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1. Which of the following terms best describes the cost or an amount substituted for cost of
an asset less the residual value?
a. Revalued amount
b. Carrying amount
c. Recoverable amount
d. Depreciable amount
Which of the following statements best describes "residual value"?
a. The estimated net amount currently obtainable if the asset is at the end of the
useful life.
b. The present value of estimated future cash flows expected to arise from the continuing
use of the asset and from its ultimate disposal.
c. The amount at which the asset could be exchanged between knowledgeable and
willing parties in an arms length transaction.
d. The amount of cash or cash equivalents that could currently be obtained by selling the
asset in an orderly disposal.
Which of the following statements is true?
a. Assets are depreciated even if their fair value exceeds their carrying amount.
b. Land and buildings are not accounted for separately when acquired together.
c. A noncurrent asset acquired as the result of an exchange of assets is not recognized.
d. A gain on disposal of a noncurrent asset is classified as revenue.
Which of the following statements regarding depreciation is true?
a. An asset must be depreciated from the date of purchase to the date of sale.
b. The annual depreciation charge shall be constant over the useful life of the asset.
c. The total cost of an asset must eventually be depreciated.
d. If the carrying amount of an asset is less than the residual value, depreciation is not
charged.
An entity bought a private jet for the use of its top-ranking officials. The private jet can be
deprecated either using a composite useful life or useful lives of its major components. It is
expected to be used over a period of 7 years. The engine of the jet has a useful life of 5
years. The private jet's tires are replaced every 2 years. The private jet shall be depreciated
using the straight line method over
a. 7 years composite useful life.
b. 5 years useful life for the engine, 2 years useful life for the tires, and 7 years useful
life applied to the balance cost of the jet.
c. 2 years useful life based on conservatism, the lowest useful life of all the parts of the
jet.
d. 5 years useful life based on a simple average of the useful lives of all major
components of the jet.
Problem 26-3
1. Depreciation is best described as a method of
a. Asset valuation
b. Current value allocation
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c. Cost allocation
d. Useful life determination
Which of the following depreciation methods is not based on the passage of time?
a. Sum of units or output method
b. Sum of years digits
c. Declining balance
d. Straight line
In which of the following depreciation methods is residual value not a factor in determining
depreciation charge in early years of the assets life?
a. Straight line
b. Service hours
c. Productive output
d. Declining balance
Which of the following depreciation methods is not appropriate for situations involving a
large number of similar items, each having a small peso cost?
a. Inventory method
b. Retirement method
c. Replacement method
d. Composite method
Which of the following statements is incorrect concerning the depreciation methods?
a. Under the output method, the cost per unit of production is constant.
b. The straight line method is particularly appropriate where the asset is expected to
decline in usefulness as a function of time and the expected use pattern of the asset is
fairly constant over time.
c. The sum of years' digits method provides for a decreasing depreciation charge.
d. First-year depreciation under the double declining balance method is computed
as the depreciable amount multiplied by double the straight line rate.
What factor must be present to use the production method of depreciation?
a. Total units to be produced can be estimated
b. Production is constant over the life of the asset
c. Repair costs increase with use
d. Obsolescence is expected
In order to calculate the depreciation of an asset for the third year using the sum of years'
digits method, which of the following must be known about the asset?
a. Acquisition cost
b. Residual value
c. Useful life
d. All must be known
If there is a change from double declining balance to straight line method
a. The accumulated depreciation is adjusted to its appropriate balance through retained
earnings based on the straight line method.
b. The accumulated depreciation is adjusted to its appropriate balance through net
income based on the straight line method.
Problem 26-4
1. Which of the following statements is the assumption on which straight line depreciation is
based?
a. The operating efficiency of the asset decreases in later years.
b. Service value declines as a function of time rather than use.
c. Service value declines as a function of obsolescence rather than time.
d. Physical wear and tear are more important than economic obsolescence.
2. The straight line method of depreciation is not appropriate for
a. An entity that is neither expanding nor contracting its investment in equipment
because it is replacing equipment as the equipment depreciates.
b. Equipment on which repairs and maintenance increase substantially with age.
c. Equipment with useful life that is not affected by the amount of use.
d. Equipment used consistently every period.
3. A principal objection to the straight line method of depreciation is that it
a. Provides for the declining productivity of an aging asset
b. Ignores variation in the rate of asset use
c. Tends to result in a constant rate of return on a diminishing investment base
d. Gives smaller periodic writeoff than a decreasing charge method
4. In which of the following situations is the production method of depreciation most
appropriate?
a. An assets service potential declines with use
b. An assets service potential declines with the passage of time
c. An asset is the subject to rapid obsolescence
Problem 26-5
1. Which of the following statements is true in relation to depreciation?
a. Depreciation is not a matter of valuation.
b. Depreciation is part of the matching of revenue and expense.
c. Deprecation retains funds by reducing income tax and dividend.
d. All of the statements are true.
2. Depreciation is normally computed on the basis of the nearest
a. Full month and to the nearest centavo.
b. Full month and to the nearest peso.
c. Day and to the nearest centavo.
d. Day and to the nearest peso.
3. The sum of the years digits method
a. Results in residual value being ignored.
b. Means the denominator is the number of years remaining at the beginning of the year.
c. Means the carrying amount should not be reduced below residual value.
d. Results in an increasing depreciation charge.
4. Economic factors that shorted the service life of an asset include
a. Obsolescence and supersession only
b. Supersession and inadequacy only
c. Inadequacy and obsolescence only
d. Obsolescence, supersession and inadequacy
5. The major difference between the service life of an asset and physical life is that
a. Service life refers to the time an asset shall be used by an entity and physical life
refers to how long the asset shall last.
b. Physical life is the life of an asset without consideration of residual value and service
life requires the use of residual value.
c. Physical life is always longer than service life.
d. Service life refers to the length of time an asset is of use to the original owner, while
physical life refers to how long the asset shall be used by all owners.