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Chapter 11: Q1Q (page 582)

Distinguish among depreciation, depletion, and amortization.

Short Answer

Expert verified

Answer

The differences between the terms depreciation, depletion, and amortization are that they imply a cost allocation of different types of assets.

Step by step solution

01

Meaning of Depreciation 

Depreciation is a branch of accounting that systematically spreads or divides the cost or other principal value of a fixed assetover its expected useful life by charging regular expenses or revenues.

02

Explaining the distinction between depreciation, depletion, and amortization

The phrases depreciation, depletion, and amortization differ in that they all refer to the cost allocation of different categories of assets. Depreciation shows that the carrying value of tangible plant assets has dropped. The word depletion is used when natural resources (wasting assets) such as lumber, oil, coal, and lead are involved. Amortization is the term used to describe the process of intangible assets such as patents or copyrights expiring.

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Most popular questions from this chapter

Why might a company choose not to use revaluation accounting?

Question: (Comprehensive Depreciation Computations) Kohlbeck Corporation, a manufacturer of steel products, began operations on October 1, 2016. The accounting department of Kohlbeck has started the fixed-asset and depreciation schedule presented on page 595. You have been asked to assist in completing this schedule. In addition to ascertaining that the data already on the schedule are correct, you have obtained the following information from the company鈥檚 records and personnel.

  1. Depreciation is computed from the first of the month of acquisition to the first of the month of disposition.
  2. Land A and Building A were acquired from a predecessor corporation. Kohlbeck paid \(800,000 for the land and building together. At the time of acquisition, the land had an appraised value of \)90,000, and the building had an appraised value of \(810,000.
  3. Land B was acquired on October 2, 2016, in exchange for 2,500 newly issued shares of Kohlbeck鈥檚 common stock. At the date of acquisition, the stock had a par value of \)5 per share and a fair value of \(30 per share. During October 2016, Kohlbeck paid \)16,000 to demolish an existing building on this land so it could construct a new building.
  4. Construction of Building B on the newly acquired land began on October 1, 2017. By September 30, 2018, Kohlbeck had paid \(320,000 of the estimated total construction costs of \)450,000. It is estimated that the building will be completed and occupied by July 2019.
  5. Certain equipment was donated to the corporation by a local university. An independent appraisal of the equipment when donated placed the fair value at \(40,000 and the salvage value at \)3,000.
  6. Machinery A鈥檚 total cost of \(182,900 includes installation expense of \)600 and normal repairs and maintenance of \(14,900. Salvage value is estimated at \)6,000. Machinery A was sold on February 1, 2018.
  7. On October 1, 2017, Machinery B was acquired with a down payment of \(5,740 and the remaining payments to be made in 11 annual installments of \)6,000 each beginning October 1, 2017. The prevailing interest rate was 8%. The following data were abstracted from present value tables (rounded).
    Present Value of \(1.00 at 8%

    10 years

    .463

    11 years

    .429

    15 years

    .315

Present Value of an Ordinary Annuity of \)1.00 at 8%

10 years

6.710

11 years

7.139

15 years

8.559

KOHLBECK CORPORATION

Fixed-Asset and Depreciation Schedule

For Fiscal Years Ended September 30, 2017, and September 30, 2018

Depreciation

Expense year

ended

September 30

Assets

Acquisition

Date

Cost

Salvage

Deprecation

method

Estimated

Life in

years

2017

2018

Land A

October 1, 2016

\( (1)

N/A*

N/A

N/A

N/A

N/A

Building A

October 1, 2016

(2)

\)40,000

Straight-line

(3)

\(13,600

(4)

Land B

October 2, 2016

(5)

N/A

N/A

N/A

N/A

N/A

Building B

Under construction

\)320,000 to date

鈥�

Straight-line

30

鈥�

(6)

Donated Equipment

October 2, 2016

(7)

3,000

150% declining-balance

10

(8)

(9)

Machinery A

October 2, 2016

(10)

6,000

Sum-of-the-years-digits

8

(11)

(12)

Machinery B

October 1, 2017

(13)

鈥�

Straight-line

20

鈥�

(14)

Instructions

For each numbered item on the schedule above, supply the correct amount. (Round each answer to the nearest dollar.)

(Depreciation鈥擟onceptual Understanding) Rembrandt Company acquired a plant asset at the beginning of Year 1. The asset has an estimated service life of 5 years. An employee has prepared depreciation schedules for this asset using three different methods to compare the results of using one method with the results of using other methods. You are to assume that the following schedules have been correctly prepared for this asset using (1) the straight-line method, (2) the sum-of-the years鈥�-digits method, and (3) the double-declining-balance method.

Year

Straight-Line

Sum-of-the Years鈥�-Digits

Double-Declining Balance

1

\( 9,000

\) 15,000

\(20,000

2

9,000

12,000

12,000

3

9,000

9,000

7,200

4

9,000

6,000

4,320

5

9,000

3,000

1,480

Total

\)45,000

\(45,000

\)45,000

Instructions

Answer the following questions.

  1. What is the cost of the asset being depreciated?
  2. What amount, if any, was used in the depreciation calculations for the salvage value for this asset?
  3. Which method will produce the highest charge to income in Year 1?
  4. Which method will produce the highest charge to income in Year 4?
  5. Which method will produce the highest book value for the asset at the end of Year 3?
  6. If the asset is sold at the end of Year 3, which method would yield the highest gain (or lowest loss) on disposal of the asset?

(Depreciation for Partial Periods鈥擲L, Act., SYD, and DDB) On January 1, 2015, a machine was purchased for \(90,000. The machine has an estimated salvage value of \)6,000 and an estimated useful life of 5 years. The machine can operate for 100,000 hours before it needs to be replaced. The company closed its books on December 31 and operates the machine as follows: 2015, 20,000 hours; 2016, 25,000 hours; 2017, 15,000 hours; 2018, 30,000 hours; and 2019, 10,000 hours.

Instructions

(a) Compute the annual depreciation charges over the machine鈥檚 life assuming a December 31 year-end for each of the following depreciation methods.

  1. Straight-line method.
  2. Activity method.
  3. Sum-of-the-years鈥�-digits method.
  4. Double-declining-balance method.

(b) Assume a fiscal year-end of September 30. Compute the annual depreciation charges over the asset鈥檚 life applying each of the following methods.

  1. Straight-line method.
  2. Sum-of-the-years鈥�-digits method.
  3. Double-declining-balance method

(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?
See all solutions

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