CAT CAT Inventory & Asset Management 2 — Questions and Answers
Question 1: Under US GAAP, what is the straight-line depreciation method?
- Equal depreciation expense each year over the asset's useful life (Correct answer)
- Higher depreciation in early years, declining over time
- Depreciation based on actual units produced by the asset
- Depreciation calculated as a fixed percentage of book value
Correct answer: Equal depreciation expense each year over the asset's useful life
Straight-line depreciation spreads the depreciable cost evenly across all years of the asset's estimated useful life.
Question 2: Which depreciation method produces higher depreciation expense in the early years of an asset's life?
- Double-declining balance (Correct answer)
- Straight-line
- Units-of-production
- Sum-of-years digits (either answer is acceptable)
Correct answer: Double-declining balance
Double-declining balance applies double the straight-line rate to the asset's declining book value, front-loading depreciation expense.
Question 3: What is the book value of a fixed asset?
- Original cost minus accumulated depreciation (Correct answer)
- Current market value of the asset
- Replacement cost of the asset
- Original cost plus improvements and repairs
Correct answer: Original cost minus accumulated depreciation
Book value (also called carrying value) equals the asset's historical cost reduced by all depreciation charged since acquisition.
Question 4: What journal entry is made when a company purchases equipment for cash?
- Debit Equipment, Credit Cash (Correct answer)
- Debit Cash, Credit Equipment
- Debit Depreciation Expense, Credit Equipment
- Debit Accounts Payable, Credit Equipment
Correct answer: Debit Equipment, Credit Cash
Buying equipment for cash increases a fixed asset (debit) and decreases cash (credit), following the basic asset exchange pattern.
Question 5: When a fully depreciated asset is sold for a gain, which account is credited for the proceeds?
- Cash (Correct answer)
- Accumulated Depreciation
- Gain on Sale of Asset
- Retained Earnings
Correct answer: Cash
The cash received from the sale is recorded as a debit to Cash; the gain is recognized in a separate Gain on Sale of Asset account.
Question 6: What does the term 'capital expenditure' (CapEx) mean in asset management?
- Spending that adds to or extends the useful life of an asset and is capitalized on the balance sheet (Correct answer)
- Routine repair costs expensed in the current period
- Cash paid for operating expenses such as rent and utilities
- Dividends paid to shareholders from retained earnings
Correct answer: Spending that adds to or extends the useful life of an asset and is capitalized on the balance sheet
Capital expenditures are significant asset purchases or improvements that provide benefits beyond one year and are recorded as assets rather than expenses.
CAT CAT Inventory & Asset Management 2
Under US GAAP, what is the straight-line depreciation method?