Operating Assets – Expense and Disposal
Easy Test
Easy Test
Click the “Check Your Answer” box below each problem to reveal the correct answer and explanation.
a. residual value
b. estimated years the asset will be used by the company
c. accumulated depreciation
d. the total amount of time the asset is estimated to be available to use
Answer
D. Depreciation expense is recorded over the time the asset is expected to be used by the company to produce revenues. The expense should not exceed the time used by the company, even if the asset can still be used (by someone else)
a. book value
b. depreciable base
c. salvage value
d. depreciation expense
Answer
A. This is called book value. It is the amount of the asset that has not yet been expensed. Depreciable base is cost less salvage value (b.). Salvage value is the amount you expect to receive when you sell the asset (c.).
a. a revenue
b. an expense
c. a gain
d. a loss
Answer
C. A gain occurs when more is received than is recorded on the books. Cost less accumulated depreciation (book value) is what is recorded in the company’s accounts. Selling an asset is a peripheral activity that is not part of day to day business. Revenue is not recorded when selling an asset because a good or service is not provided to the customer.
a. straight-line method
b. double declining balance method
c. units of production method
d. all use residual value when determining depreciation expense
Answer
D. The maximum amount of depreciation expense that can be recorded under all methods is cost less residual value (depreciable base). This also applies to double declining balance even though the annual expense calculation does not use residual value.
a. cash is recorded with a credit
b. a loss is recorded with a credit
c. an expense is recorded with a debit
d. accumulated depreciation will be reduced with a debit
Answer
D. The entry to record the sale of an asset is to increase cash for the amount received (debit), decrease the asset for historical cost (credit), decrease accumulated depreciation for the cumulative amount associated with the asset through the date of sale (debit) and plug the entry to balance with a gain (credit) or loss (debit). Accumulated depreciation is a contra asset account and is decreased with a debit.
a. straight-line method
b. double declining balance method
c. units of production method
d. the method that gives the lowest net income to be conservative
Answer
C. The most appropriate method is the method that best matches the expense with the revenues generated from the asset. Revenues from natural resources will vary. Units of production records the expense based on the production. This method best matches the expense to the revenue.
a. depreciation
b. amortization
c. depletion
d. straight-line
Answer
B. Amortization expense is used to record the cost of using an intangible asset. This works just like depreciation expense. It is acceptable to reduce the asset or record accumulated amortization when recording amortization expense. Straight-line is the method that is most commonly used to determine the annual expense.
a. is only determined for intangible assets
b. means permanent loss in value related to a long-term asset
c. is tested for on a monthly basis
d. all of the above
Answer
B. Impairment is the permanent loss in value of a long-term operating asset. Both tangible and intangible long-term assets must be tested for impairment. A company is required to test for impairment on an annual basis or when there is a change in business conditions.
a. the asset is can be used if the company maximizes the useful life
b. the asset is expected to be used to generate expenses
c. the asset is expected to be used to generate revenues
d. the asset can be used with minor maintenance
Answer
C. The useful life that should be used to estimate an annual depreciation expense is the number of years the company expects to use the asset to generate revenues.
a. straight-line
b. double declining balance
c. sum of the years’ digits
d. none of the above
Answer
A. Straight line gives an equal amount each year. Double declining balance and sum of the years digits gives higher expense in the beginning years and lower expense in the later years.
Make the journal entry to record the expenses related to the patent for the current year and the next year.
Answer
The useful life is the amount of years the company expects to benefit from the patent, 12 years. Always use the useful life (time of benefit) and not the legal life unless the time of benefit is longer than the legal life
Salary expense is paid internally and is expensed. Outside law firm fees and filing fees are paid outside the company and are capitalized as an asset.
Total Cost / useful life = annual expense x part of year used for benefit
15,300 / 12 years = $1,275 per year x 2/12 = $212.50 year 1
Current Year
| Salary Expense $26,000 Cash $26,000 |
Current Year
| Amortization Expense $212.50 Accumulated Amortization $212.50 (or patent) |
Next Year
| Amortization Expense $1,275 Accumulated Amortization $1,275 (or patent) |
Compute depreciation expense all years using
A. Double declining balance
B. Sum of the years’ digits
Answer
12. A. Double Declining Balance:
100% / 4 = 25% x 2 = 50% x Book Value
Useful life is the years it is expected to be used
The depreciable base is cost – residual value = maximum total expense
8,000 – 1,200 = 6,800
Year 1
50% x 8,000 = 4,000 expense
(cost 8,000 – A/D 0 = 8,000 BV)
Year 2
50% x 4,000 = 2,000 expense
(cost 8,000 – A/D 4,000 = 4,000 BV)
Year 3
50% x 2,000 = 1,000 not used
(cost 8,000 – A/D 6,000 = 2,000 BV)
1,000 would give a total depreciation expense of 7,000, which is greater than the depreciable base of 6,800.
The year 3 expense can only be 800 to not exceed the maximum expense of 6,800
Year 3 depreciation expense is 800, not 1,000
Year 4 = 0 expense
No more net cost left to depreciate.
0 expense later happens often with short lives using double declining balance.
12. B. Sum of years digits:
4 Year life = 1 + 2 + 3 + 4 = 10 total sum of the years
Start with the highest year / 10 and reduce it by one each year.
| Year 1 = 8,000 – 1,200 = 6,800 x 4/10 = 2,720 expense for year 1
Year 2 = 8,000 – 1,200 = 6,800 x 3/10 = 2,040 expense for year 2 Year 3 = 8,000 – 1,200 = 6,800 x 2/10 = 1,360 expense for year 3 Year 4 = 8,000 – 1,200 = 6,800 x 1/10 = 680 expense for year 4 Total expense over 4 years 6,800 = depreciable base |
A. Compute the depreciable base
B. Compute depreciation expense for the first 3 years using the straight-line method
C. Compute depreciation expense for the first 3 years using the double declining balance method.
D. Compute depreciation expense for years 2 and 3 using the units of production method.
E. Which method gives a higher net income for year 2.
F. What is the book value of the machine at the end of year 2 using the straight-line method of depreciation
Answer
13.A.
Depreciable base = Cost – residual value
$48,000 – 12,000 = $36,000
13. B. Cost – Residual Value
Useful Life
$48,000 – $12,000 = $7,200 each year
5 years
Straight-line is the same for all years
$7,200 for each of the first 3 years
13. C. Double declining balance
100% / Useful Life x 2 x Book Value
100% / 5 = 20% x 2 = 40% x (48,000 – 0) = $19,200 depreciation expense year 1
100% / 5 = 20% x 2 = 40% x (48,000 – 19,200) = $11,520 deprec. expense year 2
100% / 5 = 20% x 2 = 40% x (48,000 – 19,200 – 11,520) = $6,912 expense year 3
Notice: the 40% is the same for all years
Book value is = cost less all prior years’ depreciation expense
Depreciation expense is for one year only and is not cumulative
Accumulated depreciation is the total of all prior years depreciation expense and is cumulative
13. D. Units of Production:
Total cost – Residual Value / Total units = cost per unit x units produced
$48,000 – $12,000 / 100,000 = $0.36 per unit produced
Year 2 = 25,000 units produced x $0.36 = $9,000 depreciation expense
Year 3 = 30,000 units produced x $0.36 = $10,800 depreciation expense
13.E. The method that will give the higher net income for year 2 is the one that gives the lowest expense in year 2. Straight-line gives the lowest depreciation expense in year 2.
13.F. Book value is Cost – Accumulated depreciation:
$48,000 – $14,400 = $33,600
Accumulated depreciation is the total depreciation expense for all years at the end of the period (7,200 yr. 1 + 7,200 yr. 2)
A. Determine the book value of the building at the time of sale.
B. Determine the gain or loss on sale of the building
C. Record the sale of the building
Answer
Book value is Cost less “Accumulated Depreciation”. To determine this, you must first determine depreciation expense for each year:
$100,000 – $0 = $10,000 per year
10 years
After 8 years is $80,000 accumulated depreciation
Book Value is $100,000 – $80,000 = $20,000
A gain occurs when the amount of cash received is higher than book value.
A loss occurs when the amount of cash received is lower than book value.
| Cash received $200,000 Book value ($20,000) Gain on sale $180,000 |
The sale would be recorded:
| Cash 200,000 Accumulated Depreciation 80,000 Building 100,000 Gain on sale of building 180,000 |
Cash – increases – debit
Accumulated depreciation – decreases – debit
Building – decreases – credit – at historical cost
Gain = difference in cash received and book value