Quiz for the Topic...

Depreciation
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1.

Depreciation Expense shown on a company's income statement must be the same amount as the depreciation expense on the company's income tax return. The purpose of depreciation is to have the balance sheet report the current value of an asset. Depreciation Expense reflects an allocation of an asset's original cost rather than an allocation based on the economic value that is being consumed. An asset's useful life is the same as its physical life? One company might depreciate a new computer over three years while another company might depreciate the same model computer over five years...and both companies are right. Depreciation Expense is shown on the income statement in order to achieve accounting's matching principle. Accumulated Depreciation will appear as a deduction within the section of the balance sheet labeled as Property, Plant and Equipment. If a company continues to use equipment past the useful life that was assumed in determining the depreciation, there will be no Depreciation Expense in those additional years. A company may depreciate equipment over 10 years on a straight-line basis for its financial statements, but might use an accelerated method of depreciation over a shorter time period on its income tax return? Depreciation Expense is sometimes referred to as a noncash expense. Both Land and Land Improvements will generally be depreciated. Amortization of intangible assets and depletion of natural resources is conceptually similar to depreciation of constructed assets.

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13.

Depreciation Expense shown on the financial statements is a precise amount that is continuously refined. Over the life of an asset subject to depreciation, the accelerated method will result in more Depreciation Expense in total than the total Depreciation Expense using the straight-line method.

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15.

Which of the following depreciation methods is NOT an accelerated method? Double-declining balance Straight-line Sum-of-the-years' digits

16.

The book value of an asset is defined as

Cost minus Salvage Value Cost minus Accumulated Depreciation. Cost minus Salvage Value minus Accumulated Depreciation Estimated fair market value

17.

When a company purchases a 10-acre parcel of land and a building located on the land, the company will depreciate the entire cost over the useful life of the building. The book value of an asset indicates the asset's fair market value at that time.

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19.

A company purchases equipment for $30,000 on July 1, 2010. It estimates that the equipment will have a salvage value of $2,000 and its useful life will be 7 years. Assuming that the company's accounting year ends on December 31 of each year, what will be the Depreciation Expense for the years 2010 and 2011 assuming straight-line depreciation? Year 2010: $__________ Year 2011: $__________

20.

On January 1, 2007 an asset was acquired for $30,000. Its useful life was expected to be 10 years and the salvage value is expected to be $0. After four years of use, the company realized the asset would be useful for only three more years. (In other words, the total useful life of the asset will be seven years instead of the original 10 years.) The company uses the straight-line method of depreciation. What will be the Depreciation Expense in each of the years 2011, 2012, and 2013?

Answer 6000

21.

If a company revises the estimated useful life of one of its assets being depreciated, the company will need to reissue its earlier financial statements as the earlier depreciation was incorrect.

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