CB CB Inventory and Fixed Assets 2 — Questions and Answers
Question 1: The cost of a fixed (long-lived) asset includes all of the following EXCEPT:
- Purchase price
- Sales tax on the purchase
- Routine maintenance after acquisition (Correct answer)
- Freight and installation costs
Correct answer: Routine maintenance after acquisition
The capitalized cost of a fixed asset includes purchase price, taxes, freight, and installation, but ongoing maintenance is expensed as incurred.
Question 2: Straight-line depreciation allocates an asset's depreciable cost:
- More heavily in early years
- Equally over the useful life (Correct answer)
- Based on actual usage each year
- Only when the asset produces revenue
Correct answer: Equally over the useful life
Straight-line depreciation divides (Cost − Salvage Value) by useful life, producing the same depreciation expense each year.
Question 3: Under double-declining-balance (DDB) depreciation, the depreciation rate applied each year is:
- Straight-line rate × 1.5
- Straight-line rate × 2 (Correct answer)
- The prior year's book value × salvage value
- A fixed dollar amount
Correct answer: Straight-line rate × 2
DDB doubles the straight-line rate (2 ÷ useful life) and applies it to the asset's declining book value each period.
Question 4: When a company spends money to extend an asset's useful life beyond the original estimate, the cost should be:
- Expensed immediately as a repair
- Capitalized and depreciated over the remaining useful life (Correct answer)
- Credited to Accumulated Depreciation
- Recorded as a prepaid expense
Correct answer: Capitalized and depreciated over the remaining useful life
Expenditures that extend useful life or increase capacity are capital improvements, added to the asset's book value and depreciated going forward.
Question 5: When a fully depreciated asset is sold for its salvage value, the journal entry includes:
- A gain on disposal equal to salvage value
- A debit to Cash and a debit to Accumulated Depreciation, with a credit to the asset account (Correct answer)
- A loss on disposal
- No entry is needed
Correct answer: A debit to Cash and a debit to Accumulated Depreciation, with a credit to the asset account
Selling a fully depreciated asset for salvage removes both the asset cost and its accumulated depreciation, with cash received matching the remaining book value.
Question 6: Accumulated depreciation is classified on the balance sheet as:
- A current liability
- An expense
- A contra-asset (Correct answer)
- An equity account
Correct answer: A contra-asset
Accumulated depreciation is a contra-asset account that reduces the gross cost of property, plant, and equipment to arrive at net book value.
CB CB Inventory and Fixed Assets 2
The cost of a fixed (long-lived) asset includes all of the following EXCEPT: