/*! This file is auto-generated */ .wp-block-button__link{color:#fff;background-color:#32373c;border-radius:9999px;box-shadow:none;text-decoration:none;padding:calc(.667em + 2px) calc(1.333em + 2px);font-size:1.125em}.wp-block-file__button{background:#32373c;color:#fff;text-decoration:none} Problem 12 A warehouse with a cost of \(\$ ... [FREE SOLUTION] | 91影视

91影视

Log out

Learning Materials

Features

Discover

Chapter 10: Problem 12

A warehouse with a cost of \(\$ 800,000\) has an estimated residual value of \(\$ 200,000\), an estimated useful life of 40 years, and is depreciated by the straight-line method. (a) What is the amount of the annual depreciation? (b) What is the book value at the end of the twentieth year of use? (c) If at the start of the twenty-first year it is estimated that the remaining life is 25 years and that the residual value is \(\$ 150,000\), what is the depreciation expense for each of the remaining 25 years?

Short Answer

Expert verified
(a) $15,000, (b) $500,000, (c) $14,000 per year.

Step by step solution

01

Calculate the Annual Depreciation

Using the straight-line method, the annual depreciation can be calculated as:\[ \text{Annual Depreciation} = \frac{\text{Cost} - \text{Residual Value}}{\text{Useful Life}} \]Substituting the given values:\[ \text{Annual Depreciation} = \frac{800,000 - 200,000}{40} = \frac{600,000}{40} = 15,000 \]Thus, the annual depreciation is \( \$15,000 \).
02

Determine the Book Value at Year 20

Book value after 20 years is the original cost minus the total accumulated depreciation during this period. Total accumulated depreciation can be calculated as:\[ \text{Accumulated Depreciation} = \text{Annual Depreciation} \times \text{Number of Years} = 15,000 \times 20 = 300,000 \]Thus, the book value is:\[ \text{Book Value} = \text{Cost} - \text{Accumulated Depreciation} = 800,000 - 300,000 = 500,000 \]Therefore, the book value at year 20 is \( \$500,000 \).
03

Adjust for New Useful Life and Residual Value

At the beginning of the 21st year, the remaining life is estimated to be 25 years with a residual value of \( \$150,000 \). First, calculate the new depreciable amount:\[ \text{New Depreciable Amount} = \text{Book Value} - \text{New Residual Value} = 500,000 - 150,000 = 350,000 \]
04

Calculate the New Annual Depreciation

Divide the new depreciable amount by the remaining useful life to find the new annual depreciation:\[ \text{New Annual Depreciation} = \frac{350,000}{25} = 14,000 \]So, the depreciation expense for each of the remaining 25 years is \( \$14,000 \).

Unlock Step-by-Step Solutions & Ace Your Exams!

  • Full Textbook Solutions

    Get detailed explanations and key concepts

  • Unlimited Al creation

    Al flashcards, explanations, exams and more...

  • Ads-free access

    To over 500 millions flashcards

  • Money-back guarantee

    We refund you if you fail your exam.

Over 30 million students worldwide already upgrade their learning with 91影视!

Key Concepts

These are the key concepts you need to understand to accurately answer the question.

Straight-Line Method
The straight-line method is one of the simplest ways to calculate depreciation. This method assumes that assets lose their value evenly over time. It's easy to understand and implement, making it preferred in many accounting situations.
To use this method, you subtract the residual value from the cost of the asset and divide the result by the asset's useful life.
This gives you the amount the asset will depreciate each year. Here's a step-by-step:
  • Determine the initial cost or purchase price of the asset.
  • Subtract the estimated residual value (what you expect to sell it for at the end of its useful life).
  • Divide this number by the number of years you expect to use the asset (useful life).
By evenly spreading out the depreciation, the straight-line method provides a clear and consistent expense on financial statements.
Annual Depreciation
Annual depreciation is the amount by which an asset's value decreases each year. With the straight-line method, this is consistent each year. Knowing the annual depreciation helps businesses plan and manage their assets and finances.
For example, using the exercise provided, if a warehouse costs \(800,000, with a \)200,000 residual value over a useful life of 40 years, the annual depreciation is calculated as:\[\text{Annual Depreciation} = \frac{\text{Cost} - \text{Residual Value}}{\text{Useful Life}} = \frac{800,000 - 200,000}{40} = 15,000\]This means the asset value decreases by $15,000 each year, which is recorded as an expense.
Book Value
Book value is an asset's value on the balance sheet. It starts with the original cost and then decreases by the accumulated depreciation each year.
By the 20th year in our example, the warehouse has depreciated by \(300,000, resulting in a book value of:\[\text{Book Value} = \text{Cost} - \text{Accumulated Depreciation} = 800,000 - 300,000 = 500,000\]This means the book value at the end of 20 years is \)500,000. The book value helps in representing the asset's worth on an accounting ledger accurately over time.
Useful Life
The useful life of an asset is the period over which it is expected to be used profitably by an entity. The longer the useful life, the lower the annual depreciation using the straight-line method, reducing annual expenses.
Estimating useful life can be complex, involving factors like wear and tear, frequency of use, and technological advancements. For example, the original useful life of the warehouse was 40 years, but was adjusted to 25 years after reevaluation in the 21st year.
The useful life is critical for planning asset purchases, financial projections, and future investments.
Residual Value
Residual value is the expected value of an asset at the end of its useful life. This amount is subtracted from the asset's cost to find the depreciable amount.
If the asset is sold after its useful life, the residual value is its salvage worth. It's essential in calculating depreciation, like in our exercise where the initial residual value was $200,000, leading to a straightforward calculation of the depreciation amount. In the 21st year, the new residual value was estimated to be $150,000, altering the depreciation calculation for the remaining useful life.
This value estimation impacts financial planning and tax liabilities.

One App. One Place for Learning.

All the tools & learning materials you need for study success - in one app.

Get started for free

Most popular questions from this chapter

Prior to adjustment at the end of the year, the balance in Trucks is \(\$ 182,600\) and the balance in Accumulated Depreciation-Trucks is \(\$ 75,500\). Details of the subsidiary ledger are as follows: \begin{tabular}{cccccc} Truck & Cost & Estimated Residual Value & Estimated Useful Life & Accumulated Depreciation at Beginning of Year & Miles Operated During Year \\ \hline 1 & \(\$ 68,000\) & \(\$ 8,000\) & 300,000 miles & \(\$ 27,000\) & 40,000 miles \\ 2 & 48,600 & 6,600 & 200,000 & 39,900 & 12,000 \\ 3 & 38,000 & 3,000 & 200,000 & 8,050 & 36,000 \\ 4 & 28,000 & 4,000 & 120,000 & \(-\) & 21,000 \end{tabular} a. Determine the depreciation rates per mile and the amount to be credited to the accumulated depreciation section of each of the subsidiary accounts for the miles operated during the current year. b. Journalize the entry to record depreciation for the year.

Hicks Co. incurred the following costs related to trucks and vans used in operating its delivery service: 1\. Removed a two-way radio from one of the trucks and installed a new radio with a greater range of communication. 2\. Overhauled the engine on one of the trucks that had been purchased three years ago. 3\. Changed the oil and greased the joints of all the trucks and vans. 4\. Installed security systems on four of the newer trucks. 5\. Changed the radiator fluid on a truck that had been in service for the past 4 years. 6\. Installed a hydraulic lift to a van. 7\. Tinted the back and side windows of one of the vans to discourage theft of contents. 8\. Repaired a flat tire on one of the vans. 9\. Rebuilt the transmission on one of the vans that had been driven 40,000 miles. The van was no longer under warranty. 10\. Replaced the trucks' suspension system with a new suspension system that allows for the delivery of heavier loads. Classify each of the costs as a capital expenditure or a revenue expenditure. For those costs identified as capital expenditures, classify each as an additional or replacement component.

Colmey Company acquired patent rights on January 3,2003 , for \(\$ 472,500\). The patent has a useful life equal to its legal life of 15 years. On January 5,2006 , Colmey successfully defended the patent in a lawsuit at a cost of \(\$ 75,000\). a. Determine the patent amortization expense for the current year ended December 31, \(2006 .\) b. Journalize the adjusting entry to recognize the amortization.

Felix Little owns and operates Big Sky Transport Co. During the past year, Felix incurred the following costs related to his 18 -wheel truck. 1\. Replaced a headlight that had burned out. 2\. Removed the old CB radio and replaced it with a newer model with a greater range. 3\. Replaced a shock absorber that had worn out. 4\. Installed a television in the sleeping compartment of the truck. 5\. Replaced the old radar detector with a newer model that detects the KA frequencies now used by many of the state patrol radar guns. The detector is wired directly into the cab, so that it is partially hidden. In addition, Felix fastened the detector to the truck with a locking device that prevents its removal. 6\. Installed fog and cab lights. 7\. Installed a wind deflector on top of the cab to increase fuel mileage. 8\. Modified the factory-installed turbo charger with a special-order kit designed to add 50 more horsepower to the engine performance. 9\. Replaced the hydraulic brake system that had begun to fail during his latest trip through the Rocky Mountains. 10\. Overhauled the engine. Classify each of the costs as a capital expenditure or a revenue expenditure. For those costs identified as capital expenditures, classify each as anditional or replacement component.

A diesel-powered generator with a cost of \(\$ 345,000\) and estimated residual value of \(\$ 18,000\) is expected to have a useful operating life of 75,000 hours. During July, the generator was operated 1,250 hours. Determine the depreciation for the month.
See all solutions

Recommended explanations on Math Textbooks

Discrete Mathematics

Read Explanation

Theoretical and Mathematical Physics

Read Explanation

Applied Mathematics

Read Explanation

Mechanics Maths

Read Explanation

Decision Maths

Read Explanation

Pure Maths

Read Explanation
View all explanations

What do you think about this solution?

We value your feedback to improve our textbook solutions.

Study anywhere. Anytime. Across all devices.