HAC Healthcare Fixed Assets & Depreciation 1 — Questions and Answers
Question 1: Which depreciation method allocates an equal amount of expense each year over an asset's useful life?
- Double-declining balance
- Straight-line (Correct answer)
- Sum-of-years-digits
- Units of production
Correct answer: Straight-line
The straight-line method divides depreciable cost evenly over the asset's useful life, producing a constant annual expense.
Question 2: Under GAAP, which of the following costs is expensed rather than capitalized as part of a fixed asset's cost?
- Purchase price
- Installation costs
- Staff training costs (Correct answer)
- Transportation and delivery costs
Correct answer: Staff training costs
Staff training costs are period costs expensed as incurred; they do not add to the asset's cost basis under GAAP.
Question 3: A hospital purchases an MRI machine for $2,000,000 with a 10-year useful life and $200,000 salvage value. What is the annual straight-line depreciation?
- $200,000
- $180,000 (Correct answer)
- $220,000
- $160,000
Correct answer: $180,000
Annual depreciation = ($2,000,000 − $200,000) ÷ 10 = $180,000.
Question 4: Which term describes the minimum dollar amount at which an expenditure is recorded as a fixed asset rather than an immediate expense?
- Useful life threshold
- Capitalization threshold (Correct answer)
- Depreciation floor
- Medicare capital limit
Correct answer: Capitalization threshold
A capitalization threshold (or policy) sets the minimum cost above which an item is capitalized and depreciated rather than expensed.
Question 5: The Modified Accelerated Cost Recovery System (MACRS) is primarily used for which purpose in healthcare accounting?
- GAAP financial reporting
- Medicare cost reports
- Federal income tax depreciation (Correct answer)
- Medicaid reimbursement calculations
Correct answer: Federal income tax depreciation
MACRS is the depreciation system prescribed by the IRS for federal income tax purposes and is not used for GAAP or Medicare cost reports.
Question 6: Which agency establishes useful life guidelines for healthcare equipment used in Medicare cost reports?
- IRS
- FASB
- Centers for Medicare & Medicaid Services (CMS) (Correct answer)
- AICPA
Correct answer: Centers for Medicare & Medicaid Services (CMS)
CMS publishes the Provider Reimbursement Manual guidelines, including useful lives for assets reported on Medicare cost reports.
Question 7: When a hospital receives a government grant to purchase equipment, the preferred GAAP treatment is to:
- Record the grant as immediate revenue
- Reduce the asset's cost by the grant amount
- Record the grant as deferred revenue and amortize it over the asset's life (Correct answer)
- Expense the full grant in the period received
Correct answer: Record the grant as deferred revenue and amortize it over the asset's life
Under ASC 958 and common practice, capital grants are recorded as deferred revenue and recognized over the related asset's useful life to match the benefit period.
HAC Healthcare Fixed Assets & Depreciation 1
Which depreciation method allocates an equal amount of expense each year over an asset's useful life?