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Chapter 10: Problem 9

A refrigerator used by a meat processor has a cost of \( 198,500\), an estimated residual value of \( 30,500\), and an estimated useful life of 15 years. What is the amount of the annual depreciation computed by the straight-line method?

Short Answer

Expert verified
The annual depreciation amount is \(11,200\).

Step by step solution

01

Understand the Straight-Line Depreciation Formula

The straight-line depreciation method calculates depreciation by evenly spreading the cost of an asset over its useful life. The formula is \( \text{Annual Depreciation} = \frac{\text{Cost} - \text{Residual Value}}{\text{Useful Life}} \).
02

Identify Given Values

Identify the given values in the problem: the cost of the refrigerator is \(198,500\), the residual value is \(30,500\), and the useful life is 15 years.
03

Substitute Values into Formula

Substitute the given values into the straight-line depreciation formula: \( \text{Annual Depreciation} = \frac{198,500 - 30,500}{15} \).
04

Calculate the Depreciable Cost

Subtract the residual value from the cost to find the depreciable cost: \( 198,500 - 30,500 = 168,000 \).
05

Compute the Annual Depreciation

Divide the depreciable cost by the useful life to calculate the annual depreciation: \( \frac{168,000}{15} = 11,200 \).

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Key Concepts

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

Depreciation Calculation
Depreciation is the process of allocating the cost of a tangible asset over its useful life. This allocation helps reflect the asset's usage and wear over time.
The straight-line depreciation method is one of the simplest ways to calculate depreciation. It spreads the cost of an asset evenly across each year of its useful life. To find the annual depreciation:
  • Subtract the asset's residual value (estimated value at the end of its useful life) from its initial cost to get the depreciable cost.
  • Divide this depreciable cost by the number of years in the asset鈥檚 useful life to find the annual depreciation expense.
If a refrigerator costs \(198,500 initially and has a residual value of \)30,500 with a useful life of 15 years, the annual depreciation via the straight-line method is calculated as:\[\text{Annual Depreciation} = \frac{198,500 - 30,500}{15} = 11,200\]So, the refrigerator depreciates by $11,200 each year.
Accounting Concepts
Accounting is governed by several standard concepts that ensure consistency and transparency. These principles guide how depreciation is recorded, impacting financial statements.
Key accounting concepts relating to depreciation include:
  • Matching Principle: This requires expenses to be matched with revenues in the period they are incurred. Depreciation spreads the cost of an asset over its useful life, aligning the expense with the revenue it helps to generate.
  • Cost Principle: Assets are recorded at their original cost, ensuring that their baseline value remains objective. This initial cost forms the basis of the depreciation calculation.
  • Consistency Principle: Once a depreciation method is chosen, it should be used consistently. This ensures comparability across financial periods.
These concepts ensure that an asset鈥檚 value is accurately represented over time, thereby providing a realistic view of financial health.
Asset Depreciation Methods
While the straight-line method is straightforward, accounting offers various methods to suit different asset types and usage patterns. Each method serves specific financial and operational needs.
Popular asset depreciation methods include:
  • Straight-Line Method: The asset's cost is evenly distributed over its expected life. Ideal for assets with consistent usage.
  • Declining Balance Method: A higher depreciation expense is recorded in the early years to reflect faster initial wear. This is useful for technology or machinery that loses value quickly.
  • Units of Production Method: Depreciation is based on usage, such as machine hours or production volume. Suitable for assets whose wear is tied directly to usage.
Each method impacts financial reports differently, influencing profit and investment decisions. Understanding these methods allows companies to accurately capture asset value changes and plan for future investments.

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Most popular questions from this chapter

Load All Company made the following expenditures on one of its delivery trucks: Feb. 22. Replaced transmission at a cost of \( 2,300\). Mar. 20. Paid \( 900\) for installation of a hydraulic lift. Nov. 2. Paid \( 67\) to change the oil and air filter. Prepare journal entries for each expenditure.

Venture Company acquired patent rights on January 3,2005 , for \( 661,500\). The patent has a useful life equal to its legal life of 15 years. On January 5,2008 , Venture successfully defended the patent in a lawsuit at a cost of \( 105,000\). a. Determine the patent amortization expense for the current year ended December 31,2008 . b. Journalize the adjusting entry to recognize the amortization.

Equipment acquired on January 3,2005 , at a cost of \( 147,500\), has an estimated useful life of eight years and an estimated residual value of \( 17,500\). a. What was the annual amount of depreciation for the years 2005,2006 , and 2007, using the straight-line method of depreciation? b. What was the book value of the equipment on January 1,2008 ? c. Assuming that the equipment was sold on January 2, 2008, for \( 95,000\), journalize the entry to record the sale. d. Assuming that the equipment had been sold on January 2, 2008, for \( 100,000\) instead of \( 95,000\), journalize the entry to record the sale.

A diesel-powered tractor with a cost of \( 215,000\) and estimated residual value of \( 27,000\) is expected to have a useful operating life of 80,000 hours. During October, the generator was operated 380 hours. Determine the depreciation for the month.

On October 1, Clear Spring Co., a water distiller, acquired new bottling equipment with a list price of \( 288,750\). Clear Springs received a trade-in allowance of \( 60,000\) on the old equipment of a similar type, paid cash of \( 28,750\), and gave a series of five notes payable for the remainder. The following information about the old equipment is obtained from the account in the equipment ledger: cost, \( 210,000\); accumulated depreciation on December 31 , the end of the preceding fiscal year, \( 137,500\); annual depreciation, \( 12,500\). Journalize the entries to record (a) the current depreciation of the old equipment to the date of trade-in and (b) the exchange transaction on October 1 for financial reporting purposes.
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