1

What are the two special depreciation methods?

Answer 1

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

Question 2

Why would companies choose to do special depreciation methods?

Answer 2

The company’s assets have unique characteristics, or the nature of the industry

Question 3

When would group method be used?

Answer 3

when the assets are similar in nature and have approximately the same useful lives.

Question 4

When would composite method be used?

Answer 4

when assets are dissimilar and have different lives.

Question 5

The computation for group or composite methods is essentially the same: find an average and depreciate on that basis. True or False?

Answer 5

True

Question 6

Composite depreciation rate

Answer 6

is computed by dividing the depreciation per year by the total cost of the assets not the depreciation base.

Question 7

Composite life

Answer 7

The length of time it takes a company to depreciate its assets on a composite basis

Question 8

What are the 4 advantages of unit method (depreciation of single assets)

Answer 8

1. it simplifies the computation mathematically
2. it identifies gains and losses on disposal
3. it isolates depreciation on idle equipment
4. it represents the best estimate of the depreciation of each assets, not the result of averaging the cost over a longer period of time.

Question 9

What are the advantages of group or composite methods?

Answer 9

It simplifies the bookkeeping process and tends to average out errors caused by over or under depreciation. It doesn’t distort periodic income.

Question 10

If revenues generated by the asset are constant over its useful life what depreciation method should be used?

Answer 10

straight line

Question 11

if revenues are higher (or lower) at the beginning of the asset’s life what depreciation method should be used?

Answer 11

decreasing (increasing) method

Question 12

What is half year convention?

Answer 12

one half year’s depreciation both in the year of acquisition and in the year of disposal, or charge a full year in the year of acquisition and none in the year of disposal.

Question 13

Companies normally compute depreciation on the basis of the nearest full month,. True or False

Answer 13

True

Question 14

How is depreciation the same and different from other expenses?

Answer 14

It is the same because it reduces net income, but it differs because it does not involve a current cash outflow.

Question 15

Depreicaiton does not provide __________ for the replacement of assets. Why?

Answer 15

Funds.
The funds for the replacement of assets come from the revenues ( generated through the use of the asset)

Question 16

Chattanooga Company purchased a depreciable asset for $80,000 on January 1, 2015. The estimated salvage value is $20,000, and the estimated useful life is 5 years. The straight-line method is used for depreciation. On January 1, 2017, the company made a capital expenditure of $16,000 for an addition to the asset.

What is depreciation expense for 2017? (Assume that salvage value remains unchanged.)

Answer 16

$17,333
An addition to an asset does not extend the useful life of the asset. It is simply added to the asset and depreciation is recalculated. For 2015 & 2016 Chattanooga depreciations $12,000 per year [($80,000 - $20,000)/5]. The depreciable basis, before the addition, on January 1, 2017 is $36,000 ($80,000 - $20,000 - $12,000 - $12,000). The addition increases the depreciable basis to $52,000 ($36,000 + $16,000). The new annual depreciation for the remaining three years is calculated as $52,000/ 3 years = $17,333.

Question 17

Unless otherwise stipulated, what is depreciation normally computed on the basis of?

Answer 17

The nearest full month

Question 18

Cambodian Import Company purchased a depreciable asset for $160,000 on April 1, 2014. The estimated salvage value is $40,000, and the estimated useful life is 5 years. The straight-line method is used for depreciation.

What is the balance in accumulated depreciation on March 1, 2017 when the asset is sold?

Answer 18

$70,000
Using the straight-line method of depreciation, salvage value is used to determine the depreciable basis of the asset. In this case, monthly depreciation is calculated as: ($160,000 - $40,000) / (5 years x 12 months) = $2,000 / month. Total months of depreciation = 9 (2014) + 12 (2015) + 12 (2016) + 2 (Jan & Feb 2017) = 35.The accumulated depreciation balance when the asset is sold on March 1, 2018 is $70,000 (35 months of depreciation at $2,000 per month).

Question 19

When an asset being depreciated under the group method is disposed of, how is any resulting gain or loss recorded?

Answer 19

Recorded in the Accumulated Depreciation account
Gains and losses are not reported during the group or composite methods. When an asset is disposed of using either the group or composite method, the gain or loss is recorded in the accumulated depreciation account.

Question 20

How can the composite or group depreciation system be described?

Answer 20

A straight-line rate is computed by dividing the total of the annual depreciation expense for all assets in the group by the total cost of the assets

The group of composite methods calculate a straight-line rate that is computed by dividing the total of the annual depreciation expense for all assets in the group by the total cost of the assets.