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Chapter 11: Q6E (page 585)

(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.

Short Answer

Expert verified
  1. Depreciation = $6,250
  2. Depreciation = $5,000
  3. Depreciation = $5,250
  4. Depreciation = $37,500
  5. Depreciation = $49,688

Step by step solution

01

Meaning of Depreciations 

Depreciation can be stated as the decline in the value of an asset over a useful period.All fixed assets depreciate over time, except for land whose value increases with the passage of time. Among the various methods of depreciation, straight-line depreciation is considered to be the simplest and error-free method.

02

(a) Computing depreciation using the straight-line method for 2017

Depreciation=Costofasset - SalvagevalueUsefullife脳NumberofmonthusedNumberofmonthinayear=$212,000-$12,0008脳312=$200,0008脳312=$6,250

03

(b) Computing depreciation using activity method (units of output) for 2017

Depreciationperunit=Costofasset-SalvagevalueEstimatedproduction=$212,000-$12,00040,000units=$5perunit

Therefore total depreciation under the activity method is:

role="math" Depreciation=Total鈥�units脳Perunitprice=1,000脳$5=$5,000

04

(c) Computing depreciation using activity method (working hours) for 2017

Depreciationperunit=Costofasset-SalvagevalueEstimatedworkinghours=$212,000-$12,00020,000hours=$10perhour

Therefore total depreciation under the activity method is:

localid="1660288200619" Depreciation=Total鈥�units脳Perunitprice=1525脳$10=$5,250

05

(d) Computing depreciation using the Sum-of-the-years’-digits method for 2019

Year

Depreciation base

Depreciation factor

Calculation

Depreciation

expression

2017

200,000

11,111.11

2018

200,000

43,055.56

2019

200,000


37,500.00

Sumofyaer'sdigits=n(n+1)2=8(8+1)2=36

Therefore, depreciation under the sum-of-the-years digit method is $37,500

06

(e) Computing depreciation using the Double-declining-balance method for 2018

Calculating double-declining depreciation rate

Deprecaition=NumberofyearUsefullife脳2脳100=18脳2脳100=25%

Calculating depreciation for 2017

Depreciation=Equipmentcost脳Depreciationrate脳NumberofmonthusedNumberofmonthinayear=$212,000脳25100脳312=$13,250

Calculating depreciation for 2018

Depreciation=(Equipmentcost-Depreciationfor2017)脳Depreciationrate=($212,000-$13,250)脳25100=$49,688


Therefore, depreciation under the double-declining-balance method for 2018 is $49,688.

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Most popular questions from this chapter

(Depreciation Computation鈥擱eplacement, Nonmonetary Exchange) George Zidek Corporation bought a machine on June 1, 2015, for \(31,000, f.o.b. the place of manufacture. Freight to the point where it was set up was \)200, and \(500 was expended to install it. The machine鈥檚 useful life was estimated at 10 years, with a salvage value of \)2,500. On June 1, 2016, an essential part of the machine is replaced, at a cost of \(1,980, with one designed to reduce the cost of operating the machine. The cost of the old part and related depreciation cannot be determined with any accuracy.

On June 1, 2019, the company buys a new machine of greater capacity for \)35,000, delivered, trading in the old machine which has a fair value and trade-in allowance of \(20,000. To prepare the old machine for removal from the plant cost \)75, and expenditures to install the new one were \(1,500. It is estimated that the new machine has a useful life of 10 years, with a salvage value of \)4,000 at the end of that time. (The exchange has commercial substance.)

Instructions

Assuming that depreciation is to be computed on the straight-line basis, compute the annual depreciation on the new equipment that should be provided for the fiscal year beginning June 1, 2019. (Round to the nearest dollar.)

(Depreciation for Partial Periods鈥擲L, Act., SYD, and Declining-Balance) The cost of equipment purchased by Charleston, Inc., on June 1, 2017, is \(89,000. It is estimated that the machine will have a \)5,000 salvage value at the end of its service life. Its service life is estimated at 7 years, its total working hours are estimated at 42,000, and its total production is estimated at 525,000 units. During 2017, the machine was operated 6,000 hours and produced 55,000 units. During 2018, the machine was operated 5,500 hours and produced 48,000 units.

Instructions Compute depreciation expense on the machine for the year ending December 31, 2017, and the year ending December 31, 2018, using the following methods.

  1. Straight-line.
  2. Units-of-output.
  3. Working hours.
  4. 厂耻尘-辞蹿-迟丑别-测别补谤蝉鈥�-诲颈驳颈迟蝉.
  5. Declining-balance (twice the straight-line rate).

(Error Analysis and Depreciation, SL and SYD) Mike Devereaux Company shows the following entries in its Equipment account for 2018. All amounts are based on historical cost.

Equipment
2018
2018
Jan 1Balance 134,750June 30Cost of 23,000 equipment sold (purchased prior to 2018)
Aug. 10Purchases 32,000

12Freight on Equipment purchased 700

25Installation costs 2,700

Nov. 10Repairs 500

Instructions

  1. Prepare any correcting entries necessary.
  2. Assuming that depreciation is to be charged for a full year on the ending balance in the asset account, compute the proper depreciation charge for 2018 under each of the methods listed below. Assume an estimated life of 10 years, with no salvage value. The machinery included in the January 1, 2018, balance was purchased in 2016.

    a. Straight-line
    b. 厂耻尘-辞蹿-迟丑别-测别补谤蝉鈥�-诲颈驳颈迟蝉.

(Depreciation and Error Analysis) A depreciation schedule for semi-trucks of Ichiro Manufacturing Company was requested by your auditor soon after December 31, 2018, showing the additions, retirements, depreciation, and other data affecting the income of the company in the 4-year period 2015 to 2018, inclusive. The following data were ascertained.

Balance of Trucks account, Jan. 1, 2015

Truck No. 1 purchased Jan. 1, 2012, cost

\(18,000

Truck No. 2 purchased July 1, 2012, cost

22,000

Truck No. 3 purchased Jan. 1, 2014, cost

30,000

Truck No. 4 purchased July 1, 2014, cost

24,000

Balance, Jan. 1, 2015

\)94,000

The Accumulated Depreciation鈥擳rucks account previously adjusted to January 1, 2015, and entered in the ledger, had a balance on that date of \(30,200 (depreciation on the four trucks from the respective dates of purchase, based on a 5-year life, no salvage value). No charges had been made against the account before January 1, 2015.

Transactions between January 1, 2015, and December 31, 2018, which were recorded in the ledger, are as follows.

July 1, 2015 Truck No. 3 was traded for a larger one (No. 5), the agreed purchase price of which was \)40,000. Ichiro. paid the automobile dealer \(22,000 cash on the transaction. The entry was a debit to Trucks and a credit to Cash, \)22,000. The transaction has commercial substance.

Jan. 1, 2016 Truck No. 1 was sold for \(3,500 cash; entry debited Cash and credited Trucks, \)3,500.

July 1, 2017 A new truck (No. 6) was acquired for \(42,000 cash and was charged at that amount to the Trucks account. (Assume truck No. 2 was not retired.)

July 1, 2017 Truck No. 4 was damaged in a wreck to such an extent that it was sold as junk for \)700 cash. Ichiro received \(2,500 from the insurance company. The entry made by the bookkeeper was a debit to Cash, \)3,200, and credits to Miscellaneous Income, \(700, and Trucks, \)2,500.

Entries for straight-line depreciation had been made at the close of each year as follows: 2015, \(21,000; 2016, \)22,500; 2017, \(25,050; and 2018, \)30,400.

Instructions

  1. For each of the 4 years, compute separately the increase or decrease in net income arising from the company鈥檚 errors in determining or entering depreciation or in recording transactions affecting trucks, ignoring income tax considerations.
  2. Prepare one compound journal entry as of December 31, 2018, for adjustment of the Trucks account to reflect the correct balances as revealed by your schedule, assuming that the books have not been closed for 2018.

Presented below is information related to equipment owned by Pujols Company at December 31, 2017.

Cost (residual value \(0)

\)9,000,000

Accumulated depreciation to date

1,000,000

Value-in-use

5,500,000

Fair value less cost of disposal

4,400,000

Assume that Pujols will continue to use this asset in the future. As of December 31, 2017, the equipment has a remaining useful life of 8 years. Pujols uses straight-line depreciation.

Instructions

  1. Prepare the journal entry (if any) to record the impairment of the asset at December 31, 2017.
  2. Prepare the journal entry to record depreciation expense for 2018.
  3. The recoverable amount of the equipment at December 31, 2018, is $6,050,000. Prepare the journal entry (if any) necessary to record this increase.
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