Unit 4 Flashcards
A company purchases an asset on April 5 of the current year. The company would like to use the depreciation policy that will result in the highest deprecation expense in the last year of its useful life. Which depreciation policy should be used?
Half-year convention
Correct! Half-year convention will depreciate the asset for six months in the year of acquisition and six months in the final year of the useful life. This policy results in the highest depreciation expense in the last year of the useful life.
A pizza delivery chain buys several assets with varying useful lives at the start of the year and is trying to determine which special depreciation method to use. The following assets were purchased:
12 delivery trucks
4 pizza ovens
6 point-of-sale systems
20 sets of tables and chairs
Which depreciation method allows the pizza delivery chain to use one rate to depreciate all the assets?
Composite
Correct! The company can create an average rate and average estimated useful life to depreciate all the assets using one rate. This method can be used for dissimilar assets with varying useful lives.
A company wants to calculate a loss on impairment on an asset.
How is the loss calculated?
Carrying value less the fair value
Correct! The carrying amount of the asset less the fair value is the correct formula for determining a loss on impairment.
The asset turnover for a company in the most recent accounting year is 1.50.
Which statement accurately describes the meaning of this ratio?
The company generated net sales of $1.50 per dollar of assets in the most recent year.
Correct! The asset turnover, calculated as net sales divided by the simple average of current year and prior year total assets, defines how efficiently a company uses its assets to generate sales.
A company purchased and placed into service a piece of machinery with an original cost of $100,000. It estimates a 10-year useful life with no salvage value. At the beginning of Year 8, when accumulated depreciation was $70,000 and the asset’s book value was $30,000, the company estimates that it will use the machine for a total of 12 years.
Which statement describes the proper accounting treatment beginning with Year 8?
The company will depreciate the $30,000 book value over the next five years.
Correct! At the start of year 8, the net book value is $30,000 ($100,000 - ($100,000 / 10 x 7). Since the asset has 5 more years of estimated use (years 8 through 12), the net book value of $30,000 is depreciated over the remaining 5 years.
A company purchased a plot of land for $500,000 for the purposes of harvesting timber for resale. The company paid $10,000 to have the property boundaries marked by a land surveyor. The company also acquired a bulldozer for $100,000. The bulldozer will be used at this plot of land in addition to other locations where the company harvests trees.
What will be the company’s depletion base for the land?
$510,000
Correct! The depletion base should include all costs associated with the acquisition of the natural resource. The $10,000 cost of placing survey stakes should be included with the $500,000 purchase price when determining the depletion base.
A company owns an asset with an original cost of $300,000 and a current book value of $160,000. In reviewing the asset for impairment, the company estimates that the expected future cash flows from the use and disposal of the asset will be $220,000. The fair value of the asset, calculated as the present value of expected future cash flows, is $180,000. The company wants to identify why the asset is not considered impaired, according to the recoverability test.
Which statement identifies why the asset was not impaired?
The expected future cash flows are greater than the book value.
Correct! The recoverability test compares the expected future cash flows to the asset’s book value.
A company believes a property contains natural resources and pays $80,000 for the property. The company spends $50,000 on a bulldozer to be used in multiple projects, $10,000 to dig the land to find the natural resources, and $3,000 on intangible development costs.
How much is the depletion base for the natural resources?
$93,000
Correct! Cost of land, exploration, and intangible development cost are all part of the depletion base: $93,000 = $80,000+$10,000+$3,000
A company placed an asset into service on Day 1 of Year 1 with the following data related to the purchase:
Cost of machinery $225,000
Estimated salvage value $75,000
Product life hours 75,000 hours
Useful life 5 years
Hours used in Year 1 5,000 hours
Which amount of annual depreciation expense should be recorded at the end of Year 2 using the sum-of-years’-digits method?
$40,000
Correct! $40,000 = ($225,000- $75,000) X 4/15. Cost minus salvage value multiplied by the year two fraction of 4/15.
An asset costs $200,000 with an expected useful life of five years. At the end of five years, the salvage value is expected to be $20,000.
What is the depreciation base?
$180,000
Correct! The depreciation base is the difference between the cost and the salvage value: $200,000 - $20,000 = $180,000.
