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Chapter 9: Q3SE (page 526)

Computing first-year depreciation and book value

On January 1, 2018, Air Canadians purchased a used airplane for \(37,000,000. Air Canadians expects the plane to remain useful for five years (4,000,000 miles) and to have a residual value of \)5,000,000. The company expects the plane to be flown 1,400,000 miles during the first year.

Requirements

1. Compute Air Canadians鈥檚 first-year depreciation expense on the plane using the following methods:

a. Straight-line

b. Units-of-production

c. Double-declining-balance

2. Show the airplane鈥檚 book value at the end of the first year for all three methods.

Short Answer

Expert verified

Depreciation

Value at end of the first year

$6,400,000

$30,600,000

$11,200,000

$25,800,000

$14,800,000

$22,200,000

Step by step solution

01

Definition of Straight Line Method

The method of calculating depreciation under which each year of the asset's useful life reports the same depreciation is known as the straight-line method. The depreciation method under this method is calculated using salvage value, cost, and useful life.

02

Calculation of depreciation

a. Straight line

Depreciation=Cost-SalvagevalueEstimatedusefullifeinyears=$37,000,000-$5,000,0005=$6,400,000

b. Units of production method

Depreciation=Cost-SalvagevalueEstimatedusefullifeinmiles脳Milesrunduringfirstyear=$37,000,000-$5,000,0004,000,000脳1,400,000=$11,200,000

c. Double-declining method:

Depreciation=Cost脳100%Usefullife脳2=$37,000,000脳100%5脳2=$37,000,000脳20%脳2=$14,800,000

03

Book value at the end of the first year

Method

Book value

-

Depreciation

=

Value at end of the first year

Straight line

$37,000,000

-

$6,400,000

=

$30,600,000

Units of production

$37,000,000

-

$11,200,000

=

$25,800,000

Double declining method

$37,000,000

-

$14,800,000

=

$22,200,000

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Most popular questions from this chapter

Determining asset cost and recording partial-year depreciation, straight-line Discount Parking, near an airport, incurred the following costs to acquire land, make land improvements, and construct and furnish a small building:

a. Purchase price of three acres of land $ 80,000

b. Delinquent real estate taxes on the land to be paid by Discount Parking 6,300

c. Additional dirt and earthmoving 9,000

d. Title insurance on the land acquisition 3,200

e. Fence around the boundary of the property 9,600

f. Building permits for the building 1,000

g. Architect鈥檚 fee for the design of the building 20,700

h. Signs near the front of the property 9,300

i. Materials used to construct the building 215,000

j. Labor to construct the building 175,000

k. Interest cost on the construction loan for the building 9,400

l. Parking lots on the property 28,500

m. Lights for the parking lots 11,200

n. Salary of construction supervisor (80% to building; 20% to parking lot and concrete walks) 50,000

o. Furniture 11,200

p. Transportation of furniture from seller to the building 2,200

q. Additional fencing 6,600

Discount Parking depreciates land improvements over 15 years, buildings over 40 years, and furniture over 10 years, all on a straight-line basis with zero residual value鈥檚

Requirements

1. Set up columns for Land, Land Improvements, Building, and Furniture. Show how to account for each cost by listing the cost under the correct account. Determine the total cost of each asset.

2. All construction was complete and the assets were placed in service on October 1. Record partial-year depreciation expense for the year ended December 31. Round to the nearest dollar

Core Telecom provides communication services in Iowa, Nebraska, the Dakotas, and Montana. Core purchased goodwill as part of the acquisition of Surety Wireless Company, which had the following figures:

Book value of assets \( 700,000

Market value of assets 1,000,000

Market value of liabilities 510,000

Requirements

1. Journalize the entry to record Core鈥檚 purchase of Surety Wireless for \)280,000 cash plus a $420,000 note payable.

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

Amplify Petroleum holds huge reserves of oil. Assume that at the end of 2017, Amplify Petroleum鈥檚 cost of oil reserves totaled $80,000,000, representing 100,000,000 barrels of oil. Suppose Amplify Petroleum removed and sold 20,000,000 barrels of oil during 2018. Journalize depletion expense for 2018.

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.

Question: What is a lump-sum purchase, and how is it accounted for?
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