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Chapter 9: 7RQ (page 488)

What is depreciation? Define useful life, residual value, and depreciable cost.

Short Answer

Expert verified

The depreciation is the allocation of the cost of the asset which expensed. The life of the asset is known as the useful life of the asset, salvage value is known as the residual value and the cost of an asset that is depreciated is depreciated cost.

Step by step solution

01

Depreciation

The depreciation is the allocation of the cost of plant assets to expense over the useful life of the asset. The depreciation matches the expense against the revenue from using the asset to measure net income

02

Definition of useful life, residual value, and depreciable cost

Useful life: The useful life is defined as the time that how the company expects it will use the certain asset in the business. The estimated useful life of the asset can be expressed in time, such as months, years, usage, or the number of units produced.

Residual Value: The estimated residual value or salvage value is defined as the expected value of the asset at the of its useful life. At this price companies sell the asset, which is also known as scrap value.

Depreciable cost: The asset is purchased at a cost. The cost of the asset minus the residual life of the asset is known as the depreciable cost of the asset owned by the company.

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Most popular questions from this chapter

Journalizing natural resource depletion

Cannon Mountain Mining paid \(462,300 for the right to extract mineral assets from a 400,000-ton deposit. In addition to the purchase price, Cannon also paid a \)900 filing fee, a \(1,800 license fee to the state of Nevada, and \)55,000 for a geological survey of the property. Because Cannon purchased the rights to the minerals only and did not purchase the land, it expects the asset to have zero residual value. During the first year, Cannon removed and sold 50,000 tons of the minerals. Make journal entries to record (a) purchase of the minerals (debit Minerals), (b) payment of fees and other costs, and (c) depletion for the first year.

Accounting for intangibles

Midland States Telecom provides communication services in Iowa, Nebraska, the Dakotas, and Montana. Midland States Telecom purchased goodwill as part of the acquisition of Sheldon Wireless Enterprises, which had the following figures:

Book value of assets \( 900,000

Market value of assets 1,400,000

Market value of liabilities 530,000

Requirements

1. Journalize the entry to record Midland States Telecom鈥檚 purchase of Sheldon Wireless for \)440,000 cash plus a $660,000 note payable.

2. What special asset does Midland States Telecom鈥檚 acquisition of Sheldon Wireless identify? How should Midland States Telecom account for this asset after acquiring Sheldon Wireless? Explain in detail.

2. On January 1, Alamo Cranes purchased a crane for \(140,000. Alamo expects the crane to remain useful for six years (1,000,000 lifts) and to have a residual value of \)2,000. The company expects the crane to be used for 80,000 lifts the first year. Compute the first-year depreciation expense on the crane using the following methods: a. Straight-line b. Units-of-production (Round depreciation per unit to two decimals. Round depreciation expense to the nearest whole dollar.) Compute the first-year and second-year depreciation expense on the crane using the following method: c. Double-declining-balance (Round depreciation expense to the nearest whole dollar.)

Donahue Oil Incorporated has an account titled Oil and Gas Properties. Donahue paid \(6,400,000 for oil reserves holding an estimated 400,000 barrels of oil. Assume the company paid \)510,000 for additional geological tests of the property and $470,000 to prepare for drilling. During the first year, Donahue removed and sold 75,000 barrels of oil. Record all of Donahue鈥檚 transactions, including depletion for the first year.

What does the word capitalize mean?
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