Accounting Made Simple 23

Question 1

1. Under the GAAP accepted UNITS OF PRODUCTION METHOD OF DEPRECIATION, the RATE at which as asset is depreciated is:

Answer 1

NOT A FUNCTION OF TIME, but rather a FUNCTION OF HOW MUCH THE ASSET IS USED.

Question 2

2. Checklist Construction buys an pneumatic nailer for 2k, and it is expected to last through the construction of 20 houses.
   Using the UNITS OF PRODUCTION METHOD OF DEPRECIATION:

Answer 2

Checklist Construction would depreciate the equipment each period depending on how many houses were built, at a rate of depreciation of $100 per house (2k asset cost / 20 houses)

Question 3

3. If on a given year, Checklist used the nailer to build 9 houses, the following entry would be used to record depreciation:

Answer 3

Dep Exp…..900

Accumu Dep……900

Question 4

4. The concept of MATERIALITY plays a BIG ROLE in how some assets are accounted for. For example:

Answer 4

with a $15 wastebasket expected to last 5 years, it should theoretically be depreciated over 5 years.
However, in terms of the IMPACT ON THE FINANCIAL STATEMENTS, this is IMMATERIAL and it should be expensed on the year of purchase:

Office Admin Exp…..15
Cash………………..15