Answers

GOALS ACHIEVEMENT

1. included in an asset’s cost
2. lump-sum purchase
3. depreciation
4. allocation
5. economic life
6. inadequacy
7. depreciable base
8. stated in output
9. true
10. false
11. change in useful life
12. true
13. tax purposes
14. false
15. lessee
16. operating lease

FILL IN THE BLANK

1. lump-sum
2. materiality
3. service life
4. physical deterioration, obsolescence, inadequacy
5. straight-line
6. depreciable base, book value
7. declining balance
8. modified accelerated cost recovery system
9. cash
10. lessee, lessor
11. capital leases

MULTIPLE CHOICE

1. b.
20X1 depreciation = $100,000 X 40% = $40,000
20X2 depreciation = $60,000 X 40% = $24,000
20X3 depreciation = $36,000 X 40% = $14,400
20X4 depreciation = $21,600 X 40% = $8,640
However, 20X4 depreciation is limited to the amount to reduce net book value to the $20,000 salvage value; therefore, 20X4 depreciation is only $1,600.

 

2. c. $8,000. The book value equals cost ($20,000) minus accumulated depreciation ($12,000). The accumulated depreciation is calculated:
($20,000 – $4,000)/4 = $4,000 per year
$4,000 X 3 years = $12,000

 

3. b. Items to be expensed are those that do not benefit future periods. Repair of damage occurring during installation has no future value and should be expensed currently. The other items are all ordinary and necessary to acquire equipment and are appropriately considered to be part of an asset’s cost.

 

4. b. $152,000 and $275,000. The $152,000 consists of $150,000 site cost and $2,000 legal fees. The $275,000 amount equals the architect’s fees and construction costs.

 

5. $4,500,000. The land represents 30% of the package ($6,000,000/ ($6,000,000 + $12,000,000 + $2,000,000)). The $15,000,000 purchase price times 30% equals the $4,500,000 assigned cost.

 

6. a. Depreciation Expense is increased with a debit, and Accumulated Depreciation, a contra asset, is increased with a credit. The Machine account is not directly affected.

 

7. d. $9,000. 20X2 depreciation is calculated:
10% X 200% = 20% annual depreciation rate
20% X 1/2 year X $50,000 = $5,000 first year depreciation
$50,000 – $5,000 = $45,000 balance
$45,000 X 20% = $9,000

 

8. c. Straight-line depreciation expense would be a straight, flat (horizontal) line. This reflects that the expense is the same every year. Double-declining balance depreciation expense declines year to year, portrayed by a line sloping down to the right.

 

9. c. $43,917. The book value on January 1, 20X5, is $131,750. The book value reflects 3.5 years of depreciation at $19,500 per year ($200,000 cost minus accumulated depreciation of $68,250 ($19,500 X 3.5)). Because there is no residual value, the remaining book value must be depreciated over the remaining life of 3 years ($131,750/3 = $43,917).

 

10. b. The modified accelerated cost recovery system generally results in depreciation being recorded faster for tax purposes. Therefore, tax amounts will exceed financial reporting amounts of depreciation in the earlier years of an asset’s life.