Problem 26-2

2.

3.

4.

5.

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

2.

3.

4.

5.

6.

7.

8.

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.

c. The accumulated depreciation is not adjusted but the remaining carrying

amount is allocated over the remaining life using the straight line method.
d. The accumulated depreciation is not adjusted but the remaining carrying amount is
allocated over the original life using the straight line method.
9. An entity acquired equipment and used the straight line depreciation with a useful life of 15
years and no residual value. After 4 years of using the asset, the entity estimated that the
remaining life of the equipment was six years with no residual value. How should this
change be accounted for?
a. Revising future depreciation annually to equal the original cost divided by six.
b. Revising future depreciation annually to equal the carrying amount after 4 years
divided by six.
c. Disclosing the effect of the change on each years earnings, but maintaining the
depreciation as originally determined.
d. Revising future depreciation annually to equal the depreciable amount divided by six.
10.An addition that is an integral part of an older asset normally would be depreciated over
a. The useful life of the addition
b. The useful life of the addition or the original asset, whichever is shorter
c. The useful life of the original asset
d. Either the useful life of the addition or the original asset, as a matter of professional
judgment

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

d. An asset incurs increasing repairs and maintenance with use

5. Which of the following reasons provides the best theoretical support for accelerated
depreciation?
a. Assets are more efficient in early years and initially generate more revenue.
b. Expenses should be allocated in a manner that smooths earnings.
c. Repair and maintenance costs would probably increase significantly in later periods so
depreciation should decline.
d. Accelerated depreciation provides earlier replacement because of the time value of
money.
6. A depreciable asset has an estimated 15% residual value. At the end of its estimated useful
life, the accumulated depreciation would equal the original cost of the asset under which of
the following depreciation methods?
I. Straight line
II. Output method
a. I only
b. II only
c. Both I and II
d. Neither I nor II
7. A machine with a five-year estimated useful life and an estimated 10% residual value was
acquired at the beginning of the current year. At the end of the fourth year, accumulated
depreciation, using the sum of the years digits method, would be
a. Original cost less residual value multiplied by 1/15.
b. Original cost less residual value multiplied by 14/15.
c. Original cost multiplied by 14/15.
d. Original cost multiplied by 1/15.
8. Which of the following uses straight line depreciation?
I. Group depreciation
II. Composite depreciation
a. I only
b. II only
c. Both I and II
d. Neither I nor II
9. The composite depreciation method
a. Is applied to a group of homogenous assets
b. Is an accelerated method of depreciation
c. Does not recognize gain or loss on the retirement of a single asset in the group
d. Excludes residual value from the base of the depreciation calculation
10.An entity using the composite depreciation method for its fleet of trucks, cars, and campers
retired one of its trucks and received cash from a salvage entity. The net carrying amount of
these composite assets would be decreased by
a. Cash proceeds received and original cost of the truck.
b. Cash proceeds received.
c. Original cost of the truck less the cash proceeds.
d. Original cost of the truck.

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.