Unit 4 Depreciation, Impairments, and Depletion Practice Questions and Answers

What is the journal entry to record the ore when sold?

Debit cost of goods sold 6,000,000

Credit inventory (ore) 6,000,0Debit cost of goods sold 6,000,000

Credit inventory (ore) 6,000,00000

$6,000,000 = $240 x 25,000

A company owns a machine purchased on January 1, year 1 for $600,000. The machine has an estimated useful life of 5 years and an estimated salvage value of $75,000. The company uses the sum-of-the-years'-digits method.

What is the depreciation expense for each year and the book value of the machine at the end of year 5?

Total accumulated depreciation $525,000

Book value of the machine at the end of year 5 is its salvage $75,000

Year 1: ($600,000 - $75,000) x 5/15 = $175,000

Year 2: ($600,000 - $75,000) x 4/15 = $140,000

Year 3: ($600,000 - $75,000) x 3/15 = $105,000

Year 4: $(600,000 - $75,000) x 2/15 = $70,000

Year 5: ($600,000 - $75,000) x 1/15 = $35,000

Total accumulated depreciation $525,000 = ($175,000 + $140,000 + $105,000+ $70,000 + $35,000)

The book value of the machine at the end of year 5 is its salvage $75,000 = $600,000 - $525,000

A company purchased a truck at the beginning of 2020 for $109,200. The truck is estimated to have a salvage value of $4,200 and a useful life of 120,000 miles. It was driven 21,000 miles in 2020 and 29,000 miles in 2021.

What is the depreciation expense for 2020 and 2021 using the variable charge method?

2020: $18,375

2021: $25,275

Equipment costing $450,000 has an estimated salvage value of $30,000 and an estimated life

of 4 years or 10,000 hours. It is to be depreciated by the units-of-activity method.

What is the amount of depreciation for the first full year, during which the equipment was used for 2,700 hours?

$113,400

= (2,700 / 10,000) x ($450,000 - $30,000)

The activity method of depreciation

a. is a variable charge approach.

b. assumes that depreciation is a function of the passage of time.

c. conceptually associates cost in terms of input measures.

d. all of these answers are correct.

is a variable charge approach.

A company placed an asset into service on day 1 of year 1 with the following data related to the purchase:

Cost of machinery $225,000

Estimated salvage value $75,000

Product life hours 75,000 hours

Useful life 5 years

Hours used in Year 1 5,000 hours

What amount of annual depreciation expense should be recorded in the first year using the variable charge method, and what is the machine's book value at the end of year 1? (round your answer)

$10,000 depreciation expense

= (5,000 / 75,000) x ($225,000 - $75,000)

$215,000 book value = $225,000 - $10,000

A company placed an asset into service on day 1 of year 1 with the following data related to the purchase:

Cost of machinery $225,000

Estimated salvage value $75,000

Product life hours 75,000 hours

Useful life 5 years

Hours used in Year 1 5,000 hours

Using the information above, what amount of annual depreciation expense should be recorded in each of the five years using the straight-line method, and what is the machine's book value for each of the years?

$30,000 depreciation expense

= ($225,000 - $75,000) / 5

This amount will be the same over the 5 years

A company placed an asset into service on day 1 of year 1 with the following data related to the purchase:

Cost of machinery $225,000

Estimated salvage value $75,000

Product life hours 75,000 hours

Useful life 5 years

Hours used in Year 1 5,000 hours

Using the information above, what amount of annual depreciation expense should be recorded in the first and second years using double-declining balance method, and what is the machine's book value for each of the years?

100% / 5years = 20% straight-line rate x 2 = 40% DDB rate

$90,000 depreciation expense year 1= 40% × $225,000

$135,000 book value year 1= $225,000 - $90,000

$54,000 depreciation expense year 2= 40% × $135,000

$81,000 book value year 2= $225,000 - ($90,000 + $54,000)

Depreciation is a variable expense if the depreciation method used is

units-of-production.

Assume an asset is used evenly over a four-year service life, which method of depreciation will always result in the largest amount of depreciation in the first year?

double-declining balance.

In the first year of an asset's life, which of the following methods has the smallest depreciation?

straight-line.

In the first year of an asset's life, which of the following methods, in addition to straight line, has the smallest depreciation?

composite or group.

On July 1, 2020, a company purchased a machine with a five-year useful life for $10,000 and no salvage value. The company prepares accrual-basis financial statements on a calendar-year basis.

How many months should be included in the calculation of depreciation expense for the year of acquisition using the double-declining-balance method?

Six

On July 1, 2020, a company purchased a machine with a five-year useful life for $10,000 and no salvage value. The company prepares accrual-basis financial statements on a calendar-year basis. Using the double-declining-balance method,

What is the depreciation expense for 2020 and 2021?

Year 2020

100% / 5years = 20% straight-line rate x 2 = 40% DDB rate

$4,000 full year = 40% × $10,000

$2,000 half year = 6/12 × $4,000

Year 2021

100% / 5years = 20% SL rate x 2 = 40% DDB rate

$ 3,200 full year (40% × $ 8,000)

On July 1, 2020, a company purchased a machine with a five-year useful life for $10,000 and no salvage value. The company prepares accrual-basis financial statements on a calendar-year basis.

Using the information above, assume the company uses the sum-of-the-years'-digits method; what is the depreciation expense for 2020 and 2021?

Year 2020

$3,333.33 full year = 5/15 × $10,000

$1,666.67 half year = 6/12 × $3,333.33

Year 2021

$2,666.67 full year = 4/15 × $10,000

$1,666.67 half year 6/12 × $3,333.33; and $1,333.33 half year = 6/12 × $2,666.67

$3,000 = $1,666.67 + $1,333.33

A company has a policy of calculating depreciation using the nearest fraction of a year policy. On May 10, the company purchased and placed in service an asset costing $50,000 with a five-year useful life. The Company uses the straight-line depreciation method.

What fraction is used to calculate the depreciation expense on December 31 and what is the depreciation expense on December 31? (round your answer to a whole number)

7⅔= ⅔ in May,and full months for June to December

$6,392 = (7.67/12) x ($50,000/5)

A company purchases an asset on April 5 of the current year. The company would like to use the depreciation policy that will result in the highest depreciation expense in the last year of the asset's useful life.

Which depreciation policy should be used?

full year in period of disposal.

A company purchases an asset on April 5th of the current year. The company would like to use the depreciation policy that will result in the highest depreciation expense in the first year of the asset's useful life.

Which depreciation policy should be used?

nearest full month

When depreciation is computed for partial periods under a decreasing charge depreciation method, it is necessary to

determine depreciation expense for the full year and then prorate the expense between the two periods involved.

A company purchased machinery with an original cost of $90,000. It estimates a 20-year life with no salvage value. At the beginning of year 6, the company estimates that it will use the machine for an additional 25 years.

What is the revised total life of the machinery at the beginning of year 6?

30 years

5 years of depreciation taken + the additional 25 years

A company acquired machinery on January 1, 2015, which it depreciated under the straight-line method with an estimated life of fifteen years and no salvage value. On January 1, 2020, the company estimated that the remaining life of this machinery was six years with no salvage value.

How should this change be accounted for by the company?

by setting future annual depreciation equal to one-sixth of the book value on January 1, 2020.

A change in estimate should

be reported in the current and future periods.

A company purchased a piece of equipment for $120,000 and estimated that the asset will have no salvage value at the end of its 15-year useful life. At the end of year 5 of ownership, when accumulated depreciation was $40,000 and the asset's book value was $80,000, the company revised the asset's estimated useful life to a total of 10 years.

What is depreciation expense for year 6 assuming the company uses the straight-line method?

$16,000

= $80,000 / 5 yrs

5 yrs = 10 yrs - 5 yrs of previous depreciation taken

A company purchased a depreciable asset for $840,000 on January 1, 2017. The estimated salvage value is $84,000, and the estimated total useful life is 9 years. The straight-line method is used for depreciation. On January 1,2020, the company changed its estimates to a total useful life of 5 years with a salvage value of $140,000.

What is 2020 depreciation expense?

the equipment will depreciate 448,000 over the next two years.

$558,000 = $840,000 - $252,000 [($840,000 - $84,000) / 9] x 3

$448,000 = $558,000 - $140,000

The revised useful life of the asset is 5 years and 3 years of previous depreciation was taken leaving 2 years left.

A company bought equipment for $240,000 on January 1, 2019. The company estimated the useful life to be 3 years with no salvage value, and the straight-line method of depreciation will be used. On January 1, 2020, Jack decides that the business will use the equipment for a total of 5 years.

What is the revised depreciation expense for 2020?

$40,000

= [$240,000 - ($240,000 / 3)] / 4

The revised useful life of the asset is 5 years and 1 year of previous depreciation was taken leaving 4 years left.

A machine originally had an estimated useful life of 5 years, but after 3 complete years, it was decided that the original estimate useful life should have been 10 years. At that point, the remaining cost to be depreciated should be allocated over

7 Years

The revised useful life of the asset is 10 years and 3 years of previous depreciation was taken leaving 7 years left.

A company purchased and placed into service a piece of machinery with an original cost of $100,000. It estimates a 10-year useful life with no salvage value. At the beginning of Year 8, when accumulated depreciation was $70,000 and the asset's book value was $30,000, the company estimates that it will use the machine for a total of 12 years.

Which statement describes the proper accounting treatment beginning with Year 8?

The company will depreciate the $30,000 book value over the next five years.

At the start of year 8, the net book value is $30,000 [$100,000 - (($100,000 / 10) x 7)]. Since the asset has 5 more years of estimated use (years 8 through 12), the net book value of $30,000 is depreciated over the remaining 5 years.

Composite or group depreciation is a depreciation system whereby

a straight-line rate is computed by dividing the total of the annual depreciation expense for all assets in the group by the total cost of the assets.

For the composite method, the composite

life is the total depreciable cost divided by the total annual depreciation.

A schedule of machinery owned by a company is presented below:

Estimated

Total Cost Salvage Value Life in Years

Machine X $600,000 $40,000 14

Machine Y 800,000 80,000 10

Machine Z 300,000 60,000 6

The company computes depreciation by the composite method.

What is the composite rate of depreciation (in percent) for these assets ?

8.94%

($600,000 - $40,000) ÷ 14 = $40,000

($800,000 - $80,000) ÷ 10 = $72,000

($300,000 - $60,000) ÷ 6 = $40,000

$1,700,000 $152,000

$152,000

————— = 8.94%

$1,700,000

The composite life (in years) for these assets is

10.0 years

($560,000 + $720,000 + $240,000) ÷ $152,000 = 10.0 years

A company buys several different assets with varying useful lives at the beginning of the year and is trying to determine which special depreciation method to use.

Which depreciation method allows the company to use one rate to depreciate all the assets?

composite

A company buys several similar assets with the same useful lives at the beginning of the year and is trying to determine which special depreciation method to use.

Which depreciation method allows the company to use one rate to depreciate all the assets?

group.

A company using the composite approach to depreciation sold equipment for $12,000. The equipment was purchased five years earlier for $15,000, and the company has already recorded $5,000 in accumulated depreciation.

What is the gain from the sale?

None

The gain of $2,000 is not recognized ($12,000 - ($15,000 - $5,000)). It is offset against the accumulated depreciation account.

The journal entry is

Cash 12,000

Accumulated Depreciation (5,000 - 2,000) 3,000

Equipment 15,000

Which depreciation method does the real estate industry prefer?

increasing-charge.

An asset costs $200,000 with an expected useful life of five years. At the end of five years, the salvage value is expected to be $20,000.

What is the depreciation base?

$180,000

= $200,000 - $20,000

Accounting for impairment losses

involves a two-step process for recoverability and measurement.

In testing for recoverability of property, plant, and equipment, an impairment loss is required if the

asset's book value exceeds the undiscounted sum of expected future cash flows.

Recent, negative events in an operating division have caused a company to believe that it is possible that it will not be able to fully recover the book value of a group of assets.

What is the second step the company should take in reviewing the assets?

measure the amount of impairment as the excess of the asset's book value over its fair value.

A company wants to determine if an asset is impaired.

How is the recoverability test applied?

carrying value less the expected future cash flow (undiscounted)

A company owns an asset with an original cost of $300,000 and a current book value of $220,000. In reviewing the asset for impairment, the company estimates that the expected future cash flows from the use and disposal of the asset will be $160,000. The fair value of the asset, calculated as the present value of expected future cash flows, is $180,000. The company wants to identify why the asset is considered impaired, according to the recoverability test.

Which statement identifies why the asset is impaired?

the expected future cash flows is less than the book value.

Recognition of impairment for an asset is required if book value exceeds

undiscounted expected cash flows.

A company owns an asset with an original cost of $300,000 and a current book value of $160,000. During a review of the asset for impairment, the company estimates the expected future cash flows from the use and disposal of the asset to be $200,000. There is an active market for this asset, and the fair value of the asset, calculated as the present value of expected future cash flows, is $140,000.

Should this asset be considered impaired?

no, because the estimate of expected future cash flows (undiscounted) is greater than the book value.

When is the restoration of an impairment loss not permitted?

assets held for use.

When is the restoration of an impairment loss permitted?

assets held for disposal.

Several years ago, a company acquired an asset held for use at a cost of $400,000. Last year, the company recognized an impairment loss of $25,000 and properly reduced the asset's book value from $250,000 to $225,000.

Using the asset's new base of $225,000, the company calculates depreciation for the current year to be $10,000, bringing the book value down to $215,000. However, the company has also determined that the asset's fair value has recovered and is now estimated to be $260,000.

How should the company measure the asset on its current balance sheet?

the company should not reverse the impairment and should depreciate the asset by $10,000 to a new book value of $215,000.

Presented below is information related to a piece of equipment owned by a company on December 31, 2019.

Cost $9,450

Accumulated depreciation to date $1,050

Expected future net cash flows $7,350

Fair value $5,040

The company intends to dispose of the equipment sometime in 2020. As of December 31, 2019, the equipment has a remaining useful life of 4 years.

What is the journal entry to record the impairment loss on December 31, 2019?

Debit impairment loss 3,360

Credit accumulated depreciation 3,360

Carrying/book value is $8,400 = $9,450 - $1,050

Net realizable value is $5,040

Impairment exists because CV > NRV

Impairment loss is $3,360 =$ 8,400 - $5,040

A mining company purchased land on February 1, 2020, at a cost of $1,190,000. Attorney fees of $50,000 and surveyor costs of $10,000 is included in the cost of land. It is estimated that a total of 60,000 tons of mineral was available for mining. After it has removed all the natural resources, the company will be required to restore the property to it previous state because of strict environmental protection laws. To help restore the land, the company purchased a CAT bulldozer for $500,000. The bulldozer will be used at this plot of land in addition to other locations.

The company estimated the fair value of the restoration obligation at $90,000. The company believes it will be able to sell the property afterwards for $100,000. The company incurred development costs of $200,000 before it was able to do any mining.

What is the depletion base the company should use?

$1,380,000

= $1,190,000 + $90,000 - $100,000 + $200,000

A company incurred costs of $15.3 million for the rights to extract resources from a natural gas deposit. The company expects to extract 8 million cubic feet of natural gas during a six-year period. Natural gas extracted during years 1 and 2 were 800,000 and 1,600,000 cubic feet, respectively.

What was total depletion for year 1 and year 2 combined, assuming the company uses the units-of-production method?

$4.59 million

Depletion rate = $15.3 million ÷ 8 million cubic feet = $1.9125/cubic foot

Total depletion = (800,000 + 1,600,000) cubic feet × $1.9125 = $4.59 million

A company acquired a tract of land containing an extractable natural resource. The company is required by its purchase contract to restore the land to a condition suitable for recreational use after it has extracted the natural resource. Geological surveys estimate that the recoverable reserves will be 2,500,000 tons, and that the land will have a value of $1,000,000 after restoration. Relevant cost information follows:

Land $7,500,000

Estimated restoration costs $1,500,000

What should be the charge to depletion expense per ton of extracted material?

$3.20

= ($7,500,000 + $1,500,000 - $1,000,000) / $2,500,000

In January 2020, a company purchased a mineral mine for $5,100,000 with removable ore estimated by geological surveys at 2,000,000 tons. The property has an estimated value of $300,000 after the ore has been extracted. The company incurred $1,500,000 of development costs preparing the mine for production. During 2020, 600,000 tons were removed, and 480,000 tons were sold.

What is the journal entry to record the ore extracted?

Debit inventory (ore) 1,890,000

Credit mineral mine 1,890,000

$3.15 = [($5,100,000 + $1,500,000 -$300,000) / 2,000,000]

$1,890,000 = $3.15 x 600,000

In January 2020, a company purchased a mineral mine for $5,100,000 with removable ore estimated by geological surveys at 2,000,000 tons. The property has an estimated value of $300,000 after the ore has been extracted. The company incurred $1,500,000 of development costs preparing the mine for production. During 2020, 600,000 tons were removed, and 480,000 tons were sold.

What is the journal entry to record the ore sold?

Debit cost of goods sold 1,512,000

Credit inventory (ore) 1,512,000

$1,512,000 = $3.15 x 480,000

In January 2020, a company purchased a mineral mine for $5,100,000 with removable ore estimated by geological surveys at 2,000,000 tons. The property has an estimated value of $300,000 after the ore has been extracted. The company incurred $1,500,000 of development costs preparing the mine for production. During 2020, 600,000 tons were removed, and 480,000 tons were sold.

What is the carrying value of the ore at the end of 2020?

$378,000

= $1,890,000 - $1,512,000

A company spends $180,000,000 to purchase and prepare a quarry to mine granite and expects to mine 400,000 tons of granite. The salvage value of the property is $15,000,000, and the expected useful life of the property is 15 years.

What is the journal entry to record depletion if the company extracts 80,000 tons and sells 50,000 tons in the first year?

Debit inventory (granite) 33,000,000

Credit quarry 33,000,000

$33,000,000 = (($180,000,000 - $15,000,000)/400,000) x 80,000

Debit cost of goods sold 20,625,000

Credit inventory (granite) 20,625,000

$20,625,000 = (($180,000,000 - $15,000,000)/400,000) x 50,000

A company invests $50,000,000 into a coal mine estimated to have 20 million tons of coal. The company estimates that it can sell the coal mine for $3,000,000 after it spends $1,000,000 to restore the property after extraction. In year 1, the company extracted and sold 4,000,000 tons of coal.

How much depletion expense is incurred in year 1?

$9,600,000

($50,000,000 + $1,000,000 - $3,000,000) x (4,000,000 / 20,000,000). The salvage value and restoration costs are included in the calculation of depletion.

A company believes a property contains natural resources and pays $80,000 for the property. The company spends $50,000 on a bulldozer to be used in multiple projects, $10,000 to dig the land to find the natural resources, and $3,000 on intangible development costs.

What is the depletion base for the natural resources?

$93,000

Cost of land, exploration, and intangible development cost are all part of the depletion base $80,000+$10,000+$3,000

A company invests $15,000,000 into a coal mine estimated to have 20 million tons of coal. The coal mine is estimated to be in operation for the next five years. In year 1, the company extracted and sold 1 million tons of coal.

How much is depletion in year 1?

$750,000

= ($15,000,000 / 20,000,000) x 1,000,000

A company invested $15,000,000 in a coal mine estimated to have 1,500,000 tons of coal. In the first year, the company extracted 100,000 tons of coal. At the end of the first year, it became clear that the coal mine was likely to have only another 700,000 tons of coal remaining.

What is the depletion rate starting in the second year?

$20.00

= ($15,000,000 - $1,000,000) / 700,000

Using the information above, how is the change in the recoverable reserve estimate accounted for?

currently and prospectively.

A company invested $15,000,000 in a coal mine estimated to have 1,500,000 tons of coal. In the first year, the company extracted 100,000 tons of coal. At the end of the first year, it became evident that the coal mine was likely to have an additional 600,000 tons of coal available (in addition to the original estimate of 1,500,000 tons of coal).

What is the depletion rate starting in the second year?

$7.00 =

($15,000,000 - $1,000,000) / (1,400,000 + 600,000)

A company purchased a mine for $70 million which is estimated to have 250,000 tons of ore and a salvage value of $10 million. The company extracted and sold 50,000 tons in the first year.

What is the journal entry to record depletion expense for the first year?

Debit depletion expense 12,000,000

Credit accumulated depletion 12,000,000

$12,000,000 = (($70,000,000 - $10,000,000)/250,000) x 50,000

A company purchased a mine for $70 million which is estimated to have 250,000 tons of ore and a salvage value of $10 million. The company extracted and sold 50,000 tons in the first year.

Assume in the second year, 150,000 tons of ore are extracted, and 125,000 tons are sold.

What is the journal entry to record depletion expense for the second year?

Debit depletion expense 30,000,000

Credit accumulated depletion 30,000,000

$12,000,000 = (($70,000,000 - $10,000,000)/250,000) x 125,000

A company purchased a mine for $70 million which is estimated to have 250,000 tons of ore and a salvage value of $10 million. The company extracted and sold 50,000 tons in the first year.

How is the 25,000 tons not sold accounted for?

The 25,000 tons of ore that was extracted and not sold is reported in the current asset section of the balance sheet in an Inventory account.

Debit inventory (ore) 6,000,000

Credit accumulated depletion 6,000,000

$6,000,000 = $240 x 25,000

What is the journal entry to record the ore when sold?

Debit cost of goods sold 6,000,000

Credit inventory (ore) 6,000,000

$6,000,000 = $240 x 25,000

A company reported the following information in its annual report:

Net sales

$ 750,000

Total assets at the end of year 2

$ 500,000

Total assets at the end of year 1

$ 450,000

Net income

$ 120,000

What is the company's asset turnover ratio at the end of year 2?

1.58

= $750,000 / (($500,000 + $450,000) / 2)

The company generated $1.58 of sales for every $1.00 of assets.

The selected financial statement information for a company includes the following items:

total assets of $300,000 at the end of the current year

total assets of $500,000 at the end of the prior year

net sales of $3,000,000 in the current year

net income of $1,200,000 in the current year

What is the asset turnover for the current year?

7.5

= $3,000,000 / (($300,000 + $500,000) / 2)

The company generated $7.50 of sales for every $1.00 of assets.

The asset turnover for a company in the most recent accounting year is 1.50.

Which statement accurately describes the meaning of this ratio?

the company generated net sales of $1.50 per dollar of assets in the most recent year.

A company reported total assets of $10,000,000 as of December 31, 2019, and $14,000,000 as of December 31, 2020. Net sales revenue was $6,000,000 for the year ending December 31, 2019, and $8,000,000 for the year ending December 31, 2020.

What is the company's asset turnover ratio for the year ending December 31, 2020? (round to the nearest hundred)

0.67

= $8,000,000 / (($10,000,000 + $14,000,000) / 2)

The company generated $0.67 of sales for every $1.00 of assets.

A company's profit margin on sales was 2.50%, and its asset turnover was 0.50.

What is the company's return on assets for this period?

1.25%

= 2.50% x 0.50

The company generated $0.01 of net income for every $1.00 of assets

The selected financial statement information for a company includes the following items:

• total assets of $15,111,000 at the end of the current year

• total assets of $16,350,000 at the end of the prior year

• net sales of $12,923,000 in the current year

• net income of $1,269,000 in the current year

What is the return on assets for the current year?

8.07%

= $1,269,000 / (($15,111,000+ $16,350,000) / 2)

The company generated $0.08 of net income for every $1.00 of assets.

A company reported the following information in its 2019 annual report:

Net sales $750,000

Total assets at the end of year 2 $500,000

Total assets at the end of year 1 $450,000

Net income $120,000

What is the company's return on assets?

0.25

$120,000 / (($500,000 + $450,000) / 2)

The company generated $0.25 of net income for every $1.00 of assets.

A company reported the following information in its 2019 annual report:

Net sales $750,000

Total assets at the end of year 2 $500,000

Total assets at the end of year 1 $450,000

Net income $120,000

What is the company's profit margin on sales?

16%

= $120,000 / $750,000

The company generated $0.16 of net income for each $1.00 of sale.