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2. Carrying amount is
a. Cost of an asset or the amount substituted for cost in the financial statements, less
residual value.
b. Amount of cash paid or the fair value of the other consideration given to acquire an
asset at the tirne of acquisition or construction.
c. Net amount which the entity expects to obtain for an asset at the end of the useful life
after deducting the expected cost of disposal.
d. Amount at which an asset is recognized in the statement of financial position after
deducting any accumulated depreciation and accumulated impairment loss.
6. All of the following factors are considered in determining the useful life of an asset, except
a. Expected usage of the asset
b. Expected physical wear and tear
c. Technical obsolescence
d. Residual value
ANSWER 40-11
1. a 6. d
2. d 7. d
3. d 8. d
4. d 9. d
5. c 10. c
QUESTION 40-12 Multiple choice (AICPA
Adapted)
1. Which statement 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.
5. Which statement 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 the manner that “smooths” earnings.
c. Repairs and maintenance costs probably would increase in later periods so depreciation
should decrease.
d. Accelerated depreciation provides easier replacement because of the time value of
money.
6. An asset has a nine-year useful life and is to be appreciated under the sum of year’s digits
method. The annual depreciation expense would be the same as that under the straight line
method in the
a. Third year
b. Fifth year
c. Seventh year
d. Ninth year
7. The composite depreciation method
a. Is applied to a group of homogeneous assets
b. Is an accelerated method of depreciation
c. Does not recognize gain or loss on the retirement of single asset in the group
d. Excludes residual value from the base of the depreciation calculation
8. An entity using the composite depreciation method for a fleet of trucks, cars and campers
retired one of the trucks and received cash from a salvage entity. The net carrying amount of
these composite asset accounts would be decreased by the
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 truck
9. A machine with a four-year estimated useful life and an estimated 15% residual value was
acquired at the beginning of the current year. The increase in accumulated depreciation for the
second year using the double declining balance method would be
a. Original cost x 85% x 50%
b. Original cost x 50%
c. Original cost x 85% x 50% x 50%
d. Original cost x 50% x 50%
10. A machine with a 5-year estimated useful life and an estimated residual value was acquired
at the beginning of the current year. At the end of the fourth year, accumulated depreciation
using the sum of 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 multipled by 14 / 15
d. Original cost multiplied by 1 / 15
ANSWER 40-12
1. b 6. b
2. b 7. c
3. b 8. b
4. a 9. d
5. a 10. b
40-13 Multiple choice (IAA)
1. Depreciation is best described as a method of
a. Asset valuation
b. Current value allocation
c. Cost allocation
d. Useful life determination
3. A method which excludes residual value from the base for the depreciation calculation is
a. Straight line
b. Sum of year's digits
c. Double declining balance
d. Output method
5. Which depreciation method applies a uniform depreciation rate each period to the carrying
amount of an asset?
a. Straight line
b. Declining balance
c. Output method
d. Sum of years' digits
9. Which depreciation method 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
ANSWER 40-13
1. c 6. a
2. a 7. c
3. c 8. d
4. d 9. d
5. b 10. d