Depreciation and Amortization Flashcards
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Which depreciation approach results in higher depreciation charges in the early years of an asset's useful life?
Answer: Accelerated depreciation method
Accelerated depreciation methods (such as double-declining balance and sum-of-years-digits) front-load depreciation, recording larger amounts in earlier years and smaller amounts later.
How is the amortization of a patent typically recorded in the journal entry?
Answer: Debit Amortization Expense; Credit the intangible asset account
Amortization is recorded by debiting Amortization Expense and crediting the intangible asset account directly (or a related contra account), reducing the carrying value of the intangible.
Which depreciation system is commonly required for federal income tax purposes in the United States?
Answer: Modified Accelerated Cost Recovery System (MACRS)
The IRS requires businesses to use MACRS for depreciating most business assets for federal tax purposes, which assigns assets to recovery-period classes with prescribed depreciation rates.
On which financial statement does accumulated depreciation appear?
Answer: Balance sheet
Accumulated depreciation is a contra-asset account reported on the balance sheet, directly below the related asset's cost to show its net book value.
An asset's depreciable cost is calculated as:
Answer: Original cost minus salvage value
Depreciable cost is the portion of an asset's cost that will be expensed over its useful life, calculated as original cost minus estimated salvage value.
A machine costs $100,000, has a salvage value of $10,000, and is expected to produce 90,000 units over its life. If 15,000 units are produced in Year 1, what is Year 1 depreciation using the units of production method?
Answer: $15,000
Depreciation per unit = ($100,000 − $10,000) / 90,000 = $1.00; Year 1 depreciation = $1.00 × 15,000 units = $15,000.
When a depreciable asset is sold, the gain or loss on the sale is calculated as:
Answer: Selling price minus book value at the time of sale
The gain or loss on disposal equals the proceeds received minus the asset's book value (original cost less accumulated depreciation) at the date of sale.