Accounting chapter 11 Part A: depreciation, depletion and amortization and B Questions Fully Solved.
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Cost allocation overview: what is the logical allocation of acquiring property, plant and quipment and intangible assets - correct answer Property plant and equipment and intangible assets are purchased with the expectation that they will provide future benefits...
Accounting chapter 11 Part A:
depreciation, depletion and amortization
and B
Cost allocation overview: what is the logical allocation of acquiring property, plant and quipment and
intangible assets - correct answer Property plant and equipment and intangible
assets are purchased with the expectation that they will provide future benefits and are acquired
specifically to be used as part of the revenue generating expenses so logically the costs of acquiring the
assets should be allocated to expense during the reporting periods benefited by their use. That is their
costs are matched with the revenues they help generate.
t/f: depreciation is a process of cost allocation and not valuation - correct answer
true
What is the purpose of depreciation, depletion and amortization - correct answer
They are cost allocation processes that attempt to satisfy the matching concept
Generally how do you determine the amount of depreciation - correct answer
Distribute the cost of the asseet, less any anticipated residual value, over the estimated useful life in a
systematic and rational manner that attempts to match revenues with the use of the asset, not the
decline in its value.
What is the specific accounting treatment for assets used in the manufacture of a product - correct
answer For assets used in the manufacture of a product, depreciation, depletion or
amortization is considered a product cost to be included as part of the cost of inventory. Eventually
when the product is sold it becomes part of the cost of the goods sold
For assets not used in production, primarily plant and equipment and certain intangibles used in the
seeling and administrative function of the company, how is periodic depreciation or amortization
reported - correct answer It is an expense on the income statement
What is the difference between a product cost and a period cost - correct answer
When a product cost is reported as an expense (costs of goods sold) depends on when the product is
,sold; when a period cost is reported as an expense depends on the reporting period in which it is
incurred.
The process of measuring cost allocation requires what three factors be established at the time the asset
is put into use: - correct answer 1. Service life- the estimated use the company
expects to receive from the asset
2. Allocation base- the value of the usefulness that is expected to be consumed
3. Allocation method- the pattern in which the usefulness is expected to be consumed.
What is the service life or useful life of an asset - correct answer It is the amount of
time that the company expects to obtain from the asset before disposing of it
Service life of an asset can be expressed in what type of units - correct answer units
of time or units of activity (years/miles)
What provides the upper bound for service life of tangible, long-lived assets - correct answer
The physical life of the asset
What causes the physical life of an asset to vary - correct answer the purpose for
which the asset is acquired and the environment in which it is operated
t/f: expected obsolescence does not shorten service life below an assets physical life - correct answer
False-expected obsolescence can shorten service life below physical life
while physical life or obsolescence can shorten the physical life of a tangible asset, what generally limits
the service life of an intangible asset - correct answer legal or contractual life (i.e a
patent might be capable of producing enhanced profitability for 50 years but the legal life is only 20
years)
How does managment intent limit the service life of an asset - correct answer For
both tangible and intangible assets managment decisions and policies , like policy to sell trucks after 2
years, can shorten the period of an asset's usefulness and companies often disclose the range of service
life for different categories of assets.
, what is allocation base - correct answer The total amount of cost to be allocated
over an asset's service life
what is the amount used for allocation base - correct answer The amount is the
difference between the initial value of the asset at its acquisition (its cost) and its residual value (aka
salvage value)
what is residual or salvage value - correct answer It is the amount the company
expects to receive for the asset at the end of its service life less any depreciated disposal costs.
What are the different ways residual value is estimated - correct answer Where it
can be estimated by referring to a company's prior experience or to publicly available information
concerning resale value then companies use that estimate but since it is often difficult to estimate due
to the uncertainty about the future, many companies assume a residual value of zero
What is the goal in determining how much cost to allocate to period's of an asset's use - correct answer
Generally accepted accounting principles state that the chosen method should allocate the asset's cost
"as equitably as possible to the periods during which services are obtained from its use". GAAP further
states that the method should produce a cost allocation in a systematic and rational manner with the
objective being to allocate costs to the period in an mount that is proportional to the amount of benefits
generated by the asset during the period relative to the total benefits provided by the asset during its
life.
What are the two methods of allocation that attempt to obtain systematic and rational allocation of the
costs of an asset - correct answer 1. time based methods- allocates cost base
according to passage of time
2. activity based methods-allocates assets cost base using a measure of the asset's input or output
Depletion of natural resources typically follows which allocation method - correct answer
activity based methods
What are the different time based depreciation methods - correct answer 1.
straight line method
2. accelerated methods
a. sum of the years digits method
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