Chapter 11: Depreciation, Depletion, Impairment, and Disposal
55. Willis Limo Service purchased three used assets with the following characteristics:
Residual
Asset
Cost
Value
Life
Limo
$12,000
$2,000
10 years
Van
6,800
1,200
4 years
Photocopier
1,500
250
5 years
Assuming Willis uses straight-line depreciation, the composite depreciation rate is
a.
10.1%
b.
13.1%
c.
15.7%
d.
18.2%
56. Which one of the following statements is an advantage of the group and composite methods of depreciation?
a.
Faulty estimates are concealed for long periods.
b.
Gains are deferred beyond the period in which they actually occurred.
c.
Record keeping is simplified.
d.
Losses are not recognized in the period in which they occur.
57. Five skid steers costing $20,000 each were purchased by the Biggs Excavating Company at the beginning of 2016.
Biggs capitalized the skid steers in a single asset account and depreciates them using the group method. Each skid
steer was expected to have a residual value of $6,000 in four years. At the end of 2019, Biggs sold one skid steer for
$8,000. For what amount is accumulated depreciation debited in the journal entry to record the disposal of that skid
steer?
a.
$14,000
b.
$12,000
c.
$10,500
d.
$20,000
b
1
Challenging
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58. Which one of the following statements about group depreciation is true?
a.
When assets are sold, losses will be recognized, but not gains.
b.
This method is used for groups of dissimilar assets.
c.
Different assets in the group will have different depreciation rates.
d.
Only one accumulated depreciation account is necessary for the whole group.
Chapter 11: Depreciation, Depletion, Impairment, and Disposal
59. On January 1, 2016, Mullhausen Co. began using the composite depreciation method. There were three machines to
consider, as follows:
Residual
Asset
Cost
Value
Life
A
$20,000
$2,000
6 years
B
15,000
3,000
3 years
C
5,000
1,000
4 years
At the end of the second year, Machine B was sold for $8,200. In the entry to record the sale, there should be a
a.
$1,200 debit to Gain on Sale of Machine
b.
$6,800 debit to Accumulated Depreciation
c.
$6,800 debit to Loss on Sale of Machine
d.
$8,000 debit to Accumulated Depreciation
b
1
Moderate
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60. On January 1, 2015, Morgantown Co. purchased five machines at a price of $10,000 per machine. Because the
estimated life was five years and no salvage value was expected, a group depreciation rate of 20% was used. On
January 1, 2017, one of the machines was sold for $5,000. The correct entry to record the sale of the machine is
a.
Cash 5,000
Loss on Sale of Machine 1,000
Accumulated Depreciation 4,000
Machines 10,000
b.
Cash 5,000
Machines 5,000
c.
Cash 5,000
Loss on Sale of Machines 5,000
Machines 10,000
d.
Cash 5,000
Accumulated Depreciation 5,000
Machines 10,000
d
1
Moderate
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61. Which one of the following disclosures is required by generally accepted accounting principles?
a.
depreciation expense for each major class of asset
b.
balances of major classes of depreciable assets by nature or function
c.
accumulated depreciation on each depreciable asset
d.
an explanation of why the depreciation method used was selected by management
62. Which one of the following statements is true?
a.
Financial statement readers cannot determine whether the depreciation method used by a company is
appropriate.
b.
Financial statement readers can determine the useful lives of assets depreciated during the reported period.
c.
Financial statement readers cannot determine the depreciation expense for the reported period.
d.
Financial statement readers can accurately estimate the effect an alternative depreciation method would have
on income.
63. Which one of the following statements is not a disclosure requirement for depreciation?
a.
the balance of major classes of depreciable assets
b.
a general description of the method(s) used for depreciation
c.
the accumulated depreciation for each major class of depreciable asset
d.
the useful lives for each major class of depreciable asset
Chapter 11: Depreciation, Depletion, Impairment, and Disposal
64. On January 1, 2016, Digger purchased some equipment for $29,600. The anticipated life of the equipment was five
years and residual value was estimated to be $4,100. The machine was expected to produce 600,000 units. In January
of 2016, 35,000 units were produced and production was doubled in February. The company uses the activity
depreciation method. What is the amount of depreciation expense for the month of February?
a.
$ 637.50
b.
$1,487.50
c.
$3,453.33
d.
$2,975.00
d
1
Moderate
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65. Hill has a fiscal year-end of December 31. In February, Hill purchased a piece of equipment for $12,000 with a four-
year useful life and a zero residual value. Hill used the equipment to produce finished goods in March that were sold
on credit in April with cash collected in May. Hill uses straight-line depreciation. The amount of depreciation expense
affecting the reported income on the first quarter income statement was
a.
$250
b.
$0
c.
$500
d.
$700
b
1
Moderate
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Chapter 11: Depreciation, Depletion, Impairment, and Disposal
66. Wayne Co. purchased $40,000 of equipment with a salvage value of $5,000 and a useful life of nine years on August
15, 2016. If the company used sum-of-the-years’-digits depreciation computed to the nearest whole year, depreciation
expense for 2017 was
a.
$6,222
b.
$7,000
c.
$7,111
d.
$8,000
b
1
Moderate
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67. On June 1, 2016, Bagby Co. purchased a new car for $36,000 with a useful life of eight years and a residual value of
$4,800. If the company used double-declining-balance depreciation computed to the nearest whole year, depreciation
expense for 2017 was
a.
$6,750.00
b.
$7,687.50
c.
$5,250.00
d.
$5,850.00
a
1
Moderate
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Chapter 11: Depreciation, Depletion, Impairment, and Disposal
68. On January 2, 2016, Karen’s Culinary Delights purchased a piece of equipment for $42,000 with a useful life of seven
years and a residual value of $6,000. If Karen’s used the sum-of-the-years’-digits method with the half-year
convention, depreciation expense for 2016 was
a.
$9,000.00
b.
$10,500.00
c.
$5,250.00
d.
$4,500.00
d
1
Moderate
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69. On July 1, 2016, American Stereo purchased stereo equipment for $5,000. The estimated life of the equipment was ten
years and the residual value was estimated to be $2,000. Double-declining-balance depreciation was used. If
calculations are based on the nearest whole month, depreciation expense for the year 2018 was
a.
$720
b.
$900
c.
$640
d.
$800
a
1
Moderate
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Chapter 11: Depreciation, Depletion, Impairment, and Disposal
70. On July 9, 2015, Marcus Company purchased an asset for $18,000. Marcus estimated a four-year life and no salvage
value. Marcus uses sum-of-the-years’-digits depreciation to the nearest whole month. Depreciation expense for 2018
will be
a.
$1,800
b.
$2,700
c.
$3,600
d.
$4,500
b
1
Moderate
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71. Clementine Co. computes depreciation to the nearest whole month and uses the straight-line method. On May 2, 2015,
the company purchased an asset for $18,000 with a four-year life and a $3,600 residual value. On October 6, Karen
also sold an asset with a cost of $34,500 that had been purchased in 2015. The sold asset had been estimated to have a
five-year life and no residual value when it was purchased. The depreciation expense on these two assets for 2015
totals
a.
$7,575
b.
$10,500
c.
$9,300
d.
$7,600
a
1
Moderate
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Chapter 11: Depreciation, Depletion, Impairment, and Disposal
72. On June 15, 2015, Jupiter Corporation purchased a machine for $50,000 with an estimated useful life of six years and
a residual value of $8,000. The company uses units-of-production depreciation and estimates the machine will last
300,000 units. The machine made 15,000 units in 2015 and 45,000 units in 2016. The accumulated depreciation
balance on December 31, 2016, after the adjusting entries have been posted should be
a.
$8,400
b.
$10,000
c.
$11,200
d.
a
1
Challenging
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$13,333
Exhibit 11-2
Browning purchased a business copier for $4,500 on August 3, 2016. It has an estimated residual value of $500 and an
expected service life of five years. Browning uses double-declining-balance depreciation computed to the nearest whole
month.
73. Refer to Exhibit 11-2. Depreciation expense for 2016 was
a.
$600
b.
$667
c.
$750
d.
$1,500
c
1
Moderate
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Chapter 11: Depreciation, Depletion, Impairment, and Disposal
74. Refer to Exhibit 11-2. Depreciation expense for 2017 should be
a.
$600
b.
$667
c.
$750
d.
$1,500
d
1
Moderate
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75. Refer to Exhibit 11-2. The accumulated depreciation balance at December 31, 2017, should be
a.
$1,750
b.
$2,000
c.
$2,250
d.
$2,340
c
1
Moderate
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76. The Bourbon Street Ice Cream Company discovers that depreciation expense was overstated last year. How should
this discovery be reported in the current year?
a.
as a reduction in the current year’s depreciation expense
b.
as an increase to the retained earnings beginning balance
c.
as a miscellaneous item in the Other Revenue/Expense section of the income statement
d.
as a footnote only to the current year’s financial statements
Chapter 11: Depreciation, Depletion, Impairment, and Disposal
77. Redeau Company has been depreciating certain assets using the straight-line method. At the beginning of the current
year, the company changed to the sum-of-the-years’-digits method to depreciate these assets. Which of the following
statements regarding this change is true?
a.
The change should be accounted for prospectively.
b.
The change should be accounted for with an adjustment of the accumulated depreciation and the retained
earnings balances.
c.
The change should be accounted for by including the cumulative effect of the change in the current year’s
income statement.
d.
The accounting impact of the change is limited to the difference in current-year depreciation on the affected
assets.
78. Property, plant, and equipment must be reviewed for impairment when which one of the following events occurs?
a.
A significant change in the asset’s estimated useful life occurs.
b.
The costs of constructing the asset are determined to be less than the budgeted amount.
c.
A current period operating loss occurs.
d.
Investing activities produce a negative cash flow.
Chapter 11: Depreciation, Depletion, Impairment, and Disposal
79. When conducting an impairment test, a company must estimate
a.
future cash inflows from its use of the asset and eventual sale.
b.
future net cash flows from its use of the asset and eventual sale.
c.
total net flows from its use of the asset and eventual sale.
d.
total cash from its use of the asset and eventual sale.
80. An impairment loss must be recognized when
a.
an asset’s book value is lower than its fair value.
b.
an asset’s book value is higher than its fair value
c.
the present value of the asset’s future cash flows is lower than the asset’s fair value.
d.
the present value of the asset’s future cash flows is higher than the asset’s fair value.
81. The FASB established principles for evaluating asset impairment because it hoped financial reporting would
a.
be enhanced through increasing the usefulness of a company’s financial statements.
b.
present information that is expected to be more relevant.
c.
improve comparability across companies.
d.
All of these choices are reasons that FASB established principles for evaluating asset impairment.
Chapter 11: Depreciation, Depletion, Impairment, and Disposal
82. An example of an event where the book value of property, plant, and equipment may not be recoverable would
include
a.
a significant change in the way the asset is used.
b.
a current period operating loss.
c.
a significant decrease in the fair value of the asset.
d.
All of these choices are examples where the book value may not be recoverable.
83. When must a company include disclosures concerning the write down of an impaired asset?
a.
In the year of the write down only.
b.
In the year of the write down and the subsequent year.
c.
In the year of the write down and the next two years.
d.
In the year of the write down and the next three years.
84. The impairment loss for an asset that a company intends to hold and use is the difference between the
a.
asset’s book value and its lower fair value.
b.
asset’s book value and its fair value.
c.
present value of discounted cash flows and the book value.
d.
asset’s fair value and the present value of the discounted cash flows.
85. When must a company recognize an impairment loss?
a.
If the fair value of the total discounted cash flows is less than the book value.
b.
If the total discounted cash flows is less than the fair value.
c.
If the total undiscounted cash flows is less than the book value.
d.
If the total undiscounted cash flows is less than the fair value.
86. On January 1, 2015, Danville Corporation acquired a machine at a cost of $60,000. The machine’s service life was
estimated to be ten years and its residual value to be $6,000. The straight-line method was used for depreciation. On
January 1, 2020, the machine was no longer useful and was sold for $3,000. For 2020, in regard to this machine, how
much of a loss should Danville record?
a.
$27,000
b.
$30,000
c.
$3,000
d.
$60,000
b
1
Moderate
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Chapter 11: Depreciation, Depletion, Impairment, and Disposal
Exhibit 11-03
On January 1, 2016, Wheeler, Inc. purchased some equipment for $3,900. The equipment had an estimated life of five
years and an expected residual value of $200. On July, 1, 2018, the equipment was sold for $1,000. Wheeler uses straight-
line depreciation.
87. Refer to Exhibit 11-03, what was the amount of the loss or gain recognized in the sale?
a.
$1,000 gain
b.
$1,850 gain
c.
$1,050 loss
d.
$3,900 loss
c
1
Easy
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88. Refer to Exhibit 11-03, what is the amount of depreciation expense that needs to be brought up to date prior to the
sale?
a.
$480
b.
$370
c.
$740
d.
$200
b
1
Moderate
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89. Refer to Exhibit 11-03, what was the balance in the accumulated depreciation account prior to bringing the
depreciation expense up to date before the disposal?
a.
$1,480
b.
$1,850
c.
$1,050
d.
$3,700
a
1
Easy
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90. Which of the following is not considered involuntary disposal?
a.
expropriation by the government
b.
fire
c.
earthquake
d.
Exchange
91. Depletion of a natural resource is typically recorded as a
a.
debit to an inventory account
b.
debit to Depletion Expense
c.
debit to Cost of Goods Sold
d.
debit to Accumulated Depletion
92. Tangible assets that are attached to natural resources are depreciated over
a.
the life of the natural resource
b.
the shorter of the tangible asset’s life or the natural resource’s life
c.
the life of the tangible asset
d.
the longer of the tangible asset’s life or the natural resource’s life
93. Choice Mining Co. paid $9,000 for some land that was expected to have 50,000 units of a natural resource on it.
Development costs amounted to $520. It was expected that the land would require $780 of reclamation costs after
production. In the first year of mining, 5,000 units of the natural resource were mined. At the beginning of the second
year, it was estimated that only 40,000 units of the natural resource remained and estimated reclamation costs should
be increased to $960. In the second year, 8,000 units were mined. What was the amount of depletion for the second
year?
a.
$1,714
b.
$1,854
c.
$1,890
d.
$2,046
c
1
Challenging
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Chapter 11: Depreciation, Depletion, Impairment, and Disposal
Exhibit 11-04
Kieso Company purchased a tract of land for $4,500,000 in anticipation of extracting 1,425,000 tons of ore. The residual
value of the land is expected to be $480,000. The company mines 125,000 tons of ore in the first year.
94. Refer to Exhibit 11-04, what is the unit depletion rate? (Round to the nearest $0.01.)
a.
$3.16
b.
$3.50
c.
$2.82
d.
$3.00
c
1
Moderate
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95. Refer to Exhibit 11-04, what amount of depletion was recorded in that first year?
a.
$395,000
b.
$352,500
c.
$437,500
d.
$375,000
b
1
Moderate
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96. In 2016, Western Maryland Company paid $3,000,000 for a mining tract with reserves of 100,000 tons of ore, which
the company planned to mine over a 20-year period. The company spent $500,000 developing the mine. Western
plans to spend $200,000 for reclamation when mining has been completed, after which the land will have an estimated
value of $600,000. In 2016, Western mined and sold 8,000 tons of ore. What depletion should Western record for the
year?
a.
$155,000
b.
$248,000
c.
$280,000
d.
$296,000
b
1
Challenging
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97. Which of the following costs can be capitalized when incurred in connection with obtaining the rights
a.
Exploration costs
b.
Development costs
c.
Restoration costs
d.
All of these answer choices are correct.
98. Which one of the following statements is not true?
a.
Straight-line depreciation may be used instead of MACRS for income tax reporting.
b.
If MACRS is used for tax purposes, it must be used for book purposes.
c.
Salvage value is not considered when the MACRS system is in use.
d.
Economic lives may be different from MACRS lives.
99. The MACRS differs from straight-line depreciation computed for financial reporting. In this respect, which of the
following is not true?
a.
The MACRS uses longer asset lives.
b.
The MACRS ignores residual value.
c.
The MACRS decreases the income taxes payable in the early years of an asset’s life.
d.
The MACRS accelerates cost recovery.