Depreciation

Question 1

Depreciation is best described as a method of

a. Asset valuation
b. Current value allocation
C. Cost allocation
d. Useful life determination

Answer 1

b. Current value allocation or
C. Cost allocation

Question 2

All of the following factors are considered in determining the useful life of an asset, except

a. Expected usage of the asset
b. Expected physical wear and tear
C. Technical obsolescence
d. Residual value

Answer 2

d. Residual value

Question 3

Technical or commercial obsolescence arises from

a. Expected usage of the asset
b. Expected physical wear and tear
c. Change or improvement in production or change in the market demand for the product output of the asset
d. Expiry date of related lease of the asset

Answer 3

c. Change or improvement in production or change in the market demand for the product output of the asset

Question 4

The production method of depreciation results in

a. Constant charge over the useful life of the asset.
b. Decreasing charge over the useful life of the asset.
C. Increasing charge over the useful life of the asset.
d. Variable charge based on the expected use or output of the asset.

Answer 4

d. Variable charge based on the expected use or output of the asset.

Question 5

What factor must be present under the production method of depreciation?

a. Total units to be produced can be estimated
b. Production is constant over the life of the asset
c. Repair costs increase with use
d. Obsolescence is expected

Answer 5

a. Total units to be produced can be estimated

Question 6

Which statement is the assumption on which straight line depreciation is based?

a. The efficiency of the asset decreases in later years.
b. Service value declines as a function of time rather than use.
C. Service value declines as a function of obsolescence.
d. Physical wear and tear are more important than economic obsolescence.

Answer 6

b. Service value declines as a function of time rather than use.

Question 7

The straight line depreciation is not appropriate for

a. An entity that is neither expanding nor contracting an investment in equipment.
b. Equipment on which maintenance and repairs increase substantially with age.
c. Equipment with useful life not affected by use.
d. Equipment used consistently every period.

Answer 7

b. Equipment on which maintenance and repairs increase substantially with age.

Question 8

The principal objection to the straight line method of depreciation is that it

a. Provides for the declining productivity of an aging asset
b. Ignores variation in the rate of asset use
c. Tends to result in a constant rate of return
d. Gives smaller periodic writeoff than a decreasing method

Answer 8

b. Ignores variation in the rate of asset use

Question 9

In which of the following situations is the production method of depreciation most appropriate?

a. An asset’s service potential declines with use
b. An asset’s service potential declines with time
c. An asset is subject to rapid obsolescence
d. An asset incurs increasing repairs and maintenance

Answer 9

a. An asset’s service potential declines with use

Question 10

The composite depreciation method

a. Is applied to a group of homogeneous assets
b. Is an accelerated method of depreciation
c. Does not recognize gain or loss on the retirement of single asset in the group
d. Excludes residual value from the base of the depreciation calculation

Answer 10

c. Does not recognize gain or loss on the retirement of single asset in the group

Question 11

A method which excludes residnel ealie-rom the base don the depreciation calculation in the earlier years is

a. Straight line
b. Sum of years’ digits
c. Double declining balance
d. Output method

Answer 11

c. Double declining balance

Question 12

The double declining balance method

a. Results in a decreasing depreciation charge.
b. Means residual value is not deducted in computing the depreciation base.
c. Means the carrying amount should not be reduced below residual value.
d. All of these describe double declining balance

Answer 12

d. All of these describe double declining balance

Question 13

Which depreciation method applies a uniform depreciation rate each period to the carrying amount of an asset?

a. Straight line
b. Declining balance
c. Output method
d. Sum of years’ digits

Answer 13

b. Declining balance

Question 14

The sum of years’ digits method

a. Results in residual value being ignored.
b. Means the denominator is the number of years remaining at the beginning of the year.
c. Means the carrying amount should not be reduced below residual value.
d. Results in an increasing depreciation charge.

Answer 14

c. Means the carrying amount should not be reduced below residual value.

Question 15

Which depreciation method is not based on the passage of time?

a. Production method
b. Sum of years’ digit
c. Declining balance
d. Straight line

Answer 15

a. Production method

Question 16

Which statement provides the best theoretical support for accelerated depreciation?

a. Assets are more efficient in early years and initially generate more revenue.
b. Expenses should be allocated in a manner that “smooths” earnings.
c. Repairs and maintenance costs probably would increase in later periods so depreciation should decrease.
d. Accelerated depreciation provides easier replacement because of the time value of money.

Answer 16

a. Assets are more efficient in early years and initially generate more revenue.

Question 17

An asset has a nine-year useful life and is to be depreciated under the sum of years’ digits method. The annual depreciation expense would be the same as that under the straight line method in the

а. Third year
b. Fifth year
C. Seventh year
d. Ninth year

Answer 17

b. Fifth year

Question 18

In order to calculate the depreciation of an asset for the third year using the sum of years’ digits method, which of the following must be known about the asset?

a. Acquisition cost
b. Residual value
C. Useful life
d. All must be known

Answer 18

d. All must be known

Question 19

A machine with a four-year useful life and 15% residual value was acquired at the beginning of the current year.
The depreciation for second year using the double declining balance should be

a. Original cost × 85% × 50%
b. Original cost × 50%
c. Original cost × 85% × 50% x 50%
d. Original cost × 50% × 50%

Answer 19

d. Original cost × 50% × 50%

Question 20

A machine with a 5-year useful life and residual value was acquired at the beginning of the current year. At the end of the fourth year, accumulated depreciation using the sum of years’ digits method would be

a. Original cost less residual value multiplied by 1/15
b. Original cost less residual value multiplied by 14 / 15
C. Original cost multiplied by 14 / 15
d. Original cost multiplied by 1/15

Answer 20

b. Original cost less residual value multiplied by 14 / 15