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Chapter 9: Q6SE (page 527)

Changing the estimated life of an asset

Assume that Smith鈥檚 Auto Sales paid $45,000 for equipment with a 15-year life and zero expected residual value. After using the equipment for six years, the company determines that the asset will remain useful for only five more years.

Requirements

1. Record depreciation expense on the equipment for Year 7 by the straight-line method.

2. What is accumulated depreciation at the end of Year 7?

Short Answer

Expert verified
  1. Depreciation for the 7th year is $5,400.
  2. Accumulated depreciation up to the 7th year is $23,400.

Step by step solution

01

Definition of Depreciation

The expenses charged to report the decline in the value of the fixed assets acquired by the company are known as depreciation expenses. Such expenses are reported in the statement reporting net income.

02

Depreciation expenses on the equipment for 7th year

Depreciationfor7thyear=Cost-Salvagevalue-AccumulateddepreciationUsefullife=$45,000-$0-$18,0005=$5,400

Working note: Calculation of Accumulated depreciation up to 6 year:

Accumulateddepreciationupto6thyear=Cost-SalvagevalueUsefullife脳6=$45,000-$015脳6=$18,000

03

Accumulated depreciation at the end of the 7th year

Particular

Amount $

Depreciation for 7th year

$5,400

Add: Accumulated depreciation up to 6th year

18,000

Accumulated depreciation

$23,400

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Most popular questions from this chapter

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.

Computing depreciation鈥攖hree methods Crispy Fried Chicken bought equipment on January 2, 2018, for \(33,000. The equipment was expected to remain in service for four years and to operate for 6,750 hours. At the end of the equipment鈥檚 useful life, Crispy鈥檚 estimates that its residual value will be \)6,000. The equipment operated for 675 hours the first year, 2,025 hours the second year, 2,700 hours the third year, and 1,350 hours the fourth year.

Requirements

1. Prepare a schedule of depreciation expense, accumulated depreciation, and book value per year for the equipment under the three depreciation methods: straight-line, unit鈥檚 of-production, and double-declining-balance. Show your computations. Note: Three depreciation schedules must be prepared.

2. Which method tracks the wear and tear on the equipment most closely?

Handling acquisition of patent, amortization, and change in useful life Melbourn Printers (MP) manufactures printers. Assume that MP recently paid $200,000 for a patent on a new laser printer. Although it gives legal protection for 20 years, the patent is expected to provide a competitive advantage for only eight years

Requirements

1. Assuming the straight-line method of amortization, make journal entries to record

(a) The purchase of the patent and

(b) Amortization for the first full year.

2. After using the patent for four years, MP learns at an industry trade show that another company is designing a more efficient printer. On the basis of this new information, MP decides, starting with Year 5, to amortize the remaining cost of the patent over two remaining years, giving the patent a total useful life of six years. Record amortization for Year 5.

Journalizing partial-year depreciation and asset disposals and exchanges.

During 2018, Mora Corporation completed the following transactions:

Jan. 1 Traded in old office equipment with book value of \(55,000 (cost of \)127,000 and accumulated depreciation of \(72,000) for new equipment. Mora also paid \)70,000 in cash. Fair value of new equipment is \(133,000. Assume the exchange had commercial substance.

Apr. 1 Sold equipment that cost \)18,000 (accumulated depreciation of \(8,000 through December 31 of the preceding year). Mora received \)6,100 cash from the sale of the equipment. Depreciation is computed on a straightline basis. The equipment has a five-year useful life and a residual value of \(0. Dec. 31 Recorded depreciation as follows:

Office equipment is depreciated using the double-declining-balance method over four years with a \)9,000 residual value.

Record the transactions in the journal of Mora Corporation.

What does the word capitalize mean?
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