CHAPTER 11: DEPRECIATION, DEPLETION, IMPAIRMENT AND
DISPOSAL
1. The service life of an asset can only be measured in units of activity or output.
a.
True
b.
False
False
1
Easy
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2. GAAP allows companies to choose between time-based, activity, group, or composite cost allocation methods, but once
the method is chosen it must be applied consistently over time. This ensures that financial information is comparable.
a.
True
b.
False
True
1
Easy
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3. The depreciation base is computed as follows:
Estimated Residual Value = Depreciation Base – Asset Cost
a.
True
b.
False
True
1
Easy
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4. The use of accelerated methods is appropriate when the asset will be used more in the later periods versus earlier
periods.
a.
True
b.
False
False
1
Easy
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5. The purpose of depreciation is to allocate the asset’s cost systematically and rationally over the life of the asset to
ensure that the company has adequate capital for future replacement.
a.
True
b.
False
False
1
Easy
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6. GAAP does not require companies to disclose the balances of depreciable assets by nature or function but by major
classes.
a.
True
b.
False
False
1
Easy
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7. Since the purpose of depreciation is to match the total cost of the asset with the benefits to be derived from the asset,
the costs of repairs and maintenance associated with the asset should be considered when choosing a depreciation
method.
a.
True
b.
False
True
1
Easy
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8. Group depreciation is applied to heterogeneous assets.
a.
True
b.
False
False
1
Easy
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9. Composite depreciation is applied to homogeneous assets which have similar service lives and residual values.
a.
True
b.
False
False
1
Easy
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10. GAAP requires the general description of the methods used in the computation of depreciation regarding major
classes of assets to be disclosed in the notes of the financial statements.
a.
True
b.
False
True
1
Easy
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11. Assets sold on or before the 15th are not considered owned for the month based on the nearest whole month
convention.
a.
True
b.
False
True
1
Easy
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12. The nearest whole year depreciation convention considers assets acquired during the last 6 months of the year to have
been owned for the entire year.
a.
True
b.
False
False
1
Easy
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13. A requirement of GAAP is that companies should review their assets to ensure they are not impaired, especially when
a change dictates the book value may not be recoverable.
a.
True
b.
False
True
1
Easy
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14. A company must include impairment disclosures in the year of an impairment write-down and the subsequent three
years following to ensure comparability in reporting.
a.
True
b.
False
False
1
Easy
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15. When a company disposes of an asset by abandonment the resulting gain or loss equals the fair market value of the
asset at the time of abandonment.
a.
True
b.
False
False
1
Easy
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16. IFRS and GAAP use similar approaches when it comes to gains or losses on disposals of assets. The only difference is
GAAP requires the use of the reevaluation method.
a.
True
b.
False
False
1
Easy
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17. Acquisition costs, exploration costs, development costs, and reclamation costs can all be added to the cost of obtaining
the rights to natural resources.
a.
True
b.
False
True
1
Easy
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18. Development costs incurred for purchasing equipment can be included as part of the cost of a natural resource.
a.
True
b.
False
False
1
Easy
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19. Under the MACRS principles, the residual value of the asset is not included in the computation of depreciation.
a.
True
b.
False
True
1
Easy
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20. Under the MACRS principles, the tax life of an asset is usually shorter than the asset’s economic life.
a.
True
b.
False
True
1
Easy
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21. Which one of the following statements is not true?
a.
Depreciation is the process of allocating the purchase price of an asset minus its residual value to expense for
each period benefited by the asset.
b.
The cost of an asset includes all acquisition costs necessary to obtain the benefits to be derived from the asset.
c.
The service life of an asset is the measure of the number of years of service expected from the asset before its
disposal.
d.
The residual value of an asset is the difference between the expected book value of the asset at the end of its
service and the costs of disposal.
d
1
Easy
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22. The service life of an asset may be measured by all of the following except
a.
units of output
b.
units of activity
c.
units of input
d.
units of time
c
1
Easy
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23. What type of cost allocation must a company use?
a.
systematic
b.
rational
c.
systematic and rational
d.
systematic, rational, and reliable
c
1
Easy
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24. Which one of the following is not a factor that limits the service life of an asset?
a.
operational use
b.
replacement value
c.
deterioration as a function of time
d.
Obsolescence
b
1
Easy
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25. The factors involved in computing periodic depreciation charges for an asset do not include the
a.
method of cost allocation
b.
current value of the asset
c.
service life
d.
residual value of the asset
b
1
Easy
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26. Which of the following is not a factor in computing depreciation for a period?
a.
method of cost allocation
b.
service life
c.
present value
d.
residual value
c
1
Easy
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27. How can service life be measured?
a.
units of time
b.
units of activity
c.
units of output
d.
All of the above answer choices can be used to measure service life.
d
1
Easy
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28. What determines residual value?
a.
company policy
b.
GAAP for each class of asset
c.
IFRS
d.
FASB
a
1
Easy
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29. Depreciation of an asset based on the number of hours of usage is a(n)
a.
time-based method
b.
accelerated method
c.
replacement method
d.
activity-based method
d
1
Easy
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30. Which depreciation method ignores residual value when computing the depreciable base of an asset?
a.
sum-of-the-years’-digits method
b.
double-declining-balance method
c.
composite method
d.
group method
b
1
Easy
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Chapter 11: Depreciation, Depletion, Impairment, and Disposal
31. Which of the following depreciation methods should be used when the expected benefits to be received from an asset
will decline each period?
a.
straight-line method
b.
units-of-production method
c.
sum-of-the-years’-digits method
d.
compound-interest method
c
1
Easy
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32. Which depreciation method calculates annual depreciation expense based on the book value of the asset?
a.
double-declining-balance method
b.
sum-of-the-years’-digits method
c.
inventory systems method
d.
group method
a
1
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33. Many companies that use the declining-balance method of depreciation switch to the straight-line method at some
point in the life of a depreciable asset. When does that switch normally occur?
a.
never, since one method must be applied consistently throughout the life of an asset
b.
in the last quarter of the life of the asset
c.
when the depreciation cost under the accelerated method exceeds the depreciation cost under the straight-line
method
d.
midpoint in the life of the asset
d
1
Moderate
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Chapter 11: Depreciation, Depletion, Impairment, and Disposal
34. Which one of the following statements is true?
a.
The activity method of computing depreciation could result in zero depreciation expense in some periods of
time.
b.
If the activity method is in use, residual value should not be subtracted from cost to determine the depreciation
base.
c.
The activity method produces a constant total cost of depreciation each period.
d.
The activity method should be used when the service life of the asset is affected mostly by the passage of time.
a
1
Moderate
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Exhibit 11-1
On January 1, Year 1, Hills purchased equipment for $350,000. The equipment had an estimated useful life of ten years
and an estimated residual value of $50,000. Use the double-declining-balance method to answer the following question(s).
35. Refer to Exhibit 11-1. How much depreciation should Hills record on the asset in year 1?
a.
$35,000
b.
$30,600
c.
$60,000
d.
$70,000
d
1
Easy
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36. Refer to Exhibit 11-1. How much depreciation should Hills record on the asset in year 2?
a.
$16,000
b.
$24,000
c.
$56,000
d.
$48,000
c
1
Easy
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37. Refer to Exhibit 11-1. What is the net book value of this asset that Hills should report on the company’s balance sheet
at December 31, year 2?
a.
$142,600
b.
$224,000
c.
$192,000
d.
$102,400
b
1
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38. The Sahara Company purchased equipment on January 1, 2015, for $100,000. The equipment had an estimated
residual value of $10,000, an estimated useful life of five years, and estimated lifetime output of 18,000 units. In 2016, the
company produced 4,400 units and recorded depreciation expense of $22,000. What depreciation method did the company
use?
a.
straight-line method
b.
sum-of-the-years’-digits method
c.
double-declining-balance method
d.
units-of-output method
d
1
Moderate
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39. Devon Manufacturing Company purchased a new canning machine on July 1, 2015, for $190,000. The estimated
salvage value is $15,000. The company uses units-of-production depreciation and estimates the machine will produce
125,000 units during its useful life. In 2015, the company manufactured 5,000 units after acquiring the machine.
Depreciation expense for 2015 will be
a.
$7,600
b.
$6,500
c.
$7,000
d.
$14,000
c
1
Easy
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40. On January 1, 2016, Lefty, Inc. purchased a machine for $6,000. The estimated life and residual value were five years
and $150, respectively. The machine will produce approximately 80,000 units over its life. In 2016 and 2017, the
machine produced 10,000 and 15,000 units, respectively. In 2017, Lefty recorded $1,440 of depreciation expense. The
depreciation method in use was the
a.
activity method
b.
sum-of-the-years’-digits method
c.
double-declining-balance method
d.
straight-line method
c
1
Challenging
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41. The Chuck Company purchased a truck on January 1, 2016. The truck cost $106,000 and was expected to have a
residual value of $14,000 at the end of 2018. Chuck uses the 150%-declining-balance depreciation method. What
amount of depreciation should Chuck record on the truck in 2016?
a.
$18,400
b.
$31,800
c.
$27,600
d.
$21,200
b
1
Moderate
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42. The Antarctica Co. acquired a machine on January 1, 2016, at a cost of $60,000. The machine is expected to have a
ten-year life and a residual value of $5,000. The estimated lifetime output from the machine is expected to be 55,000
units. Under which of the following depreciation methods would the depreciation charge be the greatest in 2016 if
9,100 units were produced during the year?
a.
activity (units-of-output) method
b.
straight-line method
c.
sum-of-the-years’-digits method
d.
double-declining-balance method
d
1
Challenging
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43. Mark Industries uses the straight-line depreciation method. One asset had been purchased for $11,000. Annual
depreciation expense was $2,000 after considering residual value of $1,000. What was the estimated useful life of the
asset?
a.
5.50 years
b.
5.00 years
c.
10.00 years
d.
11.00 years
b
1
Challenging
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44. On January 1, 2016, Flo, Inc. purchased an asset for $48,000. It was estimated that the asset life was seven years, after
which it would have a residual value of $4,100. Assuming the use of the sum-of-the-years’-digits method, depreciation
expense for 2016 would be
a.
$12,804
b.
$10,975
c.
$12,000
d.
$5,487.50
b
1
Moderate
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45. On January 1, 2016, Pistachio purchased an asset that had an estimated residual value of $700 after an economic life
of four years. Pistachio used sum-of-the-years’-digits depreciation and recorded $1,560 of depreciation expense in
2018. What was the cost of the asset?
a.
$5,900
b.
$7,100
c.
$4,500
d.
$8,500
d
1
Challenging
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46. The Cardwell Company purchased a machine on January 2, 2016, at a cost of $1,200,000. The machine had an
estimated useful life of eight years and a residual value of $120,000. Cardwell computes depreciation by the sum-of-
the-years’-digits method. What amount, net of accumulated depreciation will appear on the company’s December 31,
2018, balance sheet for this machine?
a.
$570,000
b.
$630,000
c.
$805,094
d.
$1,080,000
a
1
Moderate
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47. What effect does depreciation have on the calculation of the rate of return on total assets?
a.
affects both the numerator and denominator
b.
no effect
c.
increases the outcome
d.
decreases the outcome
a
1
Moderate
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48. A student is defending a certain depreciation method. She uses the argument that repairs and maintenance costs will
probably increase as the asset gets older. She also argues that the asset will produce less as it gets older. What
depreciation method is she probably defending?
a.
straight-line method
b.
sum-of-the-years’-digits method
c.
sinking-fund method
d.
activity method
b
1
Moderate
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49. Which of the following is not a factor in selecting a depreciation method?
a.
salvage value
b.
repair and maintenance costs
c.
financial statement effects
d.
the risk associated with the cash flows from the asset
a
1
Easy
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Chapter 11: Depreciation, Depletion, Impairment, and Disposal
50. Which one of the following statements is true?
a.
One objective of depreciating an asset is to provide funds for replacement.
b.
GAAP requires the use of either straight-line or declining-balance depreciation.
c.
Straight-line depreciation results in a decreasing rate of return on total assets.
d.
Typically, the sum-of-the-years’-digits method will result in less depreciation expense in the year of
acquisition than will the double-declining-balance method.
d
1
Moderate
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51. Which one of the following statements is not true regarding depreciation?
a.
It is a systematic, rational method of allocating the cost of an asset over its useful life.
b.
It attempts to match the costs of acquiring an asset to the benefits to be derived from the asset.
c.
It does not attempt to measure the value of the asset.
d.
It provides funds for the replacement of the asset through tax savings over the asset’s life.
d
1
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52. When low-cost depreciable assets with similar characteristics, service lives, and residual values are acquired, which
depreciation method should be used?
a.
composite depreciation
b.
impairment depreciation
c.
group depreciation
d.
such assets should not be depreciated
c
1
Moderate
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53. A company purchased ten delivery vehicles at a cost of $20,000 each and used the group depreciation method. Which
of the following entries would be correct when recording the subsequent sale of a vehicle for $8,500 (group
accumulated depreciation is $88,000)?
a.
Cash 8,500
Accumulated Depreciation 8,800
Vehicles 17,300
b.
Cash 8,500
Accumulated Depreciation 11,500
Vehicles 20,000
c.
Cash 8,500
Vehicles 8,500
d.
Cash 8,500
Accumulated Depreciation 8,800
Loss on Sale 2,700
Vehicles 20,000
b
1
Moderate
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54. Lucas, Inc. purchased ten air conditioning units for $5,000 each, with an average expected service life of eight years
and a residual value of $700 each. The depreciation rate for the assets, assuming the group depreciation method is
used, will be
a.
10%
b.
10.75%
c.
12.5%
d.
14.5%
b
1
Moderate
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