Asset Depreciation Methods Quiz Chapter 9

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Questions and Answers

What is the primary reason for depreciating an asset?

To accurately reflect the asset's fair market value over time.

To reduce the asset's value to zero by the end of its useful life.

To accumulate cash for replacement of the asset.

To allocate the cost of the asset over its useful life. (correct)

What are the three main factors considered when calculating depreciation?

Cost, salvage value, and depreciation rate.

Market value, salvage value, and depreciation rate.

Cost, salvage value, and estimated useful life. (correct)

Cost, market value, and estimated useful life.

Which depreciation method allocates a constant amount of depreciation expense each year?

Diminishing-balance method.

Straight-line method. (correct)

Units-of-production method.

Accelerated depreciation method.

Which depreciation method bases the depreciation expense on the asset's carrying amount?

Diminishing-balance method. (C) Signup and view all the answers

What is the estimated value of an asset at the end of its useful life called?

Salvage value. (C) Signup and view all the answers

What is the carrying amount of an asset?

The difference between the original cost and the accumulated depreciation. (C) Signup and view all the answers

How often should the depreciation method, estimated useful life, and residual value of an asset be reviewed?

Annually. (D) Signup and view all the answers

Which depreciation method is often used for assets that have a high rate of use in the early years of their life?

Diminishing-balance method. (B) Signup and view all the answers

What is the first step in recording a disposal of property, plant, and equipment?

Update depreciation (A) Signup and view all the answers

How is the carrying amount of an asset calculated?

Cost - Accumulated Depreciation (A) Signup and view all the answers

If the proceeds from a disposal are greater than the carrying amount, what is the result?

Gain (C) Signup and view all the answers

When exchanging an old asset for a new one, what is the trade-in allowance used for?

It reduces the cost of the new asset. (D) Signup and view all the answers

What is the relevant value used when recording a new asset acquired through an exchange, in relation to the old asset given up?

Fair value (D) Signup and view all the answers

What is the final step in recording an exchange of property, plant, and equipment?

Record the cost of the new asset (D) Signup and view all the answers

In a retirement of property, plant, and equipment where no proceeds are received, what is the journal entry to record the retirement?

Debit Accumulated Depreciation, Credit Asset (C) Signup and view all the answers

When an asset is retired and it is not fully depreciated, what is the loss on retirement equal to?

The carrying amount of the asset (B) Signup and view all the answers

What are the two key characteristics that distinguish natural resources from other long-lived assets?

They are physically extracted and replaced only by an act of nature. (A) Signup and view all the answers

How is the cost of natural resources determined?

By adding the cost of acquiring and preparing the resource for use, including asset retirement costs. (A) Signup and view all the answers

Which depreciation method is typically used to calculate the depletion of natural resources?

Units-of-production method (A) Signup and view all the answers

How is the depletion expense of natural resources recorded in the accounting system?

As a debit to inventory to reflect the cost of the extracted product. (D) Signup and view all the answers

When a company sells a product extracted from a natural resource, what is the accounting treatment for the depletion expense?

It is expensed to cost of goods sold. (C) Signup and view all the answers

What is the primary difference between depreciation of plant assets and depletion of natural resources?

Depreciation is a process of allocating the cost of an asset over its useful life, while depletion is a process of reducing the carrying amount of the asset. (C) Signup and view all the answers

What are the future restoration and clean-up costs associated with a natural resource called?

Asset retirement costs (B) Signup and view all the answers

What is the accounting implication of the depletion expense for a company's financial statements?

It decreases the company's net income. (A) Signup and view all the answers

Which of the following costs would be included in the cost of land?

Cost of installing a fence around the land (A), Cost of removing an old building from the land (C), Cost of landscaping (D) Signup and view all the answers

Which of the following is NOT a characteristic of property, plant, and equipment (PP&E)?

Intended for sale to customers (C) Signup and view all the answers

What is the difference between capital expenditures and operating expenditures?

Capital expenditures are for assets that will be used for more than one year, while operating expenditures are for assets that will be used for less than one year. (C) Signup and view all the answers

What costs would be included in the cost of a building if it is constructed?

Cost of insurance during construction, interest payments during construction, and the cost of the building permit. (B) Signup and view all the answers

Which of the following is NOT a class of property, plant, and equipment?

Inventory (C) Signup and view all the answers

Which of the following costs would be included in the cost of equipment?

Sales tax paid on the equipment (B), Cost of insuring the equipment while it is in transit (C) Signup and view all the answers

What is the primary reason for distinguishing between capital expenditures and revenue expenditures?

To ensure that the company complies with accounting standards for asset valuation (A) Signup and view all the answers

What is the term used to describe the process of allocating the cost of a long-lived asset over its useful life?

Depreciation (B) Signup and view all the answers

When a company purchases multiple assets for a single price, what is the process called?

Basket purchase (B) Signup and view all the answers

What is the primary accounting principle that guides the allocation of costs to multiple assets purchased together?

Fair value principle (B) Signup and view all the answers

Which of the following is NOT a factor considered when determining the cost of a long-lived asset?

Salvage value (C) Signup and view all the answers

What is the accounting treatment for the disposal of a long-lived asset?

The asset is removed from the balance sheet and a loss is recorded if the proceeds from the sale are less than the book value. (B) Signup and view all the answers

What type of expenditure is the cost of repairing a building?

Operating expenditure (C) Signup and view all the answers

Which of the following is NOT a characteristic of intangible assets?

They have physical substance (D) Signup and view all the answers

What is the difference between land and land improvements?

Land has an indefinite life, while land improvements have a limited useful life. (A), Land is not depreciated, while land improvements are. (B) Signup and view all the answers

Which of the following is an example of an intangible asset with an indefinite life?

Goodwill (A) Signup and view all the answers

What is the main purpose of using the units-of-production method to calculate depreciation?

To calculate depreciation based on the estimated total number of units the asset will produce throughout its useful life. (C) Signup and view all the answers

When using the units-of-production method, what factor needs to be estimated in advance?

The total number of units the asset will produce throughout its useful life. (B) Signup and view all the answers

When a fully depreciated asset is still being used, how should it be accounted for on the balance sheet?

It should be carried at a nominal value of $1 on the balance sheet. (C) Signup and view all the answers

Why does depreciation expense have to be recorded for a partial period when equipment is sold in the middle of a fiscal year?

To accurately allocate depreciation expense and reflect the use of the asset during the partial period. (C) Signup and view all the answers

How is the gain or loss on the exchange of property, plant, or equipment calculated?

The fair value of the asset received minus the book value of the asset given up. (A) Signup and view all the answers

Which of the following is an example of a property, plant, and equipment asset?

A factory building owned by the company. (D) Signup and view all the answers

How is the cost of a newly acquired piece of equipment typically determined?

Based on the purchase price, transportation costs, and any installation or setup fees. (D) Signup and view all the answers

What is the primary goal of depreciation accounting?

To spread the cost of an asset over its useful life to match the revenue generated by the asset. (D) Signup and view all the answers

Study Notes

Chapter 9: Long-Lived Assets

This chapter covers long-lived assets, including property, plant, equipment, natural resources, and intangible assets.
Learning goals include distinguishing capital from revenue expenditures, recording transactions related to amortization, disposal, and depletion of tangible assets, identifying elements for determining plant and equipment costs, natural resources and intangibles, and recording transactions for intangible assets.
Success criteria include determining costs of property, plant & equipment, explaining & calculating depreciation, accounting for disposal of property, plant & equipment, calculating & recording depreciation of natural resources and identifying intangible asset & goodwill accounting issues.

Property, Plant, and Equipment

Long-lived assets owned by a company; used in production and sale of goods and services.
Characteristics:
- Have physical substance (size and shape)
- Used in business operations.
- Not intended for sale to customers.
Expected to provide services for several years.
Divided into four classes: land, land improvements, buildings, and equipment.

Determining Cost

Cost includes purchase price, non-recoverable taxes, less discounts, and rebates.
Includes all costs necessary to bring the asset to its location and ready-for-use condition, including obligations to remove or restore the asset upon retirement.
Capital expenditures benefit future periods; operating expenditures benefit only the current period.

Land and Improvements

Land cost includes the purchase price, closing costs (e.g., legal fees, surveys), and costs to prepare the land for intended use.
Land improvements are additions to land (e.g., fences, parking lots, landscaping); they have limited useful lives and are separately recorded and depreciated.

Buildings

Building costs include purchase price, closing costs, and costs to get the building ready for its intended use (e.g., renovations, repairs).
Construction costs include contract price, architects' fees, building permits, construction interest, and excavation costs.

Equipment

Equipment includes delivery equipment, office equipment, computers, machinery, vehicles, furniture, fixtures, and other similar assets.
The cost includes the purchase price, freight, insurance during transit, and assembly, installation, and testing costs.

Multiple Assets

If multiple assets are purchased together for a single price, the total cost is allocated to each asset in proportion to its relative fair value. This method is called a basket purchase.

Depreciation

Systematic allocation of the cost of a long-lived asset over its useful life.
It's a process of cost allocation (not determining fair value).
It does not accumulate cash for replacement.

Calculating Depreciation

To calculate depreciation, determine:
- The cost to acquire the asset and prepare it for use.
- The estimated useful (productive) life of the asset (expressed as time, units of activity, or units of output).
- The estimated residual value (value at the end of its useful life).

Depreciation Methods

Three depreciation methods to choose from:
- Straight-line
- Diminishing-balance
- Units-of-production

Straight-Line Method

Depreciation expense is constant each year of the asset's useful life.
Depreciable amount is calculated by subtracting the residual value from the cost.
Annual depreciation expense is calculated by dividing the depreciable amount by the estimated useful life.

Diminishing-Balance Method

Depreciation expense is based on the asset's diminishing carrying amount (cost less accumulated depreciation).
The depreciation rate remains constant, but depreciation expense declines each year.

Units-of-Production Method

Useful life is expressed as total units of production or activity.
The total estimated units of production are used to determine the depreciation cost per unit.
Annual depreciation expense is calculated by multiplying the depreciable amount per unit by the units of production during the year.

Natural Resources

Natural resources (wasting assets) include standing timber, oil, gas, and minerals.
They differ from other long-lived assets because they are physically extracted, depleted, and replaced only by nature.
The cost of natural resources includes costs to acquire, prepare, and use them while future restoration/clean-up costs are added.
Depreciation is calculated using the units-of-production method and debited to inventory.
The cost is expensed when the product is sold.

Intangible Assets

Intangible assets represent rights, privileges, and competitive advantages without physical substance, like patents, copyrights, trademarks, franchises, and licenses.
Recorded at cost (including costs to prepare an asset for use).
Amortized (depreciated) over their finite useful or legal life, whichever is shorter, and this often uses the straight-line method.
Assets with indefinite lives are not amortized.

Goodwill

Goodwill represents the value of favorable attributes of a company acquired in a business purchase; it's recorded when a business is acquired.

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Test your knowledge on the various methods and principles of asset depreciation. This quiz covers key concepts like the calculation of depreciation, different methods, and factors affecting asset valuation. Perfect for accounting students and professionals looking to refresh their expertise.