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Chapter 11: Q11-8IFRS (page 608)

Tan Chin Company purchases a building for \(11,300,000 on January 2, 2017. An engineer鈥檚 report shows that of the total purchase price, \)11,000,000 should be allocated to the building (with a 40-year life), \(150,000 to 15-year property, and \)150,000 to 5-year property. No residual (salvage) value should be considered. Compute depreciation expense for 2017 using component depreciation.

Short Answer

Expert verified

Answer

The total depreciation expense is $315,000.

Step by step solution

01

Step-by-Step SolutionStep 1: Meaning of Depreciation

In accounting, depreciation refers to an expense incurred on an intangible asset due to corrosion and abrasion. A firm may adopt various methods for computing depreciation to reflect the true and accurate value of an asset.

02

Computing depreciation expense

Component

Calculation

Depreciation Expense

Building

$11,000,000鈭�040

$275,000

15-year property

$150,000鈭�015

10,000

5-year property

$150,000鈭�05

30,000

$315,000

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Most popular questions from this chapter

(Depreciation Computations鈥擣ive Methods, Partial Periods) Muggsy Bogues Company purchased equipment for \(212,000 on October 1, 2017. It is estimated that the equipment will have a useful life of 8 years and a salvage value of \)12,000. Estimated production is 40,000 units and estimated working hours are 20,000. During 2017, Bogues uses the equipment for 525 hours and the equipment produces 1,000 units.

Instructions

Compute depreciation expense under each of the following methods. Bogues is on a calendar-year basis ending December 31.

  1. Straight-line method for 2017.
  2. Activity method (units of output) for 2017.
  3. Activity method (working hours) for 2017.
  4. Sum-of-the-years鈥�-digits method for 2019.
  5. Double-declining-balance method for 2018.

(Ratio Analysis) The 2014 annual report of Tootsie Roll Industries contains the following information.

(in millions)

December 31, 2014

December 31, 2013

Total assets

\(910.4

\)888.4

Total liabilities

219.3

208.1

Net sales

539.9

539.6

Net income

63.2

60.8

Instructions

Compute the following ratios for Tootsie Roll for 2014.

  1. Asset turnover.
  2. Return on assets.
  3. Profit margin on sales.
  4. How can the asset turnover be used to compute the return on assets?

(Depreciation Computation鈥擜ddition, Change in Estimate) In 1990, Herman Moore Company completed the construction of a building at a cost of \(2,000,000 and first occupied it in January 1991. It was estimated that the building will have a useful life of 40 years and a salvage value of \)60,000 at the end of that time.

Early in 2001, an addition to the building was constructed at a cost of \(500,000. At that time, it was estimated that the remaining life of the building would be, as originally estimated, an additional 30 years and that the addition would have a life of 30 years and a salvage value of \)20,000.

In 2019, it is determined that the probable life of the building and addition will extend to the end of 2050, or 20 years beyond the original estimate.

Instructions

  1. Using the straight-line method, compute the annual depreciation that would have been charged from 1991 through 2000.
  2. Compute the annual depreciation that would have been charged from 2001 through 2018.
  3. Prepare the entry, if necessary, to adjust the account balances because of the revision of the estimated life in 2019.
  4. Compute the annual depreciation to be charged, beginning with 2019.

(Depletion Computations鈥擳imber) Stanislaw Timber Company owns 9,000 acres of timberland purchased in 2006 at a cost of \(1,400 per acre. At the time of purchase, the land without the timber was valued at \)400 per acre. In 2007, Stanislaw built fire lanes and roads, with a life of 30 years, at a cost of \(84,000. Every year, Stanislaw sprays to prevent disease at a cost of \)3,000 per year and spends \(7,000 to maintain the fire lanes and roads. During 2008, Stanislaw selectively logged and sold 700,000 board feet of timber of the estimated 3,500,000 board feet. In 2009, Stanislaw planted new seedlings to replace the trees cut at a cost of \)100,000.

Instructions

  1. Determine the depreciation expense and the cost of timber sold related to depletion for 2008.
  2. Stanislaw has not logged since 2008. If Stanislaw logged and sold 900,000 board feet of timber in 2019, when the timber cruise (appraiser) estimated 5,000,000 board feet, determine the cost of timber sold related to depletion for 2019.

(Depletion Computations鈥擬inerals) At the beginning of 2017, Aristotle Company acquired a mine for \(970,000. Of this amount, \)100,000 was ascribed to the land value and the remaining portion to the minerals in the mine. Surveys conducted by geologists have indicated that approximately 12,000,000 units of ore appear to be in the mine. Aristotle incurred \(170,000 of development costs associated with this mine prior to any extraction of minerals. It also determined that the fair value of its obligation to prepare the land for an alternative use when all of the mineral has been removed was \)40,000. During 2017, 2,500,000 units of ore were extracted and 2,100,000 of these units were sold.

Instructions

Compute the following.

  1. The total amount of depletion for 2017.
  2. The amount that is charged as an expense for 2017 for the cost of the minerals sold during 2017.
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