FINALS SA1: DEPRECIATION and

DEPLETION
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MC Theory
Choose the BEST POSSIBLE answer.

A company using the group depreciation method for its delivery trucks retired one of
the trucks after the average service life of the group was reached. Cash proceeds
were received from a salvage company. The net carrying amount of these group asset
accounts would be decreased by the *
2 points

original cost of the truck.

original cost of the truck less the cash proceeds.
cash proceeds received.
cash proceeds received and original cost of the truck.

Which statement regarding depreciation is incorrect? *

2 points

Depreciation of noncurrent operating assets is an accounting process for the purpose of allocating asset
costs over the periods benefited by use of the assets
Service value declines as a function of time rather than use, is the assumption on which straight-line
depreciation is based
The composite depreciation method does not recognize gain or loss on the retirement of specific assets in
the group.
The double-declining-balance method ignores salvage value in calculating periodic depreciation expense.
none of the above

Depreciation of noncurrent operating assets is an accounting process for the purpose

of *
2 points

reporting the declining asset values on the balance sheet.

allocating asset costs over the periods benefited by use of the asset.
accounting for costs to reflect the change in general price levels.
Setting aside funds to replace assets when their economic usefulness expires.

Which reason provides the best theoretical support for accelerated depreciation? *
2 points

Assets are more efficient in early years and initially generate more revenue.
Expenses should be allocated in a manner that "smooths" earnings.
Repairs and maintenance costs will probably increase in later periods, so depreciation should decline.
Accelerated depreciation provides easier replacement because of the time value of money.

Exploration and evaluation expenditures are incurred *

2 points

When searching for an area that may warrant detailed exploration, even though the entity has not yet
obtained the legal rights to explore a specific area.
When the legal rights to explore a specific area have been obtained, but the technical feasibility and
commercial viability of extracting a mineral resource are not yet demonstrable.
When a specific area is being developed and preparations for commercial extraction are being made.
In extracting mineral resource and processing the resource to make it marketable or transportable.

Depletion expense *
2 points

Is usually part of cost of goods sold.

Includes tangible equipment cost in the depletable cost.
Excludes intangible development cost from the depletable cost.
Excludes restoration cost from the depletable cost.

Which principle best describes the conceptual rationale for the methods of matching
depreciation expense with revenues? *
2 points

Partial recognition
Immediate recognition
Systematic and rational allocation
Associating cause and effect

When the estimate of an asset's useful life is changed, *

2 points

depreciation expense for past periods must be recalculated.

depreciation expense for future years is not changed.
depreciation expense for the current and future years is changed.
None of the above

Which depreciation method most closely approximates the method used to deplete the
cost of natural resources? *
2 points

Straight-line
Double-declining-balance
Sum-of-the-years'-digits
Units-of-production
A method that ignores salvage value in calculating periodic depreciation expense. *
2 points

productive-output
group composite
sum-of-the-years'-digits
double-declining-balance

Which statement is the assumption on which straight-line depreciation is based? *

2 points

The operating efficiency of the asset decreases in later years.

Service value declines as a function of time rather than use.
Service value declines as a function of obsolescence rather than time.
Physical wear and tear is more important than economic obsolescence.

An item of PPE is said to be fully depreciated when *

2 points

Salvage value equals zero

Accumulated depreciation equals salvage value
Cost equals Depreciable amount
Depreciable amount equals zero

According to GAAP, which method may be used to account for the costs of drilling dry
wells in the oil and gas industry? *
2 points

successful effort method

full cost method.
either A or B
neither A nor B

The composite depreciation method *

2 points

is applied to a group of homogeneous assets.

is an accelerated method of depreciation.
does not recognize gain or loss on the retirement of specific assets in the group.
excludes salvage value from the base of depreciation calculation.

The sum-of-the-years'-digits method of depreciation is being used for a machine with a

five-year estimated useful life. What would be the fraction applied to the cost to be
depreciated in the fourth year? *
2 points

4/5
2/5
4/15
2/15

Which expenditure would never qualify as an exploration and evaluation asset? *

2 points

Expenditure for acquisition of rights to explore.

Expenditure for exploratory drilling.
Expenditures related to the development of mineral resource.
Expenditures for activities in relation to evaluating the technical feasibility and commercial viability of
extracting a mineral resource.

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FINALS SA1: DEPRECIATION and

DEPLETION
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MC PROBLEMS
Choose the BEST POSSIBLE answer.

Kindly present a picture/scanned copy of your handwritten solution, with your complete name appearing in the
upper left side corner of each page of paper.

Mango Co. owns a machine that was bought on January 1, 2017, for P752,000. The
machine was depreciated under the sum of the years' digits method using estimated
useful life of 5 years and salvage value of P48,000. At the beginning of 2020, Mango
Co. determined that the useful life of the machine should have been 4 years and the
salvage value P70,400. For the year 2020, how much should be recognized as
depreciation expense? *
3 points

P38,400
P88,800
P118,400
P140,800
answer not given

SMR Coal Mining acquires a property at a cost of P10,000,000. Intangible

development costs amounted to P2,400,000. After extraction has occurred, SMR Coal
Mining must restore the property (estimated present value of the obligation is
P1,200,000), after which it can be sold for P3,400,000. The company estimates that
100,000 tons of coal can be extracted. If 18,000 tons were extracted during the first
year, which of the following would be included in the entry to record the depletion? *
3 points

Debit to accumulated depletion for P1,836,000.

Debit to inventory for P1,836,000.
Credit to inventory for P1,800,000.
Credit to accumulated depletion for P3,060,000.

LM Corporation purchased 20 acres of land for P120,000,000. The company expects

to extract 5 million tons of minerals from this lad over the next 20 years, at which time,
residual value shall be P6,000,000. The following costs were also incurred related to
the mining activities: Successful exploration costs, P10,000,000 and cost of
P1,600,000 for dry wells. During the first 2 years of the mine’s operations, 300,000
tons were mined each year and sold for P80 per ton. How much would be the
depletion for the second year? *
3 points

6,000,000
7,000,000
7,440,000
7,536,000

Orange Company purchased a drilling machine in 2010 for P240,000. The machine
was depreciated on the straight-line method over an estimated useful life of 20 years,
with no salvage value. At the beginning of 2020, when the machine had been in use
for 10 years, the company paid P40,000 to overhaul the machine. As a result of this
improvement, the company estimated that the useful life of the machine would be
extended an additional 5 years. What would be the depreciation expense recorded for
the machine in 2020? *
3 points

P8,000
P10,667
P12,000
P14,667
answer not given

On January 1, 2017, Ube Co. purchased equipment at a cost of P420,000. The

equipment was estimated to have a useful life of 5 years and a salvage value of
P60,000. Ube Co. uses the sum of the years' digits method of depreciation. What
should the accumulated depreciation be at December 31, 2020? *
3 points

P240,000
P288,000
P336,000
P360,000

*
3 points

13.3
16.0
18.0
19.8
ABC, Inc. purchased a crane on January 1, 2018, for P205,500. At the time of
purchase, the crane was estimated to have a life of 6 years and a residual value of
P13,500. In 2020, ABC Inc. determined that the crane had a total useful life of 7 years
and a residual value of P9,000. If ABC Inc. uses the straight line method of
depreciation, what will be the depreciation expense for the crane in 2020? *
3 points

P32,000
P26,500
P18,928
P16,000

In January 2018 PM Corporation purchased a mineral mine for P14,400,000 with

removable ore estimated by geological surveys at 8,640,000 tons. The property has
an estimated value of P1,440,000 after the ore has been extracted. The company
incurred P4,320,000 of intangible development costs in preparing the property for the
extraction of ore. During 2020, 1,080,000 tons were removed and 960,000 were sold.
For the year ended December 31, 2020, how much should the company include as
depletion in its cost of goods sold? *
3 points

1,440,000
1,620,000
1,920,000
2,160,000

On January 1, 2018, Nickel Co. purchased a land for P12,000,000. The company
expected to extract 2,000,000 tons of mine from this land over the next 20 years at
which time, the residual value of the asset shall be zero. During 2018 and 2019
operations, 60,000 tons were mined each year and sold for P80 per ton. The estimate
of the remaining lifetime capacity of the mine was raised to 2,400,000 tons at the start
of 2020 and the residual value was to be P960,000. How much should be recognized
as depletion in 2020 if the total production for 2020 is 100,000 tons? *
3 points

P430,000
P450,000
P455,000
P470,000

On January 1, 2020, Banana Co. entered into a contract to acquire a new machine for
its factory. The machine, which had a cash price of P300,000, was paid for as follows:
Down payment P30,000; Note payable in 10 equal monthly installments P240,000;
1,000 shares of Banana Co. ordinary shares with an agreed value of P50 per share:
P50,000 Total P320,000. Prior to the machine's use, installation costs of P8,000 were
incurred. The machine has an estimated useful life of 10 years and salvage value of
P10,000. What should the company record as depreciation expense for the first year
under the straight line method? *
3 points

P29,800
P30,000
P31,000
P31,800

Apple Co. purchased a machine on January 1, 2019, for P180,000 cash. The machine
has an estimated useful life of 4 years and a salvage value of P47,000. The company
uses the double-declining-balance method of depreciation for all its assets. What will
be the carrying amount of the machine as of December 31, 2020? *
3 points

P51,000
P47,000
P45,000
P43,000
answer not given

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