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Chapter 11: Q1E (page 584)

(Depreciation Computations鈥擲L, SYD, DDB) Deluxe Ezra Company purchases equipment on January 1, Year 1, at a cost of \(469,000. The asset is expected to have a service life of 12 years and a salvage value of \)40,000.

Instructions

  1. Compute the amount of depreciation for each of Years 1 through 3 using the straight-line depreciation method.
  2. Compute the amount of depreciation for each of Years 1 through 3 using the sum-of-the-years鈥�-digits method.
  3. Compute the amount of depreciation for each of Years 1 through 3 using the double-declining-balance method. (In performing your calculations, round constant percentage to the nearest one-hundredth of a point and round answers to the nearest dollar.)

Short Answer

Expert verified
  1. Straight-line depreciation = $35,750
  2. Depreciation for Year 1,2 and 3 is $66,000,$60500 and $55,000

3. Depreciation for Year 1, 2 and 3 is $390,818, $65,149 and $54,289

Step by step solution

01

Meaning of Straight-Line Depreciation

Straight-line depreciation is the simplest way to assess depreciation over time.By allocating identical amounts to the asset's accounting periods over its useful life, it makes the asset's expense predictable along with smoothing net income.

02

(a) Computing the amount of depreciation for each of Years 1 through 3 using the straight-line depreciation method

Straight-line method depreciation for each of Years 1 through 3 =$35,750

Working notes:

Calculating the amount of depreciation

Straightlinedepreciation=Equipmentcost-SalvagevalueServicelife=$469,000-$40,00012=$429,00012=$35,750



03

(b) Computing the amount of depreciation for each of Years 1 through 3 using the sum-of-the-years’-digits method

Calculating the sum of years鈥� digit

Sumofyearsdigit=Servicelife脳(Servicelife+1)2=12脳132=78

Calculating depreciation for Year 1

Depreciation=NumberofyearsSumofyears脳(Assetvalue-Salvagevalue)=1278脳($469,000-$40,000)=1278脳$429,000=$66,000

Calculating depreciation for Year 2

Depreciation=NumberofyearsSumofyears脳(Assetvalue-Salvagevalue)=1178脳($469,000-$40,000)=1178脳$429,000=$60,500

Calculating depreciation for Year 3

Depreciation=NumberofyearsSumofyears脳(Assetvalue-Salvagevalue)=1078脳($469,000-$40,000)=1078脳$429,000=$55,000



04

(c) Computing the amount of depreciation for each of Years 1 through 3 using the double-declining-balance method

Calculating double-declining-balance rate

Doubledecliningbalacemethodrate=TotalpercenatgeYears脳2=100%12脳2=16.67%

Calculating depreciation for Year 1

Depreciation=Equipmentvalue脳Doubledecliningbalancemethodrate=$469,000脳16.67%=$78,182

Calculating the book value of the asset after one year

Bookvalue=Equipmentcost-Depreciationof鈥�Year1=$469,000-$78,182=$390,818

Calculating depreciation for Year 2

Depreciation=(Equipmentcost-DepreciationofYear1)脳Doubledecliningrate=($469,000-$78,182)脳16.67%=$390,818脳16.67%=$65,149

Calculating depreciation for Year 3

Depreciation=(Equipmentcost-DepreciationofYear1-DepreciationofYear2)脳Doubledecliningrate=($469,000-$78,182-$65,149)脳16.67%=$325,65脳16.67%=$54,289

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Most popular questions from this chapter

(Depreciation鈥擲YD, Act., SL, and DDB) The following data relate to the Machinery account of Eshkol, Inc. at December 31, 2017.


Machinery

A

B

C

D

Original cost

\(46,000

\)51,000

\(80,000

\)80,000

Year purchased

2012

2013

2014

2016

Useful life

10 years

15,000 hours

15 years

10 years

Salvage value

\( 3,100

\) 3,000

\( 5,000

\) 5,000

Depreciation method

Sum-of-the year digits

Activity

Straight-line

Double-declining balance

Accum. depr. through 2017

\(31,200

\)35,200

\(15,000

\)16,000

*In the year an asset is purchased, Eshkol, Inc. does not record any depreciation expense on the asset. In the year an asset is retired or traded in, Eshkol, Inc. takes a full year鈥檚 depreciation on the asset.

The following transactions occurred during 2018.

  1. On May 5, Machine A was sold for \(13,000 cash. The company鈥檚 bookkeeper recorded this retirement in the following manner in the cash receipts journal.

Cash 13,000

Machinery (Machine A) 13,000

b. On December 31, it was determined that Machine B had been used 2,100 hours during 2018.

c. On December 31, before computing depreciation expense on Machine C, the management of Eshkol, Inc. decided the useful life remaining from January 1, 2018, was 10 years.

d. On December 31, it was discovered that a machine purchased in 2017 had been expensed completely in that year. This machine cost \)28,000 and has a useful life of 10 years and no salvage value. Management has decided to use the double-declining-balance method for this machine, which can be referred to as 鈥淢achine E.鈥�

Instructions

Prepare the necessary correcting entries for the year 2018. Record the appropriate depreciation expense on the above-mentioned machines. No entry is necessary for Machine D.

Companies following international accounting standards can revalue fixed assets above the assets鈥� historical costs. Such revaluations are allowed under various countries鈥� standards and the standards issued by the IASB. Liberty International, a real estate company headquartered in the United Kingdom (U.K.), follows U.K. standards. In a recent year, Liberty disclosed the following information on revaluations of its tangible fixed assets. The revaluation reserve measures the amount by which tangible fixed assets are recorded above historical cost and is reported in Liberty鈥檚 stockholders鈥� equity.

Liberty International

Completed Investment Properties

Completed investment properties are professionally valued on a market value basis by external valuers at the balance sheet date. Surpluses and deficits arising during the year are reflected in the revalution reserve.

Liberty reported the following additional data. Amounts for Kimco Realty (which follows GAAP) in the same year are provided for comparison.

Liberty

(pounds sterling, in thousands)

Kimco

(dollars, in millions)

Total revenues

拢 741

$ 517

Average total assets

5,577

4,696

Net income

125

297

Instructions

  1. Compute the following ratios for Liberty and Kimco.
    1. Return on assets.
    2. Profit margin on sales.
    3. Asset turnover.

How do these companies compare on these performance measures?

  1. Liberty reports a revaluation surplus of 拢1,952. Assume that 拢1,550 of this amount arose from an increase in the net replacement value of investment properties during the year. Prepare the journal entry to record this increase.
  2. Under U.K. (and IASB) standards, are Liberty鈥檚 assets and equity overstated? If so, why? When comparing Liberty to U.S. companies, like Kimco, what adjustments would you need to make in order to have valid comparisons of ratios such as those computed in (a) above?

Electroboy Enterprises, Inc. operates several stores throughout the western United States. As part of an operational and financial reporting review in a response to a downturn in its markets, the company鈥檚 management has decided to perform an impairment test on five stores (combined). The five stores鈥� sales have declined due to aging facilities and competition from a rival that opened new stores in the same markets. Management has developed the following information concerning the five stores as of the end of fiscal 2016.

Original cost \(36million

Accumulated depreciation \)10 million

Estimated remaining useful life 4 years

Estimated expected future

annual cash flows (not discounted) \(4.0 million per year

Appropriate discount rate 5 percent

Accounting

  1. Determine the amount of impairment loss, if any, that Electroboy should report for fiscal 2016 and the book value at which Electroboy should report the five stores on its fiscal year-end 2016 balance sheet. Assume that the cash flows occur at the end of each year.
  2. Repeat part (a), but instead assume that (1) the estimated remaining useful life is 10 years, (2) the estimated annual cash flows are \)2,720,000 per year, and (3) the appropriate discount rate is 6 percent.

Analysis

Assume that you are a financial analyst and you participate in a conference call with Electroboy management in early 2017 (before Electroboy closes the books on fiscal 2016). During the conference call, you learn that management is considering selling the five stores, but the sale won鈥檛 likely be completed until the second quarter of fiscal 2017. Briefly discuss what implications this would have for Electroboy鈥檚 2016 financial statements. Assume the same facts as in part (b) above.

Principles

Electroboy management would like to know the accounting for the impaired asset in periods subsequent to the impairment. Can the assets be written back up? Briefly discuss the conceptual arguments for this accounting.


(Impairment) Assume the same information as E11-16, except that Suarez intends to dispose of the equipment in the coming year. It is expected that the cost of disposal will be \(20,000.

Cost

\)9,000,000

Accumulated depreciation to date

1,000,000

Expected future net cash flows

7,000,000

Fair value

4,800,000

Instructions

  1. Prepare the journal entry (if any) to record the impairment of the asset at December 31, 2017.
  2. Prepare the journal entry (if any) to record depreciation expense for 2018.
  3. The asset was not sold by December 31, 2018. The fair value of the equipment on that date is \(5,300,000. Prepare the journal entry (if any) necessary to record this increase in fair value. It is expected that the cost of disposal is still \)20,000.

Silverman Company purchased machinery for \(162,000 on January 1, 2017. It is estimated that the machinery will have a useful life of 20 years, salvage value of \)15,000, production of 84,000 units, and working hours of 42,000. During 2017, the company uses the machinery for 14,300 hours, and the machinery produces 20,000 units. Compute depreciation under the straight-line, units-of-output, working hours, sum-of-the-years鈥�-digits, and double-declining-balance methods.
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