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Flashcards in Section 2 - Depreciation under GAAP Deck (51):
1

What is a fixed asset?

An asset that has a useful life of more than one year or accounting period.

2

Under the straight-line method, an asset is depreciated by

Under the straight-line method, an asset is depreciated by finding the depreciation expense or annual depreciation rate.

 

        Depreciable Base**          = Annual depreciation expense

Estimated Useful life in Years

OR

 

                    1.00                       = Annual depreciation rate** (Rate x Depreciable Base)

Estimated Useful life in Years

3

The declining balance is multiple of the straight line rate. The most commonly used percentages are:

The declining balance method can be used as either 125%, 150% or 200% or the straight-line depreciation rate.

 

The 200% rate, also referred to as the "double declining balance" is used most often.

 

4

Which of the four is not one of the depreciation methods?

 

  • Straight-line
  • Residual Value
  • Declining Balance 
  • Sum of the year's digit

Residual value

 

Residual value is an estimated dollar value determined by management. It represents the amount they expect to recover for an asset at the end of its useful life

5

Under GAAP rules, depreciation cannot begin until 

Under GAAP, depreciation cannot begin until the asset has been acquired and placed in service.

6

When using the straight-line method, an even amount of depreciation expense is taken each year of the assets useful life. 

 

True or False

True.

 

Under the straight-line method of depreciation, an even amount of depreciation is recognized each year.

7

The balance in the Accumulated Depreciation account represents:

Total depreciation expense recognized since the asset was placed in service.

8

The depreciation rate is multiplied by the book value under which depreciation method?

Declining balance method of depreciation

9

What happens to the book value of an asset when depreciation is recognized?

Anytime depreciation is recorded, the Accumulated Depreciation account increases and the associated asset's book value decreases.

10

Paved parking areas, driveways, fences, and outdoor lighting are examples of land improvements.

 

True or False

True

11

Under the Units of Production method, assets are depreciated each year based on:

The numbers of units produced, such as total hours used, total miles driven, total copies made or some other measure of production.

 

Under the units of production method, the depreciation is subject to fluctuation as an asset is depreciated each year according to the unit of measure (hours, miles, copies)

12

Elijah CO purchased equipment that incurred the following breakdown of costs:

  • Invoice price : $21,000
  • Sales Tax:              600
  • Freight in:              420
  • Installation:            155

 

Thus when the purchase of equipment is recorded in the books, the journal entry is as follows:

 

Equipment (DR.) $22,175  (increase to Equipment account balance)

Cash (CR.) $22,175        (decrease to Cash account balance)

13

The Depreciation Expense account appears on which Financial Statement?

Income Statement

14

The balance in the Depreciation Expense account represents:

Total cost of the asset expensed against revenue for the current period.

 

(The portion of the asset that has been expensed recognizes the portion of the asset that has lost value)
 

15

What are land improvements?

land improvements are enhancements to a plot of land to make it more usable and are recorded separately from land because they have a limited life; therefore they are depreciated. 

16

The portion of an asset used for manufacturing purposes is depreciated and recorded in which account

Inventory - Work in Process Overhead

17

The general entry to record Depreciation Expense is:

Depreciation Expense (DR.)               (increase to Expense account balance)

                   Accumulated Depreciation (CR.)               (increase to Accum Dep. account balance)

 

Please note, since Accumulated Depreciation is an example of a contra-asset account, an increase to this account represents a decrease to the associated asset account.

18

How should a company depreciate assets that were acquired in a group purchase?

Sometimes when companies make purchases, they pay a single price for a group of assets, and since the invoice isn't itemized, the company is not able to differentiate how much of the cost, freight, installation, and other costs are attributable to each asset. Due to the fact that one asset may have a life of three years, another five years and some of the assets in the group may not be depreciable at all; the company must allocate a separate cost for each asset.

The price of each asset is a group purchase is computed as follows:

 

Step 1: Specific asset fair market value (FMV)  = Rate

                 Total FMV of all assets acquired

 

Step 2: Rate x total acquisition cost = specific asset acquisition cost

 

19

The portion of the asset used up, worn out each year is recognized as ________.

Depreciation expense. 

20

How is the useful life determined?

The useful life is an estimated number of years the company expects the asset to last or the amount of production it expects from the asset measured in hours, miles, units produced or any other measurable standard.

 

Under GAAP depreciation rules, the useful life is determined based on an estimate made by management as compared to the IRS rules which uses tables with a specific recovery period (useful life) for different classes of assets.

21

Under GAAP,  fixed assets can be depreciated using one of the four basic methods.

 

The four basic methods are:

  1. The straight-line method
  2. The Units of Production (UOP) or Units of Output method
  3. Declining Balance - Accelerated method
  4. Sum of the years digits method - Accelerated method

22

When an asset is purchased, the value recorded in the ledger includes any costs incurred to

The cost of an asset is not just the invoice price. It also includes any costs incurred to Acquire, Transport, or Prepare the asset for its intended use such as sales tax, commissions, title fees, transportation, and installation.

23

Depreciation for machines, buildings, or other fixed assets used in the manufacturing process of products is recorded in 

Inventory - Work in Process Overhead

 

Depreciation of assets used for manufacturing purposes is recorded in the Inventory - Work in Process Overhead account.

24

Perry CO purchased equipment that incurred the following breakdown of costs:

  • Invoice price : $11,000
  • Sales Tax:              600
  • Freight in:              200
  • Installation:            465

 

Thus when the purchase of equipment is recorded in the books, the journal entry is as follows:

Equipment (DR.) $12,265  (increase to Equipment account balance)

                    Cash (CR.) $12,265        (decrease to Cash account balance)

25

The _______ method of depreciation takes more depreciation in the earlier years of an asset’s useful life and the yearly depreciation rate is a multiple of either 125%, 150% or 200% of the straight-line depreciation rate.

Declining Balance

26

Is the residual value included in the depreciation cost for an asset?

 

 

No.

 

Since the amount is expected to be recaptured by the company, the residual (salvage) value cannot be depreciated. 

27

The Accumulated Depreciation account appears on which Financial Statement?

Balance Sheet

 

As we know, assets appear on the Balance Sheet; and the contra-asset account Accumulated Depreciation, appears directly beneath the related asset and represents a total of all depreciation expense recognized since the asset was placed in service. 

28

An asset can never be depreciated beyond its depreciable base.
 

True or False

True.

 

The depreciable base represents the maximum amount of depreciation that can be taken for an asset.

29

Examples of land improvements include

Examples of land improvements include paved parking areas, driveways, fences, and outdoor lighting. 

30

What is the depreciable base?

The depreciable base is the cost minus the residual value.

 

 The depreciable base represents the maximum amount of depreciation that can be taken for an asset.

 

Example. Company A purchased equipment for $13,000 with a residual value of $2,000 and an estimated useful life of 4 years.

What is the assets depreciable base?

The depreciable base in this case is $11,000 ($13,000-2,000)

31

Land is never depreciated.

 

True or False

True.

32

When assets are used for both manufacturing and nonmanufacturing purposes, depreciation is allocated proportionately between which _________ and ________ _________.

Inventory - Work in Process overhead (Manufacturing purposes)

Depreciation Expense (Non-manufacturing purposes)

33

The declining balance is an _______ method of depreciation

Accelerated

34

Which method of depreciation takes an even amount of depreciation expense every year?

The straight-line method

 

35

What is the residual value?

The residual value is an estimated dollar amount made by management of how much they expect to recover for an asset at the end of its useful life whether it is disposed of by means of selling or trading. 

36

The _______ method of depreciation is based on a standard unit of measure other than years.

Units of Production

37

Book value (net book value) does not represent an assets fair market value, instead, it represents the undepreciated cost of the asset as it appears on the company’s books and balance sheet.

 

True or False

True.

38

YannaCo’s purchase of equipment, printer, computer, and copier has an acquisition cost of $7,000. The invoice does not differentiate between the price of each item. Using the formula for group purchases, what is the cost of each asset?

 

Asset FMV

Equipment $3,000

Printer             500

Computer    3,500

Copier          1,500

Forumula

Step 1: Specific asset fair market value (FMV)  = Rate

                 Total FMV of all assets acquired

Step 2: Rate x total acquisition cost = specific asset acquisition cost

 

Asset Cost

  • Equipment     $2,471
  • Printer                  412
  • Computer        2,882
  • Copier              1,235

 

 

39

What does this formula represent?

 

Acquisition cost - residual value = ______

Depreciable base.

40

An asset is considered fully depreciated when

An asset is considered fully depreciated when the book value equals the residual (salvage) value, or, if the asset has no residual value, it is considered fully depreciated when the book value is equal to zero.
 

41

Depreciation for each asset is usually calculated separately and is based on ____ factors

4 factors

  1. Asset cost
  2. Asset estimated useful life
  3. Asset estimated residual (salvage) value
  4. Method of depreciation chosen

42

When depreciation expense is recorded at the end of the year, quarter, month or period, the same accounts are debited and credited in the adjusting journal entry regardless of which method is used.

 

True or False

True.

 

The general entry for the recognition of depreciation expense uses the same accounts, regardless of which method is used; the only difference is the amount recognized as an expense.

 

The general entry to record depreciation expense is:

 

Depreciation Expense (DR.)

                    Accumulated Depreciation (CR.)

43

A machine’s life may be measured in

Years of expected use or the expected units of production.

 

Assets are depreciated over the estimated the number of years the company expects the asset to last or the amount of production it anticipates from the asset measured in hours, miles, units produced or any other measurable standard.

44

Under the units of production method, the estimated number of years an asset is expected to last is irrelevant.

 

True or False

True.

Under the units of production method, depreciation is based on units of output as opposed to years. For example, a machine can be depreciated based on units produced, or total hours used as opposed to years. Likewise, instead of depreciating a car based on the number of years, it can be depreciated according to total miles driven.

45

What are the four factors needed to determine depreciation?

  1. Asset cost
  2. Asset estimated useful life
  3. Asset estimated residual (salvage) value
  4. Method of depreciation chosen

46

What is the estimated useful life?

The estimated useful life is the number of years the company expects the asset to last or the amount of production it expects from the asset measured in hours, miles, units produced or any other measurable standard. 

47

When an asset has a useful life of more than one year or will last in the business for more than one accounting period, it is considered a

Fixed Asset.

48

Regardless of the depreciation method selected, or how much annual depreciation is taken, total depreciation over the life of the asset cannot exceed the depreciable base.

 

True or False

True.

 

Using the different methods yields a different amount of depreciation recognized each year, however, regardless of which depreciation method is selected, the maximum amount of depreciation that can be taken is equal to the depreciable base. The book value of the asset at the end of its useful life must be equal to the residual (salvage) value. If the asset has no residual value, then it is fully depreciated to zero.

49

What is the formula to determine the asset cost in a group purchase?

Step 1: Specific asset fair market value (FMV)  = Rate

                 Total FMV of all assets acquired

 

Step 2: Rate x total acquisition cost = specific asset acquisition cost

50

The cost of an asset is often referred to as

Historical cost, Original cost or Acquisition cost

51

Depreciation for machines, buildings or other fixed assets used by a manufacturing company for non-manufacturing activities such as office furniture is recorded in

Depreciation Expense

 

Depreciation of assets used for nonmanufacturing purposes is recorded in the Depreciation Expense account.