Operating Assets – Expense and Disposal
Medium Test
Medium Test
Click the “Check Your Answer” box below each problem to reveal the correct answer and explanation.
a. it is an approximation of appraised value
b. it is an approximation of current fair market value
c. it is the amount that will be depreciation expense in the future
d. it is the allocation of an asset’s cost over time used
Answer
C. Book value is cost less accumulated depreciation. It is the amount that is not yet expensed. It is not a reflection of fair market value (which is the same thing as appraised value). (d.) is depreciation expense.
a. the depreciable base and the original cost
b. the original cost and accumulated depreciation
c. the book value and the cash received
d. the cash received and the salvage value
Answer
C. The gain or loss will always be equal to the net amount recorded for the asset, which is the original cost less accumulated depreciation, and the cash received. When you get more than the asset net amount on the books there is a gain. When you get less than the net asset amount on the books there is a loss.
a. a cost of using the asset must be recorded for all time the asset is used
b. the residual value will not be correct if the partial expense is not recorded
c. the sale will result in a gain if the adjustment for partial year is not made
d. none of the above
Answer
A. An expense must be recorded for the entire time a capitalized asset is used (unless there is indefinite life). Not recording partial year depreciation expense when the asset is used for part of the year does not give proper matching.
a. a loss of $5,000
b. a gain of $1,400
c. a loss of $1,400
d. a gain of $6,400
Answer
C. The book value (cost less accumulated depreciation) is $6,400. This is the net amount currently recorded in the company’s accounts. The company received less than book value, which is a loss. The entry would be recorded as:
| Loss on sale of asset 1,400 Cash 5,000 Accumulated Depreciation 3,600 Asset name 10,000 |
a. it exactly matches revenues produced during the period with the expense
b. assets are always used for an equal amount of time every day
c. it is easy to calculate
d. assets always produce more revenue in the beginning years of use
Answer
C. Straight-line is easy to calculate. It is also assumed that many assets will produce revenues equally over time. All other choices are incorrect statements. Depreciation is always an estimate (a.). When (d) is true, it is appropriate to use the double declining method of depreciation.
a. the fair market value of the land can be determined exactly and the value of goodwill must be estimated
b. the land has a definite life and goodwill has an indefinite life
c. land never decreases in value and goodwill always decreases in value
d. none of the above
Answer
D. The fair market value of goodwill is derived from an operating unit. An operating unit is valued based on the future cash flows generated by a group of assets.
a. record the cost of using the asset over the time revenues are produced with the asset
b. show that the fair market value of assets decreases over time
c. show the replacement cost of the asset
d. report the asset at book value which is the same as fair market value
Answer
A. Depreciation is recorded to match the cost (expense) of using the asset to revenues produced, ONLY. It is not done to approximate fair market value in any way. There are too many factors that determine fair market value for book value to reflect fair market value. It is an indication that the asset is being used and must be replaced at some point (some books call this wear and tear).
a. straight-line method
b. double declining balance method
c. units of production method
d. all can be projected given the ease of the calculation
Answer
C. The depreciation expense recorded using units of production will vary with production in future years which is often difficult to project. All other methods listed can be projected once an estimate of life and residual value is made.
a. patent
b. goodwill
c. leasehold improvements
d. either b. or c.
Answer
B. Goodwill most often has indefinite life. Patents are granted for a definite length of time and leasehold improvements last for the life of the lease. Intangible assets with an indefinite life are not expensed over the time of benefit, they are tested for impairment.
a. straight-line
b. double declining balance
c. sum of the years’ digits
d. time based
Answer
Double declining balance will give a depreciation expense of
100%/5 = 20% x 2 = 40% x BV of 100,000 = 40,000
Sum of the years’ digits will give a depreciation expense of 5/15 x 100,000 = 33,333
Time based is not a common method of depreciation
Compute depreciation expense for year 1 and year 2 using
A. Straight-line
B. Double Declining Balance
C. Sum of the Years Digits
Answer
The total cost of the asset is all costs incurred to get the machine ready for use.
Total cost is 21,200 + 400 + 2,300 = 23,900
Annual maintenance is expensed as it is incurred.
The useful life is the time the company expects to use the machine.
The expense must be recorded over the time the machine is expected to produce revenues.
11.A
| 23,900 – 5,000 = 4,725 annual expense 4 years |
Year 1 = $4,725 x 10/12 = $3,938
expense March to December
Year 2 = $4,725
a full year of expense
11.B
100 % / 4 years = 25% x 2 = 50% x 23,900 = $11,950 annual expense
Year 1
$11,950 x 10/12 = $9,958 expense March to December
Year 2
$23,900 – $9,958 = $13,942 BV x 50% = $6,971
11.C.
1 + 2+ 3+ 4 = 10 total years
Year 1
4/10 x (23,900 – 5,000) = 7,560 x 10/12 = $6,300 expense
Year 2
3/10 x (23,900 – 5,000) = $5,670 expense for the full year
Year 3 would be 2/10 x (23,900 – 5,000)
Year 4 would be 1/10 x (23,900 – 5,000)
A. Compute depreciation expense for the 4th year
B. What is the book value of the asset at the end of the 4th year?
Answer
First: Compute depreciation expense for the first 3 years and accumulated depreciation at the end of year 3.
| $100,000 – $15,000 = $12,143 each year 7 years |
x 3 years = $36,429 accumulated depreciation at the end of year 3
The formula for computing depreciation expense in future years after you have added costs or revised an estimated life is:
Current book value – new residual value
New life from this point forward
12.A.
| Cost 100,000 – A/D (36,429) = Book Value 63,571 |
| $63,571 – 10,000 = $8,929 each year for the next 6 years 6 years |
The 4th year depreciation expense is $8,929
12.B. Book value at end of 4th year is:
| Cost 100,000 – Accumulated Depreciation (45,358) = Book Value 54,642 |
Accumulated depreciation is 36,429 for first three years + 8,929 for the fourth year.
A. Compute depreciation expense for the first 2 years using the straight-line method
B. Compute depreciation expense for the first 2 years using the double declining balance method.
C. Compute depreciation expense for the first 2 years using the sum of the years’ digits method.
D. The machine is sold on April 1st of the third year for $65,000. Record the entry to record the sale given the company uses the double declining method of depreciation.
Answer
13.A.
94,000 – 12,000
6 years
= $13,667 annual expense
Used 10 months since March 1st:
$13,667 x 10/12 = $11,389 for year 1
(only expense for the part of the year used)
Year 2 is a full year: $13,667
13.B.
100% / 6 = 16.67% x 2 = 33.33% x (94,000 – 0) = $31,330
then 33% x (94,000 – 0) = $31,330
Year 1
Used since March 1st, 10 months
$31,330 x 10/12 = $26,108 for year one
Year 2
same 33.33% x (94,000 – 26,108) = $22,628
13.C
1 + 2 + 3 + 4 + 5 + 6 = 21 total years
The first year begins with the highest year divided by total years:
Then reduce it by one each year.
Year 1
94,000 – 12,000 = 82,000
x 6/21 = 23,429 x 10/12 (10 months) = 19,524
Year 2
94,000 – 12,000 = 82,000
x 5/21 = 19,524
13.D.
First compute depreciation expense for the 3rd year for the 3 months the
asset was used before the sale:
33.33% x (94,000 – 26,108 – 22,628) = 15,086 BV x 3/12 = 3,772
| Cash 65,000 Accumulated depreciation 52,508 Machine 94,000 Gain on sale 23,508 |
Accumulated depreciation is the total depreciation expense recorded for all years and the partial period up to the date of the sale (26,108 + 22,628 + 3,772 = 52,508)
Machine is decreased for the total cost
Gain is the difference in cash received and the book value at the time or sale or
the amount it takes to make the journal entry balance
| Cash received 65,000 – Book Value (41,492) = Gain 23,508 |
Book value = 94,000 cost – 52,508 accumulated depreciation
14. The company has the following information related to a reporting unit.
The company is testing for impairment and has determined the following:
| Fair market value of reporting unit | $720,000 |
| Undiscounted future cash flows | $810,000 |
| Appraised fair market value of operating unit assets | $750,000 |
| Implied fair market value of Goodwill | $900,000 |
| Book value of reporting unit | $850,000 |
Make the entry to record goodwill impairment.
Answer
| Book Value of reporting unit | $850,000 |
| Fair Market Value of reporting unit | $720,000 |
| Impairment – Yes | $130,000 |
BV is higher than FMV
| Loss on Impairment 130,000 Goodwill 130,000 |