CPA Financial Accounting and Reporting (FAR) : Depreciation and Amortization
Study concepts, example questions & explanations for CPA Financial Accounting and Reporting (FAR)
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Example Questions
Example Question #1 : Depreciation And Amortization
A company buys 200 doors for $75 each at the beginning of Year 1. On the same day, the company buys an other 300 doors for $85 each. None of the doors are expected to have any salvage value. The cheaper doors have a useful life of 7 years and the more expensive doors have a useful life of 9 years. In Year 2, the company sells one of the cheaper doors for $90 and one of the more expensive doors for $120. All doors were put into a single group for depreciation purposes. How much gain will the company recognize on the sale of the doors in Year 2?
$44.44
$70.44
$0
$25.71
$0
The doors will use the group/composite method of depreciation. Therefore, no gain or loss will be recognized until all items in the group have been sold.
Example Question #2 : Depreciation And Amortization
The Great Dane Bus company buys a new bus on February 14, Year 1. The bus costs $100,000 and has a salvage value of $8,000. The company expects the bus to be used for 200,000 miles and will depreciate it using the units of production method. The bus is driven 35,000 miles during Year 1 and another 40,000 miles during Year 2. What is the book value of the bus at the end of Year 2?
$54,000
$73,600
$65,500
$75,900
$65,500
Since the bus is being depreciated using the units-of-production method, $.46 in depreciation will be recorded for every mile driven ($100K cost - $8K salvage value divided by 200K estimated miles). At the end of Year 2, 75K miles have been driven, for a total of $34,500 in depreciation (75K miles x $.46 per mile). Therefore, the book value of the bus is $65,500 ($100K - $34,500).
Example Question #3 : Depreciation And Amortization
A mining company uses the depletion method to allocate the cost of removing natural resources from its mine. Which of the following statements is correct?
Both of the above
The depletion base equals the cost to purchase the mine minus the mine's estimated residual value
Neither of the above
If the number of units mined equaled the number of units sold, the depletion expense would be equal to the number of units mined
The depletion base equals the cost to purchase the mine minus the mine's estimated residual value
The depletion base will be equal to the cost to purchase the mine minus the mine's estimated residual value.
Example Question #4 : Depreciation And Amortization
Of the following assets, which would be typically reported on a balance sheet as an intangible?
Leasehold improvements
R&D costs
Patent registrations
Derivatives
Patent registrations
Patents are intangible assets and their fees are capitalized.
Example Question #5 : Depreciation And Amortization
A firm should recognize goodwill on the balance sheet at which of the following points?
Costs have been incurred in the development of goodwill
The fair market value of the company's asset exceeds the book value of the company's asset
Goodwill has been created in the purchase of a business
When the firm expects a future benefit from the creation of goodwill
Goodwill has been created in the purchase of a business
Goodwill is recognized in the balance sheet when it has been created from a business acquisition.
Example Question #5 : Depreciation And Amortization
Of the following, which cost would be included in a "land" account?
Clearing trees
Loan interest on debt to purchase the land
Installing facility on the land
Engineer fees
Clearing trees
Clearing trees would be a part of getting the land ready for its intended use, where as a facility on the land is its own asset, engineer fees are separate, and loan interest has its own recognition rules.
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