HAC Healthcare Fixed Assets & Depreciation 2 — Questions and Answers
Question 1: The double-declining balance (DDB) method calculates annual depreciation by applying which rate to the asset's net book value?
- The straight-line rate
- Twice the straight-line rate (Correct answer)
- 150% of the straight-line rate
- The MACRS recovery rate
Correct answer: Twice the straight-line rate
DDB uses twice the straight-line rate applied to the remaining net book value each year, accelerating depreciation in early years.
Question 2: A hospital disposes of medical equipment with a net book value of $50,000 for $30,000 cash. What is the financial statement impact?
- Gain of $20,000
- Loss of $20,000 (Correct answer)
- No gain or loss is recognized
- Revenue of $30,000
Correct answer: Loss of $20,000
The proceeds ($30,000) are less than the net book value ($50,000), resulting in a $20,000 loss on disposal.
Question 3: Under ASC 360, an impairment loss on a long-lived healthcare asset is recognized when:
- Fair value exceeds the carrying amount
- The carrying amount exceeds undiscounted future cash flows (Correct answer)
- The asset reaches the end of its useful life
- The asset's useful life is revised downward
Correct answer: The carrying amount exceeds undiscounted future cash flows
ASC 360 triggers an impairment test when events occur indicating possible impairment; a loss is recognized when carrying amount exceeds undiscounted future cash flows.
Question 4: Under ASC 842, which type of lease requires the lessee to recognize a right-of-use asset and a lease liability on the balance sheet with interest and amortization recognized separately?
- Operating lease
- Finance lease (Correct answer)
- Short-term lease
- Variable lease
Correct answer: Finance lease
A finance lease under ASC 842 is treated similarly to a capital lease — the lessee capitalizes the asset and liability and records interest expense plus amortization separately.
Question 5: A hospital acquires a building for $5,000,000. The land is independently appraised at $500,000. What amount is subject to depreciation?
- $5,000,000
- $5,500,000
- $4,500,000 (Correct answer)
- $500,000
Correct answer: $4,500,000
Land is not depreciated; only the building portion ($5,000,000 − $500,000 = $4,500,000) is depreciable.
Question 6: Component accounting for healthcare facilities requires organizations to:
- Depreciate all building components as one unit
- Depreciate significant components with different useful lives separately (Correct answer)
- Apply a single useful life to the entire facility
- Expense minor components as incurred regardless of cost
Correct answer: Depreciate significant components with different useful lives separately
Component accounting requires that major parts of an asset with significantly different useful lives (e.g., roof vs. structure) be depreciated individually.
Question 7: Which depreciation method typically results in the highest depreciation expense in the first year of an asset's life?
- Straight-line
- Sum-of-years-digits
- Double-declining balance (Correct answer)
- Units of production
Correct answer: Double-declining balance
Double-declining balance applies the highest rate in year one because the full cost (before any depreciation) is multiplied by twice the straight-line rate.
HAC Healthcare Fixed Assets & Depreciation 2
The double-declining balance (DDB) method calculates annual depreciation by applying which rate to the asset's net book value?