Download CPA Exam Practice: Intermediate Accounting - Depreciation Methods and more Exams Business Informatics in PDF only on Docsity!
Intermediate Accounting Chapter 10 CPA Exam Practice A manufacturing firm purchased used equipment for $135,000. The original owners estimated that the residual value of the equipment was $10,000. The carrying amount of the equipment was $120,000 when ownership transferred. The new owners estimate that the expected remaining useful life of the equipment was 10 years, with a salvage value of $15,000. What amount represents the depreciable base used by the new owners? A. $110, B. $105, C. $120, D. $125,000 correct answer C. $120, $120,000 is correct. The purchase price of the asset acquired less its salvage value is the asset's depreciable cost. In this case, total depreciation on the asset is limited to $120,000 ($135, purchase price-$15,000 salvage value). The cost to the seller and the previous salvage value are not relevant to the new owner. What factor must be present to use the units of production (activity) method of depreciation? A. Repair costs increase with use. B. Obsolescence is expected. C. Total units to be produced can be estimated. D. Production is constant over the life of the asset. correct answer C. Total units to be produced can be estimated.
Total units to be produced can be estimated is correct. Without an estimate for total units to be produced, depreciation could not be computed. Annual depreciation under this method is: [(Cost-salvage value)/(Total estimated production)] × (units produced year).The quantity in square brackets is the rate of depreciation per unit. On April 1, 2016, Kew Co. purchased new machinery for $300,000. The machinery has an estimated useful life of five years, and depreciation is computed by the sum-of-the-years'-digits (SYD) method. The accumulated depreciation on this machinery at March 31, 2018 should be: A. $120, B. $192, C. $180, D. $100,000 correct answer C. $180, $180,000 is correct. $180,000 equals $300,000[(5 + 4)/(5 + 4 + 3 + 2 + 1)]. Two full years of depreciation have been recorded, and the SYD method uses the number of years left at the beginning of each year as the numerator of the fraction used in depreciation. At the beginning of the first and second years, five and four years of the asset's life remained, respectively. The denominator is the sum of the digits up to the asset's useful life (5). Spiro Corp. uses the sum-of-the-years' digits method to depreciate equipment purchased in Janaury 2015 for $20,000. The estimated salvage value of the equipment is $2,000, and the estimated useful life is four years. What should Spiro report as the asset's carrying amount as of December 31, 2017? A. $2,
B. $48,
C. $21,
D. $32,000 correct answer A. $38, $38,400 is correct! Depreciation in 2016 = $240,000(2/10) = $48,000. Depreciation in 2017 = ($240,000-$48,000)(2/10) = $38,400. The DDB method's rate is always twice the straight-line rate, or 2/useful life. The method does not subtract salvage value when computing depreciation, but it also does not reduce book value below salvage value. The depreciation in any year is the rate times the beginning net book value of the asset. Which of the following uses the straight-line depreciation method? Group depreciation Composite depreciation A. Yes Yes B. No Yes C. No No D. Yes No correct answer A. Yes Yes Yes; Yes is correct.Composite (group) depreciation averages the service life of a number of property units and depreciates the group as if it were a single unit. The term "group" is used when the assets are similar; the term "composite" is used when they are dissimilar. The mechanical application of both of these methods is identical. The depreciation rate is the following ratio:
Sum of annual straight-line depreciation of individual assets Total asset cost Thus, both group and composite depreciation utilize the straight-line depreciation method. When should a long-lived asset be tested for recoverability? A. When the asset's carrying amount is less than its fair value. B. When external financial statements are being prepared. C. When the asset's fair value has decreased, and the decrease is judged to be permanent. D. When events or changes in circumstances indicate that its carrying amount may not be recoverable. correct answer D. When events or changes in circumstances indicate that its carrying amount may not be recoverable. When events or changes in circumstances indicate that its carrying amount may not be recoverable is correct. Long-lived assets need to be tested for impairment when facts or circumstances indicate that the carrying amount may not be recoverable. An indication that the carrying value is no longer recoverable includes innovations in technology which may make the product or process obsolete. A firm began a mineral exploitation venture during the current year by spending (1) $40 million for the mineral rights; (2) $100 million exploring for the minerals, one-fourth of which were successful; and (3) $60 million to develop the site. Management estimated that 20 million tons of ore would ultimately be removed from the property. Wages and other extraction costs for the current year amounted to $10 million. In total, 2 million tons of ore were removed from the deposit in the current year. The entire production for the period was sold. What amount of depletion is recognized during the current year under the full costing method?
$3.20 is correct. The depletion rate is the sum of the cost incurred to acquire the mineral rights, find the minerals, and develop the site less the salvage value, all divided by the estimated number of units of resource expected to be removed from the site. The depletion rate per ton is ($2,000,000 + $500,000-$100,000)/750,000 = $3.20. This rate is applied to the units removed each period to determine depletion for that period.As such, it allocates the total cost of the obtaining and developing the resource to each unit of resource removed. Which of the following is a required footnote disclosure on property, plant, and equipment? A. Range of useful lives of plant assets. B. Accumulated depreciation related to plant assets. C. Depreciation methods of plant assets. D. All of these. correct answer D. All of these. All of the above is correct. All items listed are required disclosures: useful life, depreciation methods, and the accumulated depreciation of plant asset. Read through select disclosures of the financial statements of real companies-this will help reinforce the disclosure requirements and jog your memory because you will remember reading about the disclosure.
