Mastering Depreciation
MASTERING DEPRECIATION
TESTBANK
Section 1DEPRECIATION ON THE FINANCIAL STATEMENTS V. TAX RETURN
1.The cost of a plant asset is recognized:
a.when it is paid for.
b.as it yields benefits to the company.
c.in the period in which it is acquired.
d.in the period in which it is sold.
2.Depreciation expense:
a.must be computed annually, but may also be computed for shorter periods
b.may be computed either annually or for shorter periods, but not both
c.must be computed once over the life of the asset
d.may be computed either annually or once over the life of the asset
3.The purpose of depreciation isto:
a.provide a tax deduction over several years.
b.match an asset’s cost per year to the depreciable base divided by the number of years the asset is expected to be in service.
c.match an asset’s cost to the revenue that the asset helps the company produce each year.
d.none of the above.
4.Which of the following statements about the accumulated depreciation accountis correct?
a.It appears on the balance sheet and represents the total depreciation expense taken in the current year.
b.It appears on the balance sheet and represents the total depreciation expense taken in all years to date.
c.It appears on the income statement and represents the total depreciation expense taken in the current year.
d.It appears on the income statement and represents the total depreciation expense taken in all years to date.
5.When a CPA examines a company’s financial statements and expresses an opinion on whether they materially conform to GAAP rules, this service is referred to as a(n):
a.compilation
b.audit
c.review
d.none of the above
© American Institute of Professional Bookkeepers, 2010
Section 2DEPRECIATION UNDER GAAP (FOR BOOK PURPOSES)
1.A company purchases land and a building for $300,000. The appraisal attributes a fair market value (FMV) to the land of $180,000 and to the building of $220,000. As a result, the building’s cost will be booked at:
a.$220,000
b.$165,000
c.$135,000
d.$180,000
2.A company purchases land and a building for $300,000. The appraisal attributes a fair market value (FMV) to the land of$180,000 and to the building of $220,000. As a result, the land’s cost will be booked at:
a.$220,000
b.$165,000
c.$135,000
d.$180,000
3.Your firm purchases a bookcase and you are given the following data:
Cost$700
Sales tax35
Freight (paid by purchaser)40
To record the purchase, you:
a.debit Sales Tax Expense for $35.
b.debit Furniture for $700.
c.debit Furniture for $775.
d.debit Furniture for $740.
4.An asset’s original cost does not include:
a.invoice price
b.freight-in
c.set-up costs
d.freight-out
5.Your firm purchases equipment and you are given the following data:
Cost$10,000
Sales tax700
Delivery cost100
Installation cost75
For what amount do you debit the Equipment account?
a.$10,000
b.$10,700
c.$10,775
d.$10,875
Section 3THE STRAIGHT-LINE METHOD OF DEPRECIATION
Assume all companies are on a calendar year unless otherwise stated.
1.On January 1, 20X1, your company, which uses the straight-line method,purchases 3 machines,recorded as follows:
CostSalvage ValueUseful Life
Machine No. 1$ 6,000$1,0005 years
Machine No. 26,0001,00010 years
Machine No. 311,0001,00010 years
What is total 20X1depreciation for the 3 machines?
a.$2,500
b.$2,900
c.$1,250
d.$5,000
2.DepCo uses the straight-line method.Assets purchased between the 1st and 15th are depreciated for the entire month; assets purchased after the 15thas though they were acquired the following month. On March 20, 20X1,DepCo purchases for $9,000 a printer that it expects to last for 5 years and to have a residual value of $2,000. What is 20X1depreciation expense for the printer?
a.$1,000
b.$800
c.$1,050
d.$250
3.DepCo uses the straight-line method. Assets purchased between the 1st and 15th are depreciated for the entire month; assets purchased after the 15thas though they were acquired the following month. On March 20, 20X1, DepCo purchases for $9,000 a printer that it expects to last for 5 years and to have a residual value of $2,000. What is 20X2 depreciation expense for the printer?
a.$1,400
b.$800
c.$750
d.$250
4.DepCo uses the straight-line method. Assets purchased between the 1st and 15th are depreciated for the entire month; assets purchased after the 15thas though they were acquired the following month. On March 20, 20X1, DepCo purchases for $9,000 a printer that it expects to last for 5 years andhave a residual value of $2,000. What is the balance in DepCo’s Accumulated Depreciation account as of Dec. 31,20X3?
a.$3,000
b.$3,850
c.$1,750
d.Insufficient information to calculate
5.On January 1, 20X1, PrimeCo,which uses the straight-line method, purchases for $59,000 a machine that it expects to last for 10 years and to have a residual value of $8,000. What is the machine’s book value at the end of 20X3?
a.$15,300
b.$35,700
c.$53,900
d.$43,700
6.On July 1, 20X1, your company, which uses the straight-line method, purchases 3 machines,as follows:
CostSalvage ValueUseful Life
Machine No. 1$80,000$14,00012 years
Machine No. 255,00010,0008 years
Machine No. 327,0003,0005 years
Assets purchased between the 1st and 15th are depreciated for the entire month; assets purchased after the 15thas though they were acquired the following month. What is total 20X1 depreciation for the 3 machines?
a.$15,925
b.$9,471
c.$7,963
d.$18,942
7.RayCouses the straight-line method.Assets purchased between the 1st and 15th are depreciated for the entire month; assets purchased after the 15thas though they were acquired the following month. On May12, 20X1, RayCo purchases for $25,000furniture that itexpects to last for 10 years and to have a residual value of $1,000. What is20X1 depreciation expense for the furniture?
a.$1,600
b.$2,400
c.$1,200
d.$1,400
8.MyCo uses the straight-line method.Assets purchased between the 1st and 15th are depreciated for the entire month; assets purchased after the 15thas though they were acquired the following month. On April22, 20X1, MyCo purchases for $50,000equipment that it expects to last for 10 years and to have a residual value of $5,000. What is 20X2 depreciation expense for the equipment?
a.$3,375
b.$3,000
c.$4,500
d.$5,000
9.ZyCo uses the straight-line method.Assets purchased between the 1st and 15th are depreciated for the entire month; assets purchased after the 15thas though they were acquired the following month. On May 2, 20X1, ZyCo purchases for $25,000furniture that it expects to last for 10 years and to have a residual value of $1,000. What is the balance in the accumulated depreciation account at the end of 20X3?
a.$2,400
b.$6,400
c.$7,200
d.Insufficient information to calculate
10.Under GAAP, the straight-line depreciation rateequals:
a.Depreciable base/Years of estimated life
b.Depreciation rate × Depreciable base
c.(Original cost – Residual value)/Years of estimated life
d.1/Years of estimated life
11.On January 1, 20X1, PrimeCo,which uses the straight-line method, purchases for $59,000 a machine that it expects to last for 10 years and to have a residual value of $8,000. What is the balance in the Accumulated Depreciation account at the end of 20X4?
a.$20,400
b.$15,300
c.$23,600
d.$38,600
Section 4THE UNITS OF PRODUCTION (UOP) METHOD OF DEPRECIATION
1.Georgia Inc., which uses UOP depreciation, purchases for $16,000 a machine witha useful life of 15,000 machine hours and a salvage value of $1,000. You are given the following data:
20X13,000
20X22,200
20X36,170
20X45,300
Depreciation expense on the machine for 20X4 is:
a.$3,000
b.$3,630
c.$5,300
d.$3,200
2.On May 1, 20X1, your company, which uses UOP depreciation, purchases for $260,000 a machine with a useful life of 2,520,000 units and a residual value of $10,000. In 20X1, the machine produces 100,000 units;in 20X2, 120,000 units. What is the balance in Accumulated Depreciation at the end of 20X2?
a.$10,912
b.$11,904
c.$21,824
d.$9,920
3.If you get a memo stating your firm uses the following formula to compute depreciation, what depreciation method will you be using?
(Historical cost – Salvage value)/Total estimated units of output
a.Straight-line
b.Units of production
c.Sum-of-the-years’ digits
d.Declining balance
4.On January 1, 20X1, ZipCo, which uses UOP depreciation, purchasesfor $24,000, a truck with an estimated useful life of 100,000 miles and a residual value of $4,000. Miles driven are as follows:
Year / Miles20X1 / 20,000
20X2 / 15,000
20X3 / 10,000
20X4 / 25,000
20X5 / 30,000
Depreciation expense for the truck is 20X1 is:
a.$4,000
b.$4,800
c.$20,000
d.$24,000
5.On July 1, 20X1, ZipCo, which uses UOP depreciation, purchases for $36,000a truck with an estimated useful life of 60,000 miles and a residual value of $6,000. Miles driven are as follows:
Year / Miles20X1 / 5,000
20X2 / 10,000
20X3 / 20,000
20X4 / 25,000
20X5 / 30,000
The book value of the truckon December 31, 20X3 is:
a.$18,500
b. $26,000
c. $12,500
d. $33,500
Section 5THE DECLINING BALANCE (DB) METHOD OF DEPRECIATION
Assume all companies are on a calendar year unless otherwise stated.
1.Your company uses the DDB method. Assets purchased between the 1st and 15th are depreciated for the entire month; assets purchased after the 15thas though they were acquired the following month. On May 1, 20X1, it purchases for $250,000a machinewith a useful lifeof 12yearsand a salvage value of $10,000. What is the machine's book value at the end of 20X2?
a.$173,611
b.$185,185
c.$208,323
d.$215,278
2.Your companyuses the DDB method. Assets purchased between the 1st and 15th are depreciated for the entire month; assets purchased after the 15thas though they were acquired the following month.On July 1, 20X1, it purchases for $200,000 machine with a useful life of 10 years and a salvage value of $20,000.What is20X2 depreciation expense?
a.$38,800
b.$32,400
c.$32,000
d.$36,000
3.On January 1, 20X1, your company purchases for $500,000a machine with a useful life of 12 years and a salvage value of $25,000. If your company uses DDB depreciation, what is 2004 expense?
a.$48,225
b.$45,814
c.$47,839
d.$45,428
4.Your companyuses the DDB method. Assets purchased between the 1st and 15th are depreciated for the entire month; assets purchased after the 15thas though they were acquired the following month.On April 6, 20X1, your firm purchases for $250,000a machine thatmanagement estimates will last 15 years and have a salvage value of $10,000. What is 20X1 depreciation expense?
a.$21,333
b.$25,000
c.$33,333
d.$32,000
5.Yourfirm uses 150% depreciation.Assets purchased between the 1st and 15th are depreciated for the entire month; assets purchased after the 15thas though they were acquired the following month.On March 12, 20X1, your companypurchases for $200,000a machine that it estimates will last 10 years and have a salvage value of $60,000. What is 20X1 depreciation expense?
a.$21,000
b.$30,000
c.$17,500
d.$25,000
6.Your company uses the DDB method. Assets purchased between the 1st and 15th are depreciated for the entire month; assets purchased after the 15thas though they were acquired the following month.On January 12, 20X1, your companypurchases for $200,000a machine that management estimates will last 10 years and have asalvage value of $50,000. What is 20X2 depreciation expense?
a.$32,000
b.$40,000
c.$30,000
d.$24,000
7.On January 22, 20X1, your company purchases a machine for $200,000. Your company uses 150% DB depreciation. Assets purchased between the 1st and 15th are depreciated for the entire month; assets purchased after the 15thas though acquired the following month.Management estimates the machine will last 10 years and have a salvage value of $60,000. What is 20X1 depreciation expense?
a.$21,000
b.$27,500
c.$19,250
d.$25,667
8.On July 8, 20X1, your company purchases a machine for $100,000. Yourfirm uses the DDB method. Assets purchased between the 1st and 15th are depreciated for the entire month; assets purchased after the 15thas though acquired the following month.Management estimates the machine will last 8 years and have a salvage value of $35,000. The book value at the end of 20X1 is:
a.$32,000
b.$12,500
c.$68,000
d.$87,500
9.On November 17, 20X1, your company purchases a building for $500,000. Your company uses the DDB method. Assets purchased between the 1st and 15th are depreciated for the entire month; assets purchased after the 15thas though acquired the following month.Management estimates the building will last 50 years and have a salvage value of $150,000. What is20X1 depreciation expense?
a.$20,000
b.$1,667
c.$3,333
d.$14,000
10.On April 21, 20X1, your company purchases a building for $600,000. Yourfirm uses the DDB method. Assets purchased between the 1st and 15th are depreciated for the entire month; assets purchased after the 15thas though acquired the following month.Management estimates the building will last 40 years and have a salvage value of $100,000. Depreciation expense for 20X1 is:
a.$20,000
b.$16,667
c.$22,500
d.$30,000
Section 6THE SUM-OF-THE-YEARS’-DIGITS (SYD) METHOD OF DEPRECIATION
Assume all companies are on a calendar year unless otherwise stated.
1.On January 1, 20X1, your company purchases for $550,000a machine with an estimated useful life of 10 years and a salvage value of $50,000. Using SYD depreciation, the 20X2 depreciation expense is:
a.$81,818
b.$90,000
c.$18,182
d.$200,000
2.On January 1, 20X1, your company purchases for $450,000 a machine with an estimated useful life of7years and a salvage value of $40,000. Using SYD depreciation, What is20X4 depreciation expense?
a.$73,214
b.$64,286
c.$58,571
d.$87,857
3.On July 11, 20X1, your firm purchases for $125,000a machine with an estimated useful life of 8 years and asalvage value of $5,000. Yourfirm uses SYD depreciation and depreciates assets purchased between the 1st and 15th of the month for the entire month and assets purchased after the 15thas though they were acquired the following month.What is 20X1 depreciation expense?
a.$11,111
b.$13,333
c.$26,667
d.$13,889
4.On January 12, 20X1, your company purchases for $125,000 a machine with an estimated useful life of 15 years and a salvage of $5,000. Your company uses SYD depreciation and depreciates assets purchased between the 1st and 15thof the month for the entire month and assets purchased after the 15thas though they were acquired the following month.What is the machine’s book value at the end of 20X1?
a.$107,143
b.$115,000
c.$113,718
d.$110,000
5.On February 28, 20X1, your company purchases for $150,000 a machine with an estimated useful life of last 10 years and a salvage value of $10,000. Your company uses SYD depreciation and depreciates assets purchased between the 1st and 15thof the month for the entire month and assets purchased after the 15thas though they were acquired the following month.What is 20X1 depreciation expense?
a.$21,212
b.$23,333
c.$25,455
d.$27,273
6.On May 1, 20X1, your company purchases for $260,000 a machine with an estimated useful life of 12 years and a salvage value of $10,000. Your company uses SYD depreciation and depreciates assets purchased between the 1st and 15thof the month for the entire month and assets purchased after the 15thas though they were acquired the following month.What is20X2 depreciation expense?
a.$38,462
b.$38,256
c.$36,325
d.$35,256
Section 7DEPRECIATION UNDER FEDERAL INCOME TAX DEPRECATION RULES
1.Below are four asset purchases made in 2009.
AssetCostDate
Office Table$1,000January 1, 2009
Office Desk1,500September 29, 2009
File Cabinet2,000October 15, 2009
Computer6,000December 31, 2009
What is the maximum 2009 Section 179 deductionfor these purchases?
a.$10,500
b.$2,500
c.$8,000
d.$0
2.On May 11, 2009, your calendar year firm pays $6,000 for a used computer server, its only asset purchase for the year, and estimates that the serverwill have a salvage value of $500. If no Section 179 deduction is taken, what is your firm’s maximum2009deduction for depreciation?
Table 1: Half-Year Convention
200% Declining Balance
Year / 3 Year / 5 Year / 7 Year1 / 33.33% / 20.00% / 14.29%
2 / 44.45% / 32.00% / 24.49%
3 / 14.81% / 19.20% / 17.49%
4 / 7.41% / 11.52% / 12.49%
5 / 11.52% / 8.93%
6 / 5.76% / 8.92%
7 / 8.93%
8 / 4.46%
a.$2,000
b. $1,200
c. $1,100
d. $869
3.Depreciation of property other than real property begins in the middle of the quarter in which it is placed in service when more than:
a.25% of the total cost of all depreciable property placed in service during the year occurs during the fourth quarter.
b.40% of the total cost of Section 179 property placed in service during the year occurs during the fourth quarter.
c.40% of the total cost of all depreciable property placed in service during the year occurs during the fourth quarter.
d.25% of the total cost of Section 179 property placed in service during the year occurs during the fourth quarter.
4.On May 11, 2009, your calendar year firm pays $10,000 for a newmachine, its only asset purchase for the year, and estimates that the machinewill have a salvage value of $1,000. If your firm does not take a Section 179 deduction, how much depreciation will the firm claim on its2009 federal income tax return based on the MACRS table below?
Table 1: Half-Year Convention
200% Declining Balance
Year / 3 Year / 5 Year / 7 Year1 / 33.33% / 20.00% / 14.29%
2 / 44.45% / 32.00% / 24.49%
3 / 14.81% / 19.20% / 17.49%
4 / 7.41% / 11.52% / 12.49%
5 / 11.52% / 8.93%
6 / 5.76% / 8.92%
7 / 8.93%
8 / 4.46%
a.$6,000
b. $1,429
c. $2,000
d. $5,715
5.On May 11, 2009, your calendar year firm purchases for $10,000 a used machine with an estimated salvage value of $1,000. Ifthe machine is the only fixed asset purchased in 2009 and no Section 179 deduction is taken, what is your firm’s maximum 2009 deduction for depreciation?
Table 1: Half-Year Convention
200% Declining Balance
Year / 3 Year / 5 Year / 7 Year1 / 33.33% / 20.00% / 14.29%
2 / 44.45% / 32.00% / 24.49%
3 / 14.81% / 19.20% / 17.49%
4 / 7.41% / 11.52% / 12.49%
5 / 11.52% / 8.93%
6 / 5.76% / 8.92%
7 / 8.93%
8 / 4.46%
a.$6,000
b. $1,429
c. $2,000
d. $5,715
6.Depreciation of fixed assets underGAAP v. for tax purposes is based on:
a.original cost less salvage valueunder GAAPv. original cost for tax purposes.
b.original cost for GAAP v. the original cost less salvage value for tax purposes.
c.original cost less the salvage value both under GAAP and for tax purposes.
d.original cost both under GAAP and for tax purposes.
7.Generally,under MACRS, the recovery period for a computer is:
a.3 years
b.4 years
c.5 years
d.7 years
8.Under MACRS, the recovery period for commercial real estate placed in service in 2009 is:
a.31½ years
b.27½ years
c.39 years
d.7 years
9.Under MACRS, the recovery period for residential real property is:
a.31½ years
b.27½ years
c.39 years
d.7 years
10.Generally, under MACRS, the recovery period for machinery is:
a.3 years
b.4 years
c.5 years
d.7 years
Section 8TAX DEPRECIATION OF PASSENGER CARS AND OTHER VEHICLES
1.If a used SUV purchased in 2009 costs $50,000 and weighs5,800 pounds, the maximum Section 179 expense that can be taken is:
a.$0
b.$2,960
c.$25,000
d.$50,000
2.If anew SUV that costs $50,000 and weighing 6,500 pounds is placed in service in 2009,the maximum Section 179 expense that can be taken is:
a.$0
b.$10,960
c.$25,000
d.$50,000
3.If a newpassenger autothat costs $50,000 and weighs5,000 pounds is placed in service in 2009,the maximum Section 179 expense that can be taken is:
a.$0
b.$10,960
c.$25,000
d.$50,000
4.Under MACRS, the recovery period for a passenger auto is:
a.3 years
b.4 years
c.5 years
d.7 years
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