303 Exam 3- CH. 10

Question 1

Asset Turnover Formula

Answer 1

Net Sales/Average Total Assets

Question 2

Profit Margin on Sales Formula

Answer 2

Net Income/Net Sales

Question 3

Return on Assets Formula

Answer 3

Net Income/Average Total Assets
OR Asset Turnover * PM on Sales

Question 4

Which of the following is NOT true of depreciation accounting?

Answer 4

Depreciation lowers the book value of the asset as it ages and its fair value declines

Question 5

The major difference between the service life of an asset and its physical life is that

Answer 5

service life refers to the time and asset will be used by a company and physical life refers to how long the asset will last

Question 6

T/F: Total depreciation over an asset’s life cannot exceed an amount equal to cost minus estimated salvage value

Answer 6

True

Question 7

T/F: The sum-of-years digits method does not deduct the salvage value in computing the depreciation base

Answer 7

False; declining-balance method does not deduct salvage value

Question 8

Co. purchased a depreciable asset for $45,000. The estimated value is $5,625, and the estimated useful life is 4 years. The double-declining method will be used for depreciation. What is the depreciation expense for the second year?

Answer 8

100%/4 * 2 = .50
.50* 45,000 = 22,500 Year 1 Depreciation
(45,000 - 22,500) * .5 = 11,250 Year 2 depreciation expense

Question 9

Co. purchased a depreciable asset for $72,000 on Jan 1. The estimated salvage value is $25,100, and the estimated useful life is 5 years. The straight line method is used. On Jan. 1, 2022 the company made a capital expenditure of $15,000 for an addition to the asset. What is depreciation expense for 2022?

Answer 9

72,000 - 25,100 / 5 years = 9380
9380 * 2 = 18,760
72,000 - 18,760 + 15,000 = 68,240
68,240 - 25,100 / 3 = 14,380

Question 10

T/F: Unless otherwise stipulated, depreciation is normally computed on the basis of the nearest fraction of a year

Answer 10

False; depreciation is normally computed on the basis of the nearest full month

Question 11

Co. purchase a depreciable asset for 93,000 on Jan. 1. The estimated savage value is 16,000, and the estimated useful life is 10 years. The double-declining balance method will be used for depreciation. What is the depreciation expense for the second year on this asset?

Answer 11

100%/10= .1 x 2 = .2
.20 * 93,000 = 18,600
( 93,000 - 18,600 ) x .2 = 14,880

Question 12

T/F: For the composite method, an average (composite) depreciation rate is determined by dividing the depreciation per year by the total cost of the assets

Answer 12

True

Question 13

Which of the following principles best describes the conceptual rationale for the methods of matching depreciation expense with revenues?

Answer 13

Systematic and rational allocation

Question 14

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

Answer 14

False; supersession not obsolescence

Question 15

All of the following are economic factors related to depreciation except:

Answer 15

wear and tear

Question 16

T/F: Economic factors that shorten the service life of an asset include technological changes in the industry and damage.

Answer 16

False; Economic factors that effect the service life of an asset include technological changes in the industry causing the asset to become inadequate, and changing company demands which will cause an asset to become obsolete but damage is nor an economic factor.

Question 17

T/F: The major limitation of the straight-line method is that it is inappropriate in situations in which depreciation is a function of time instead of activity.

Answer 17

False; this major limitation of the activity method. It is inappropriate in situation in which depreciation is a function of time instead of activity

Question 18

A principle objection to the straight-line method of depreciation is that it

Answer 18

assumes that the asset’s economic usefulness is the same each year

Question 19

Which one of the following is not an accelerated depreciation method?

Answer 19

Straight line method

Question 20

Co. purchased a depreciable asset for $171,000 on April 1, 2020. The estimated salvages value is $45,000, and the estimated useful life is 5 years. The straight line method is used for depreciation. What is the balance in accumulated depreciation on March 1, 2023 when the asset is sold?

Answer 20

171,000 - 45,000 / 60 months = 2100
For 35 months the accumulated depreciation is 73,500 (35 * 2100)

Question 21

Which one of the following statements regarding revision of depreciation rates is incorrect?

Answer 21

changes in estimate should be handled in the current period only.

Question 22

Co. purchased a depreciable asset for $52,020 on October 1, 2020. The estimated salvage value is $11,700, and the estimated useful life is 6 years. The straight-line method is used for depreciation. What is the book value on July 1, 2022 when the asset is sold?

Answer 22

52,020 - 11,700 / 72 = 560
21 * 560 = 11, 760
52020 - 11760 = 40260

Question 23

When an asset being depreciated under the group method is disposed of, any resulting gain or loss:

Answer 23

is recorded in the Accumulated Depreciation Account

Question 24

Ignoring income tax effects, accelerated depreciation methods can

Answer 24

offset the effect of increasing repair and maintenance costs as the asset ages

Question 25

In computing partial-year depreciation, depreciation is normally computed on the basis of

Answer 25

the nearest full month

Question 26

An impairment of PPE has occurred if

Answer 26

the sum of the expected future net cash flows is less than the asset's carrying value

Question 27

Co. owns machinery with a book value of $2,215,000. It is estimated that the machinery will generate future cash flows of $1,993,000. The machinery has a fair value of $1,910,000. The JE to record the impairment loss will

Answer 27

increase the asset's Accumulated Depreciation account by $305,000

Question 28

Co. owns equipment with a cost of $326,000 and accumulated depreciation at Dec. 31, 2021 of $124,000. It is estimated that the machinery will generate future cash flows of $170,000. The machinery has a fair value of $153,000. If Pharoah uses IFRS, the co. should recognizes a loss on impairment of:

Answer 28

326,000 - 124,000 = 202,000 202,000 - 153,000 = 49,000

Question 29

Co. owns machinery with a book value of $520,000. It is estimated that the machinery will generate future cash flows of $467,000. The machinery has a fair value of $405,000. Co. should recognize a loss on impairment of:

Answer 29

115,000 467,000< 520,000 = impairment 520,000 - 405,000 = loss of 115,000

Question 30

When is the restoration of an impairment loss permitted?

Answer 30

on assets being held for disposal

Question 31

An asset impairment occurs when the asset's carrying value exceeds the:

Answer 31

expected future cash flows

Question 32

Co. owns equipment with a cost of $294,800 and accumulated depreciation at Dec. 31 of $151500. It is estimated that the machinery will generate future cash flows of $167700. The machinery has a fair value of $115500. Co should recognize a loss on impairment of

Answer 32

167700>143300 (294800 - 151500) = 24400 Answer is 0

Question 33

Depletion is normally calculated using the stright line method

Answer 33

False; depletion is calculated using the units of production method

Question 34

The total cost of natural resources includes all exploration, acquisition, restoration, and intangible development costs

Answer 34

true

Question 35

Depletion expense

Answer 35

includes tangible equipment costs in the depletion base

Question 36

the depletion rate is calculated as follows

Answer 36

total cost minus salvage value divided by the total estimated units

Question 37

Co. reports beg of the year total assets of 904,000, end of year total assets of 1090000, net sales of 1266190, and net income of 257,000. Co asset turnover ratio is

Answer 37

(904,000 + 1,090,000) /2 = 997,000 1,266,190 / 997,000 = 1.27

Question 38

A general description of the depreciation methods applicable to major classes of depreciable bases is

Answer 38

should be included in corporate financial statements or notes

Question 39

Under MACRS, which on of the following is NOT considered in determining depreciation?

Answer 39

salvage value