Depreciation Quiz

QUESTIONS

1. Accumulated depreciation is a...

        A) Liability

        B) Contra-asset

 

2. Accumulated depreciation has a...

        A) Debit balance

        B) Credit balance

 

3. Depreciation is...

        A) What happens when you drive your new car off the lot

        B) A rational method for recognizing expense over time

 

4. The formula for calculating depreciation expense under the straight-line method is...

        A) (Acquisition Cost - Salvage Value) / Estimated Useful Life

        B) (Salvage Value - Acquisition Cost) / Estimated Useful Life

 

5. The matching principle of accounting states that...

        A) Expenses should be recognized in the period they were incurred

        B) Expenses should be recognized when the cash is paid out

 

6. The journal entry for recognizing depreciation expense is...

        A) Debit: Depreciation Expense; Credit: (Accumulated Depreciation)

        B) Debit: Depreciation Expense; Credit: (Equipment)

 

7. An item will have a salvage value if...

        A) It can be sold once it's completed depreciated

        B) It can be used by the company to serve a different purpose

 

8. The units of production depreciation method recognizes expense based on...

        A) The output of the equipment

        B) The estimated useful life of the equipment

 

9. The double declining balance method and sum of the years' digits method...

        A) Recognize expense more quickly at the start of the equipment's life

        B) Prolong recognition of expense until the end of the equipment's life

 

10. Depreciation is...

        A) Always an obvious accounting policy

        B) Subject to the best estimates from management

 

ANSWER KEY:

1B, 2B, 3B, 4A, 5A, 6A, 7A, 8A, 9A, 10B

 

PRACTICE PROBLEMS

1. If a company purchases $100,000 worth of equipment with no salvage value and expects the equipment's useful life to be 10 years, how much depreciation expense will it recognize in the first year? The fifth year?

2. If a company purchases $100,000 worth of equipment with a $10,000 salvage value and expects the equipment's useful life to be 10 years, how much depreciation expense will it recognize in the first year? The fifth year?

3. If a company purchases $100,000 worth of equipment and recognizes $30,000 worth of accumulated depreciation over the first 3 years, what is the carrying value (a.k.a book value, net value) of the equipment at the end of the third year?

4. If a company purchases $100,000 worth of equipment and estimates no salvage value and recognizes $20,000 worth of depreciation expense in the first year, how many years has it estimated the equipment will last?

5. If a company purchases $100,000 worth of equipment and estimates a salvage value of $15,000 and estimated useful life of 5 years, what will be the equipment's carrying value at the end of 5 years? What will be the balance in the contra-asset accumulated depreciation account?

 

ANSWER KEY:

1: ($100,000 - $0) / 10 = $10,000 in both the first and fifth years

2: ($100,000 - $10,000) / 10 = $9,000 in both the first and fifth years

3. Equipment: $100,000; Accumulated Depreciation ($30,000); Carrying Value $70,000

4. ($100,000 - $0) / X = $20,000; X = 5 years

5. $15,000; $85,000