Q. If an asset is sold before the end of its useful life, what must be calculated?
A.
Book Value
B.
Depreciation Expense
C.
Market Value
D.
Residual Value
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Solution
When an asset is sold before the end of its useful life, the Book Value must be calculated to determine any gain or loss on the sale.
Correct Answer:
A
— Book Value
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Q. If an asset is sold for more than its book value, what is the accounting treatment?
A.
Record a loss
B.
Record a gain
C.
No entry required
D.
Adjust the depreciation method
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Solution
If an asset is sold for more than its book value, a gain is recorded in the financial statements.
Correct Answer:
B
— Record a gain
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Q. In the Units of Production Method, depreciation expense is based on what factor?
A.
Time
B.
Usage
C.
Market Value
D.
Cost
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Solution
The Units of Production Method calculates depreciation based on the actual usage or production of the asset.
Correct Answer:
B
— Usage
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Q. In which scenario would the Units of Production Method be most appropriate?
A.
For a building with a long useful life
B.
For machinery that is used more in certain periods
C.
For office furniture
D.
For land improvements
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Solution
The Units of Production Method is most appropriate for machinery that is used more in certain periods, as it ties depreciation to actual usage.
Correct Answer:
B
— For machinery that is used more in certain periods
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Q. What is the effect of using an accelerated depreciation method on financial statements?
A.
Higher net income in early years
B.
Lower net income in early years
C.
No effect on net income
D.
Higher cash flow in early years
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Solution
Using an accelerated depreciation method results in lower net income in the early years due to higher depreciation expenses.
Correct Answer:
B
— Lower net income in early years
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Q. What is the effect of using the Straight-Line Method on financial statements?
A.
Higher initial expenses
B.
Lower net income in early years
C.
Consistent expense recognition
D.
Variable expense recognition
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Solution
The Straight-Line Method results in consistent expense recognition, leading to stable net income over the asset's useful life.
Correct Answer:
C
— Consistent expense recognition
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Q. What is the main advantage of the Units of Production Method?
A.
Simplicity
B.
Accuracy in matching expenses to revenues
C.
Lower initial depreciation
D.
Higher tax benefits
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Solution
The main advantage of the Units of Production Method is its accuracy in matching expenses to revenues based on actual usage.
Correct Answer:
B
— Accuracy in matching expenses to revenues
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Q. What is the primary characteristic of the Declining Balance Method of depreciation?
A.
It uses a fixed percentage of the asset's book value.
B.
It allocates the same amount each year.
C.
It is based on the number of units produced.
D.
It is only used for tax purposes.
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Solution
The Declining Balance Method uses a fixed percentage of the asset's book value, resulting in higher depreciation expenses in the earlier years.
Correct Answer:
A
— It uses a fixed percentage of the asset's book value.
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Q. What is the primary purpose of calculating depreciation?
A.
To reduce taxable income
B.
To reflect asset usage
C.
To determine market value
D.
To increase cash flow
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Solution
The primary purpose of calculating depreciation is to reduce taxable income by recognizing the expense associated with asset usage.
Correct Answer:
A
— To reduce taxable income
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Q. When switching from one depreciation method to another, what must be done?
A.
Recalculate past depreciation
B.
Disclose the change
C.
Ignore the change
D.
Change the asset's useful life
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Solution
When switching from one depreciation method to another, the change must be disclosed in the financial statements.
Correct Answer:
B
— Disclose the change
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Q. Which depreciation method would be most appropriate for a vehicle that is expected to have a higher usage in the first few years?
A.
Straight-Line Method
B.
Declining Balance Method
C.
Units of Production Method
D.
Sum-of-the-Years'-Digits Method
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Solution
The Declining Balance Method is appropriate for assets like vehicles that experience higher usage and wear in the initial years.
Correct Answer:
B
— Declining Balance Method
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Q. Which depreciation method would likely result in the highest total depreciation expense over an asset's life?
A.
Straight-Line Method
B.
Declining Balance Method
C.
Units of Production Method
D.
None of the above
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Solution
The Declining Balance Method typically results in the highest total depreciation expense over an asset's life due to accelerated depreciation in the early years.
Correct Answer:
B
— Declining Balance Method
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Q. Which method of depreciation allocates an equal amount of depreciation expense each year?
A.
Declining Balance Method
B.
Straight-Line Method
C.
Units of Production Method
D.
Sum-of-the-Years'-Digits Method
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Solution
The Straight-Line Method allocates an equal amount of depreciation expense each year over the useful life of the asset.
Correct Answer:
B
— Straight-Line Method
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Q. Which method of depreciation would likely result in the lowest book value at the end of an asset's useful life?
A.
Straight-Line Method
B.
Declining Balance Method
C.
Units of Production Method
D.
All methods result in the same book value
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Solution
The Declining Balance Method typically results in the lowest book value at the end of an asset's useful life due to accelerated depreciation.
Correct Answer:
B
— Declining Balance Method
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