Module 1

Question 1

Lundy Company purchased a depreciable asset for $99,000 on January 1. The estimated salvage value is $18,000, and the estimated useful life is 9 years. The double-declining balance method will be used for depreciation.

What is the depreciation expense for the second year on this asset? (Please round the double-declining balance rate to 2 decimal places, e.g. 0.35 or 35% in your intermediate calculations.)

Answer 1

$16,988
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 9 years, the straight-line depreciation rate is 11% per year. The double-declining method rate, therefore is 22%. First year depreciation is $99,000 x 22% = $21,780. The book value at the beginning of the 2nd year is $77,220 ($99,000 - $21,780). The second year depreciation is $77,220 x 22% = $16,988.

Question 2

For 2017, Lassiter Company reports beginning of the year total assets of $900,000, end of the year total assets of $1,100,000, net sales of $1,250,000, and net income of $250,000.

What is Lassiter’s 2017 asset turnover ratio?

Answer 2

125 times
Correct. The asset turnover ratio is calculated by dividing the net sales by the average total assets for the period. Lassiter’s asset turnover ratio is calculated as: $1,250,000/[($900,000 + $1,100,000)/2] = 1.25 or 125 times.

Question 3

Mains Corporation owns equipment with a cost of $290,000 and accumulated depreciation at December 31, 2017 of $150,000. It is estimated that the machinery will generate future cash flows of $165,000. The machinery has a fair value of $115,000.

Which of the following should be recognized as a a loss on impairment?

Answer 3

$0
Correct. An impairment is recorded when an asset fails the recoverability test. If the expected future cash flows is less than the carrying amount, the asset is impaired. The amount of the impairment is the fair value of the asset is less the book value. If the fair value of the asset is not known, the present value of the expected cash flows can be used to determine the fair value. In this case, the future cash flows of $165,000 is greater than the book value of $140,000 ($290,000 - $150,000). Therefore, no impairment exists.

Question 4

McDonald Company acquired machinery on January 1, 2015 which it depreciated under the straight-line method with an estimated life of fifteen years and no salvage value. On January 1, 2020, McDonald estimated that the remaining life of this machinery was six years with no salvage value.

How should this change be accounted for by McDonald?

Answer 4

By setting future annual depreciation equal to one-sixth of the book value on January 1, 2020
Correct. No entry is made at the time the change in estimate occurs, however, future charges for depreciation in subsequent periods are determined by dividing the remaining book value less any salvage value by the remaining estimated life. In this case, McDonald’s Company should set future annual depreciation equal to one-sixth of the book value of the asset on the date that the estimated life of the asset changed.

Question 5

How do you compute the return on total assets?

Answer 5

Divide net income by average total assets
Correct. The return on total assets is calculated as net income divided by average total assets.