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.

1. Which of the following is not used when computing depreciation expense?

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


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) 

2. Acquisition cost less accumulated depreciation of an asset is

a. book value
b. depreciable base
c. salvage value
d. depreciation expense


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.). 

3. A company that sells an asset for more than cost less accumulated depreciation will record

a. a revenue
b. an expense
c. a gain
d. a loss


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. 

4. Which method of depreciation does not consider residual value when determining depreciation expense?

a. straight-line method
b. double declining balance method
c. units of production method
d. all use residual value when determining depreciation expense


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. 

5. Which of the following could be recorded when selling an asset for more than book 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


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.

6. Which of the following methods is most appropriate to use when expensing the use of natural resources?

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


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. 

7. The account used to match the cost of using an intangible asset to revenues produced with the asset is

a. depreciation
b. amortization
c. depletion
d. straight-line


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.

8. Impairment

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


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.

9. The number of years used for the estimated useful life is the number of years

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


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.

10. Which depreciation method typically gives the highest depreciation expense in later years?

a. straight-line
b. double declining balance
c. sum of the years’ digits
d. none of the above


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. 

11. A company incurred $26,000 of salary expense developing a patent during the current year. The company paid $12,000 to a law firm and $3,300 in filing fees on November 1st of the current year. The patent has a legal life of 20 years and an expected life of 12 years before being obsolete by a better product.

Make the journal entry to record the expenses related to the patent for the current year and the next year.


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)
12. A company purchased a computer server for a cost of $8,000 at the beginning of the current year. The computer is expected to have a potential to be used for 5 years and be sold after 4 years for $1,200.

Compute depreciation expense all years using
A. Double declining balance
B. Sum of the years’ digits


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

13. A machine cost $48,000 and is expected to be used for 5 years. After 5 years the machine is expected to be sold for $12,000. Total units produced is expected to be 100,000, beginning with 20,000 in year 1 and increasing in increments of 5,000 for years 2 and 3 before producing the same amounts of units in years 4 and 5.

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


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)

14. A building with acquisition cost of $100,000 was sold for $200,000. The building had an estimated useful life of 10 years and has been used for the past 8 years. Depreciation was recorded using the straight-line method.

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


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