Quiz Questions for Chapter 9

2. What is the effect of the depreciation accounting method change on the reported income in 1984? How will this change affect profits in future years?

The value of fixed assets typically decreases over time. The amount of the decrease each year is accounted for and is called depreciation. Depreciation for the year is expensed on the income statement and added to the accumulated depreciation account on the balance sheet. So the value of the fixed assets on the balance sheet is reduced by the accumulated depreciation.

| In Year 1, depreciation is $5,000 plus 15% of the asset’s outlayFrom Year 2, depreciation is either * 30% of the asset’s book value; or * if the asset’s book value is less than $6,500, depreciation is the asset’s book value (i.e. asset is depreciated to zero once book value < $6,500)

An impairment loss shall be recognized only if the carrying amount of a long-lived asset (asset group) is

c. The amounts recognized as of the acquisition date for each major class of assets acquired and liabilities assumed.

Assets are to be recorded and valued based of the type of asset there are.

A company purchases equipment costing $50 000, which it expects to last for 12 years and to have

6. Forman, Inc. owns machinery with a cost of $250,000. Its estimated useful life is 10 years and a $30,000 salvage value.

b. The inventory write down recorded, as an expense by the company is $4.4 million. It is measured at lower of cost and net realizable value. Cost is measured by weighted average using standard cost method or

Natalie estimates that all of her baking equipment will have a useful life of 5 years or 60 months and no salvage value. (Assume Natalie decides to record a full month’s worth of depreciation, regardless of when the equipment was obtained by the business.)

It is wrong to take depreciation on business expenses and to claim it as assets. Operating expenses would be distorted.

Depreciation involves spreading the cost of an item over several years or over its useful lifetime. This is an accounting of the reduction in value of the merchandise and it will be reflected as an expense on the company’s income statement. Therefore, this is important because nothing holds its full value over time and organizations need to account for the devaluation. Accountants and financial officers follow GAAP guidelines to determine depreciation. The depreciation of an item is an estimated guess not a proven reality.

costs $350,000, that will have a useful life of eight years, and that will have a salvage value of $25,000. If this

Since depreciation expense is subtracted in computing profit, but does not affect cash, it is added back to convert profit to cash flows from operating activities.

One of these is with regards to goodwill and intangible assets with identifiable useful lives.