Topic 7: Quiz

Question 1

Depreciation is a means of cost allocation, not a matter of valuation.

Answer 1

True

Question 2

Depreciation is based on the decline in the fair value of the asset.

Answer 2

F

Question 3

Depreciation, depletion, and amortization all involve the allocation of the cost of a
long-lived asset to expense.

Answer 3

T

Question 4

The cost of an asset less its residual value is its depreciation base.

Answer 4

T

Question 5

The three factors involved in the depreciation process are the depreciation base,
the useful life, and the risk of obsolescence.

Answer 5

F

Question 6

Inadequacy is the replacement of one asset with another more efficient and economical asset.

Answer 6

F

Question 7

The major objection to the straight-line method is that it assumes the asset’s economic usefulness and repair expense are the same each year.

Answer 7

T

Question 8

The units-of-production approach to depreciation is appropriate when depreciation is a function of time instead of activity.

Answer 8

T

Question 9

An accelerated depreciation method is appropriate when the asset’s economic usefulness is the same each year.

Answer 9

F

Question 10

The declining-balance method does not deduct the residual value in computing the depreciation base.

Answer 10

T

Question 11

Changes in estimates are handled prospectively by dividing the asset’s book value less any residual value by the remaining estimated life.

Answer 11

T

Question 12

Under component depreciation, each component of an item of property, plant and equipment whose cost is significant relative to the total cost of the asset must be depreciated separately.

Answer 12

T

Question 13

Component depreciation must be calculated using the straight-line method.

Answer 13

F

Question 14

The first step in determining an impairment loss is to identify whether impairment
indicators are present.

Answer 14

T

Question 15

The recoverable amount used to impairment test a long-lived tangible asset is defined as the asset’s fair value less costs to sell.

Answer 15

F

Question 16

An asset’s value in use is defined as the present value of the cash flows expected from its future use and eventual sale at the end its useful life.

Answer 16

T

Question 17

Recoveries of impairment for tangible long-lived assets are reported as components of other comprehensive income.

Answer 17

F

Question 18

A recovery of impairment for a tangible long-lived asset is limited to the carrying value that would have been reported had the impairment not occurred.

Answer 18

T

Question 19

After an impairment loss is recorded, the recoverable amount becomes the basis for the impaired asset and is used to calculate depreciation in future periods.

Answer 19

T

Question 20

An impairment loss is the amount by which the carrying amount of the asset exceeds the sum of the expected future cash flows from the use of that asset.

Answer 20

F

Question 21

Recoverable amount is defined as the higher of fair value less costs to sell or value-in-use.

Answer 21

T

Question 22

Assets held for disposal should be reported at the lower of cost or net realizable value.

Answer 22

T

Question 23

Intangible development costs and restoration costs are part of the depletion base.

Answer 23

T

Question 24

Although IFRS allows it, most companies do not use revaluation accounting.

Answer 24

T

Question 25

Unrealized gains from revaluations do not increase net income but are instead
reported as components of other comprehensive income.

Answer 25

T

Question 26

The Accumulated Other Comprehensive Income account related to revaluations cannot have a negative balance.

Answer 26

T

Question 27

Revaluation surplus is a temporary account which is closed to Retained Earnings at the end of an accounting period.

Answer 27

F

Question 28

The recoverability test is the first step in impairment testing under both IFRS and U.S. GAAP.

Answer 28

F

Question 29

The asset turnover is computed by dividing net sales by ending total assets.

Answer 29

F

Question 30

The profit margin on sales is a measure for analyzing the use of property, plant,
and equipment.

Answer 30

T