Operating Assets – Expense and Disposal

Self Test

Self Test

Click the “Check Your Answer” box below each problem to reveal the correct answer and explanation.

1. Residual value, sometimes called salvage value, is

a. the current fair market value of the asset
b. the fair market value of the asset when purchased
c. the expected value of the equipment when the company is finished using it
d. subsequent amounts spent to use the asset

Answer

C. Residual value is the amount the asset is expected to be sold for (fair market value) when the company is done using the asset. (b.) is historical cost. 

2. Depreciable cost (depreciable base) is the

a. net cost of the asset that is expensed over the useful life
b. cost of the asset less amounts currently depreciated
c. cost of the asset plus residual value
d. cost that will not be expensed over the life of the asset

Answer

A. The depreciable cost is the net amount that is expensed over the useful life. It is computed as historical cost less residual value. The original cost less the amount you expect to get back when you sell it is the maximum you can depreciate.

3. The useful life of an asset is

a. always the amount of years the asset is expected to last
b. always the amount of years the company intends to use the asset
c. not an estimate, the company knows exactly how long the asset will be used
d. none of the above

Answer

B. Estimated useful life is always the estimated amount of years the asset is expected to be used by the company to produce revenues. The asset may last longer than the company uses it. It is an estimate that is made at the time the asset is purchased.

4. Depreciation expense for the year using the straight-line method is computed by:

a. cost less accumulated depreciation divided by useful life
b. cost less residual value divided by useful life
c. cost plus residual value divided by the life the asset is expected to last
d. cost less residual value multiplied by useful life

Answer

B. Annual depreciation expense using the straight-line method is computed as historical cost less residual value divided by the useful life. 

5. Depreciation expense for the year using the double declining balance method is computed by:

a. 100% multiplied by the useful life multiplied by book value
b. 100 % divided by the useful life multiplied by historical cost
c. 100% divided by useful life multiplied by 2 multiplied by book value
d. cost divided by useful life multiplied by 2

Answer

C. The formula for computing the annual expense using double declining balance is 100% divided by useful life = % x 2 = % x book value. Book value is cost less accumulated depreciation. Book value is lower each year since accumulated depreciation is higher each year.

6. Book value means

a. Historical cost divided by useful life
b. Historical cost less accumulated depreciation
c. Historical cost plus accumulated depreciation
d. Fair market value less historical cost

Answer

B. Book value is historical cost less accumulated depreciation. Book value is not an estimate of fair market value. Book value is the amount that will be expensed in the future as the asset is used. It is the cost of the asset not yet expensed.

7. The account that is always used when depreciation expense is incurred is

a. accumulated depreciation
b. book value
c. residual value
d. the asset account that is depreciated

Answer

A. Accumulated depreciation is always credited when depreciation expense is incurred (debit). The asset remains at historical cost and is not credited. Accumulated depreciation is a contra asset account that serves to reduce the asset’s book value. 

8. Intangible assets are almost always expensed over the useful life of the asset using

a. the straight-line method
b. the double declining balance method
c. the equally declining method
d. most company’s use a different method and there is not one commonly used

Answer

A. Intangible assets are considered to give equal benefit over future years and the straight-line method is typically used to match the expense with the revenues produced.

9. The expense that is associated with natural resources is called

a. depreciation
b. amortization
c. depletion
d. resource expense

Answer

C. Depletion expense is incurred when a natural asset is used. Depreciation is the expense incurred from using property, plant, & equipment. Amortization is the expense incurred from using an intangible asset. Resource expense is not an account.

10. The method that is most commonly used to record depletion expense is

a. the straight-line method
b. the double declining balance method
c. the equally declining method
d. the units of production method

Answer

D. Units of production is the most common method used to represent the cost of natural resources used. As more is produced and sold, more expense is recorded. This gives better matching.

11. When a company changes the estimated useful life of an asset

a. the annual depreciation expense will not change
b. prior year’s depreciation expense must be recomputed
c. future year’s depreciation expense will be different than the prior year
d. the cost of the asset increases

Answer

C. When the estimated life is changed, the amount that must be expensed each year to expense the cost over the total useful life also changes. You do not go back and recomputed prior year’s depreciation, you change the amount for each future year. The cost will only change when a subsequent expenditure is made. 

12. When a long-term asset is sold, the asset is credited (decreased) for historical cost and

a. accumulated depreciation is credited (increase)
b. accumulated depreciation is debited (decrease)
c. depreciation expense is credited (decrease)
d. cash is credited (decrease)

Answer

B. When a long-term asset is sold, the asset is decreased (credit) at historical cost, accumulated depreciation associated with the asset is removed (debit), cash is debited for the amount received and the difference is recorded as a realized gain (credit) or a loss (debit).

13. A gain on the sale of an asset will be recorded when

a. the asset is sold for less than book value
b. the asset is sold for more than book value
c. the asset is sold for more than fair market value
d. either b. or c.

Answer

B. A gain occurs when the cash received is more than the net amount given up. The net amount given up is the historical cost less accumulated depreciation, which is book value. Selling for more than fair market value can still produce a loss if book value is more than received (c).

14. The formula for computing depreciation expense using the sum of the years digits is

a. add the useful years and multiply by the depreciable cost
b. multiply the number of years the asset is expected to be used by the depreciable base and divide by total useful years
c. multiply the number of years the asset is expected to be used by the historical cost and divide by total useful years
d. add the useful years and multiply by book value

Answer
B. Sum of the years digits multiplies a fraction of the total life by the depreciable base. The fraction of the total life is useful life used from this point on including the current year divided by the total of the sum of all years used.
15. An impairment loss on assets with indefinite life other than goodwill occurs when

a. fair market value is greater than book value
b. book value is less than fair market value
c. fair market value is less than book value
d. fair market value is more than historical cost

Answer
C. An impairment loss occurs on assets with indefinite life other than goodwill when book value is higher than fair market value. The asset has less future value than the amount recorded on the books.