Chapter 11 Flashcards
(34 cards)
Montana Mining acquires a coal mine at a cost of $1,800,000. Intangible development costs total $360,000. After extraction has occurred, the company must restore the property (estimated fair value of the obligation is $180,000), after which it can be sold for $210,000. What is the amount of depletion per ton given that Montana Mining estimates 5,000 tons of extractable coal?
A. $384
B. $426
C. $360
D. $468
B - $426
Depletion cost per unit = (total cost - salvage value)/ total estimated units
Total cost is the cost of the mine plus development costs plus restoration costs (($1,800,000 + $360,000 + $180,000) -$210,000)/5,000 = $426
Acquisiton costs 1800000
Add: Intangible development costs 360000
Add: Estimated fair value of the obligation 180000
Less: Salvage value -210000
Cost for Depletion 2130000
Divided by tons of coal 5000
Depletion per ton 426
You are working to determine the depreciation on an asset purchased in the start of June that has a total depreciation of $5,000 for the current year and a 5-year useful life. Which of the following would be the correct formula to use?
A. 7/12 X $5,000
B. $5,000/5
C. 5/12 X $5,000
D. $5,000/4
A. 7/12 X $5,000
On December 31, 2020, Heart Industries had total assets of $8.4 million. If Heart’s net sales for 2020 were $5.6 million and its asset turnover ratio was 0.7, then what were Heart’s total assets as of January 1, 2020?
A. $15.2 million
B. $8 million
C. $16 million
D. $7.6 million
D. $7.6 million
Adding the salvage value to depreciable base will yield
A. overall depreciation.
B. obsolescence.
C. service life.
D. acquisition cost.
D. acquisition cost.
Kessler GPS spent $180,000 on equipment in January 2019. The equipment had a useful life of 3 years, and Kessler GPS uses straight-line depreciation. In 2020, a new model of equipment came out and Kessler calculated an impairment of $54,000 on August 6, 2020. However, the new model was defective, and older models had an increased market value of $112,000 in 2021. If Kessler GPS is holding their older equipment for disposal, how would they record this late increase in value in March 2021?
A. They would record a $112,000 increase in value for the equipment.
B. They would not record the increase in value.
C. They would record a $46,000 increase in value for the equipment.
D. They would record a $68,000 decrease in value for the equipment.
C. They would record a $46,000 increase in value for the equipment.
The book value for the equipment was $180,000 at the time of purchase. With a useful life of 3 years, they would have $60,000 annual depreciation. Therefore, on January 1, 2020, the book value for the equipment would be $120,000. After the loss on impairment in August 2020, the book value would be $66,000. Depreciation is not recorded for assets to be disposed of. If Kessler GPS is holding the equipment for disposal, they could increase the value of the asset up to $120,000 (book value at time of impairment) or $112,000 (market value), whichever is lower. Therefore, they would record an increased value of $46,000 ($112,000 – $66,000).
An asset was originally purchased by the Sampson Corp. for $260,000. The depreciable base was determined to be $209,000, with an eight-year useful life. Given this information, the salvage value of this asset is
A..$26,125.
B. $58,625.
C. $51,000.
D. $35,000.
C. $51,000.
Depreciation base under straight line method = Cost of the machine - depreciable base = salvage value
The ________ method is used most often by companies due to its simplicity.
A. activity
B. sum-of-the-years’-digits
C. declining-balance
D. straight-line
D. straight-line
The straight-line depreciation method is the simplest whereas, an activity-based depreciation, declining-balance, and sum-of-the-years’-digits are more complex forms of depreciation.
When the cost of a building is written off over a number of years, the expense is called
A. amortization.
B. acquisition.
C. depletion.
D. depreciation.
D. depreciation.
The systematic and rational allocation of cost of a building over a number of years is called depreciation. Acquisition is the purchase of an asset. Amortization and depletion are cost allocation methods for intangible assets and natural resources, respectively.
The Pulton Company purchased a depreciable asset for $400,000 on January 1, 2019. The estimated salvage value is $40,000, and the estimated useful life is 9 years. The straight-line method is used for depreciation. In 2022, the company changed its estimates to a total useful life of 5 years with a salvage value of $60,000. In 2022, the depreciation expense was
A. $120,000.
B. $110,000.
C. $60,000.
D. $40,000.
B. $110,000.
accumulated depreciation =($400000-$40000)*3/9
=$120000
=$400000-$120000=$280000
=($280000-60000)/(5-3)
=110,000
Every year, Hercules Inc. has invested an increasing amount in manufacturing equipment. Given that there are a large number of relatively inexpensive machines and all the machines have relatively similar useful lives, Hercules has depreciated the machinery as a group at a uniform rate using the straight-line method. Over time, the ratio of the group’s total accumulated depreciation to the total cost of the machinery has increased steadily. Currently, the ratio stands at 0.75 to 1. What is the most likely reason for this increasing ratio?
A. The estimated average useful life of Hercules’ machinery is equal to its actual average useful life.
B. The estimated average useful life of Hercules’ machinery is greater than its actual average useful life.
C. Hercules has been retiring fully depreciated machinery that should have remained in service.
D. The estimated average useful life of Hercules’ machinery is less than its actual average useful life.
D. The estimated average useful life of Hercules’ machinery is less than its actual average useful life.
Even though the firm is spending slightly more on equipment each year, its ratio of accumulated depreciation to total cost should remain constant, because the increase in total cost should lead to a proportional increase in accumulated depreciation. This, of course, assumes that the firm is accurately estimating the useful life of its machinery. An increase in the accumulated-depreciation-to-total cost ratio suggests that the firm is accumulating depreciation faster than it spends money on new machinery. This in turn suggests that the firm is able to use the machines for a period longer than their estimated average useful lives.
Kuhn Shoes purchased a lacing machine on January 2, 2012 for $255,000. The machine was being depreciated on the straight-line method over an estimated useful life of 15 years, with no salvage value. At the beginning of 2019, the company paid $35,000 to overhaul the machine. As a result of this improvement, the company estimated that the useful life of the machine would be extended an additional 8 years (23 years total). What should be the depreciation expense recorded for the machine in 2019?
A. $10,688
B. $4,375
C. $2,188
D. $21,375
A. $10,688
The machine has 7 years depreciation at a rate of $17,000 per year ($255,000/15) for a total of $119,000. This gives a book value of $255,000 – $119,000 = $136,000. The cost of the overhaul needs to be added to this book value for a new value of $136,000 + $35,000 = $171,000. The machine now has a useful life of 16 years (23 – 7). This gives an annual depreciation of $171,000/16 = $10,688.
Lugo & Associates purchased machinery on January 4, 2013, for $438,000. The straight-line method is used, and useful life is estimated to be 12 years with a $42,000 salvage value. At the beginning of 2019, Lugo spent $118,000 to overhaul the machinery. After the overhaul, Lugo estimated that the useful life would be extended 6 years (18 years total), and the salvage value would be $60,000. The depreciation expense for 2019 should be
A. $28,083.
B. $29,833.
C. $24,833.
D. $59,667.
C. $24,833.
Purcahse price , Jan 4 2013 $438,000
Accumulated depreciation [($438,000-$42,000)/12 yrs] x 6 yrs ($198,000)
Book value at Dec 31, 2018 $240,000
Add: Overhaul $118,000
Bok value for 2019 $358,000
(Less): Salvage value ($60,000)
Depreciable value $298,000
÷ Remaining useful life (18 yrs - 6 yrs) 12 yrs
= Depreciation expense for 2019 $24,833.33
Flanagan Concrete owns equipment with a book value of $3,500,000. The equipment is estimated to generate future cash flows of $2,975,000. The equipment has a fair value of $2,890,000. The journal entry to record the impairment loss will
A. record a loss of $85,000.
B. include a $610,000 credit to the Equipment account.
C. reduce income from continuing operations by $525,000.
D. increase the asset’s Accumulated Depreciation account by $610,000.
D. increase the asset’s Accumulated Depreciation account by $610,000.
If an asset is impaired, the amount of the impairment loss is the book value minus the fair value. Therefore, the impairment loss is $3,500,000 – $2,890,000 = $610,000. This will be recorded as a debit (increase) to the Loss on Impairment account and a credit (increase) to the Accumulated Depreciation—Equipment account.
Ken and Tammy are working with asset valuation. Ken is trying to determine if an asset is impaired, and Tammy is calculating the amount of impairment for an asset that has no available market value. What is the difference between the values used by Ken and Tammy?
A. Ken will be using undiscounted future cash flows, and Tammy will be using discounted future cash flows.
B. Ken will be using average historical cash flows, and Tammy will be using the present value of future cash flows.
C. Ken will be using discounted future cash flows, and Tammy will be using undiscounted future cash flows.
D. Ken will be using the present value of future cash flows, and Tammy will be using average historical cash flows.
A. Ken will be using undiscounted future cash flows, and Tammy will be using discounted future cash flows.
The recoverability test uses undiscounted cash flows to determine if an asset is impaired which is the test Ken would use. Tammy, on the other hand, has an asset for which the market value is not available, she will be using discounted future cash flows
When analyzing asset impairments, how are undiscounted future cash flows different from discounted future cash flows?
A. Undiscounted future cash flows are used in the recoverability test to determine if an asset is impaired, and discounted future cash flows are used to calculate the amount of impairment if market value is not available.
B. Discounted future cash flows are used to determine if an asset is impaired and to calculate the amount of impairment, and undiscounted future cash flows are not used.
C. Undiscounted future cash flows are used to determine if an asset is impaired and to calculate the amount of impairment, and discounted future cash flows are not used.
D. Discounted future cash flows are used to determine if an asset is impaired, and undiscounted future cash flows are used to calculate the amount of impairment if market value is not available.
A. Undiscounted future cash flows are used in the recoverability test to determine if an asset is impaired, and discounted future cash flows are used to calculate the amount of impairment if market value is not available.
The recoverability test uses undiscounted cash flows to determine if an asset is impaired, whereas, if market value is not available, discounted future cash flows are used.
Billings Corporation acquires a coal mine at a cost of $2,000,000. Intangible development costs total $275,000. After extraction has occurred, Billings must restore the property (estimated fair value of the obligation is $305,000), after which it can be sold for $750,000. Billings estimates that 5,000 tons of coal can be extracted. If 900 tons are extracted the first year, which of the following would be included in the journal entry to record depletion?
A. Debit to Inventory for $329,400
B. Debit to Accumulated Depletion for $329,400
C. Credit to Inventory for $135,000
D. Credit to Accumulated Depletion for $1,500,600
A. Debit to Inventory for $329,400
Inventory should be debited for the entire Depletion expense. Depletion cost per unit = (total cost - salvage value)/ total estimated units. Total cost is the cost of the mine plus development costs plus restoration costs (($2,000,000 + $305,000 + $275,000) -$750,000)/5000 = $366. The total depletion, which is the amount to debit is the unit cost times the number of units $366 x 900 =$329,400.
Ceres Corporation acquired a mineral mine for $6,000,000 of which $600,000 was ascribed to land value after the mineral has been removed. Geological surveys have indicated that 9 million units of the mineral could be extracted. During 2020, 1.8 million units were extracted and 1.2 million units were sold. What is the total amount of depletion recorded in Inventory during 2020?
A. $1,080,000
B. $4,000,000
C. $6,000,000
D. $72,000
A. $1,080,000
Depletion cost per unit = (total cost - salvage value)/ total estimated units. Total cost is the cost of the mine ($6,000,000 -$600,000)/9,000,000 = $0.60. The depletion cost per unit times the units extracted is the amount of depletion for the year. $0.60 x 1,800,000 = $1,080,000
Why do companies compute the depletion cost per unit?
A. to determine the salvage value
B. to estimate the fair value of the property
C. to calculate the total depletion expense for a period
D. to determine the total number of units extracted in a period
C. to calculate the total depletion expense for a period
The depletion cost per unit is used to allocate the costs of the natural resource to each unit extracted. The amount extracted is multiplied by the per unit depletion cost to calculate the total depletion expense for the period. The salvage value is deducted from the total cost and then divided by the total estimated units available to calculate the depletion cost per unit. The total units extracted for a period are not determined by the depletion cost per unit but are used to determine the total depletion expense for the period.
Last year, Beecher Manufacturing had a 12.5% ROA, net income of $800,000, and net sales of $1,600,000. Given these values, what was the firm’s asset turnover ratio?
A. 0.20
B. 0.25
C. 0.45
D. 0.50
B. 0.25
Return on assets = 12.5%
Net income = $800,000
Net sales = $1,600,000
Return on assets = Net income/Average total assets
12.5% = 800,000/Average total assets
Average total assets = $6,400,000
Asset turnover ratio = Net sales/Average total assets
= 1,600,000/6,400,000
= 0.25
For the fiscal year that just ended, Oliver Industries had a 15% ROA, net income of $2.1 million, and an asset turnover ratio of 0.4. Given these values, what were the firm’s net sales?
A. $3.5 million
B. $9.8 million
C. $5.6 million
D. $14 million
C. $5.6 million
A firm’s return on assets (ROA) is equal to its net income divided by its average total assets. Thus, we know that the firm’s average total assets must be $2,100,000/15% = $14 million. We can then multiply this amount times the firm’s asset turnover ratio to arrive at net sales of $5.6 million.
Depreciation is a:
A. measure of deterioration in the physical condition of an asset.
B. means of allocating the cost of a tangible asset to each of the periods that benefit from its use.
C. matter of valuation
D. means of recording the decline in an asset’s fair market value
B. means of allocating the cost of a tangible asset to each of the periods that benefit from its use.
The depreciable base (cost) of an asset is its original cost:
A. plus accumulation depreciation
B. plus salvage value
C. less accumulated depreciation
D. less salvage value
D. less salvage value
Which of the following depreciation methods uses book value to determine annual depreciation?
A. Units of Production
B. Declining Balance
C. Straight-line
D. Sum-of-the-years’ digits
B. Declining Balance
The major difference between the service life of an asset and its physical life it that
A. Physical life is always longer than service life
B. Physical life is the life of an asset without consideration of salvage value and service life requires the use of salvage.
C. Service life refers to the time an asset will be used by a company and physical life refers to how long the asset will last.
D. Service life refers to the length of time an asset is of use to its original owner, while physical life refers to how long the asset will be used by all owners.
C. Service life refers to the time an asset will be used by a company and physical life refers to how long the asset will last.
