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Chapter 10: Problem 9

A refrigerator used by a meat processor has a cost of \(93,750, an estimated residual value of \)10,000, and an estimated useful life of 25 years. What is the amount of the annual depreciation computed by the straight-line method?

Short Answer

Expert verified
The annual depreciation is $3,350.

Step by step solution

01

Understand the Straight-Line Depreciation Formula

The straight-line depreciation method involves spreading out the cost of the asset evenly over its useful life. The formula to calculate annual depreciation using the straight-line method is: \[ \text{Annual Depreciation} = \frac{\text{Cost of the Asset} - \text{Residual Value}}{\text{Useful Life of the Asset}} \]
02

Identify Given Values

From the problem statement, identify the values provided:- Cost of the Asset: \(93,750 - Residual Value: \)$10,000 - Useful Life of the Asset: 25 years.
03

Substitute Values into the Formula

Plug the given values into the straight-line depreciation formula:\[ \text{Annual Depreciation} = \frac{93,750 - 10,000}{25} \]
04

Calculate the Depreciable Cost

Determine the difference between the cost of the asset and its residual value:\[ 93,750 - 10,000 = 83,750 \]This means the depreciable cost of the asset is \( 83,750 \).
05

Compute the Annual Depreciation

Divide the depreciable cost by the useful life to find the annual depreciation:\[ \text{Annual Depreciation} = \frac{83,750}{25} = 3,350 \]

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Key Concepts

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

Annual Depreciation Calculation
Calculating annual depreciation is a key accounting practice used by businesses to allocate the cost of a tangible asset over its useful life. In the straight-line method, the process is straightforward and quite simple to understand. The formula is given by:\[ \text{Annual Depreciation} = \frac{\text{Cost of the Asset} - \text{Residual Value}}{\text{Useful Life in Years}} \]You start by identifying three important factors:
  • **Cost of the Asset:** This is the initial purchase price of the asset.
  • **Residual Value:** Also known as the salvage value, this is the estimated value the asset will have at the end of its useful life.
  • **Useful Life of the Asset:** This is the period during which the asset is expected to be productive and valuable for the business.
By plugging these values into the formula, you calculate how much the asset "loses" in value each year. This loss reflects the asset's use and aging during the period.
Useful Life of Asset
The useful life of an asset is a crucial concept in depreciation. It represents the span of time over which an asset is expected to be functional and contribute to a business's operations. Several factors determine the useful life of an asset:
  • **Physical Condition:** The present condition of the asset can influence how long it will last.
  • **Expected Usage:** How intensively the asset is used impacts its lifespan.
  • **Technological Advances:** Innovations can make assets obsolete sooner than expected.
Having an accurate estimate of useful life is important, as it affects financial planning and the timing of asset replacement. Overestimating can lead to under-spending on maintenance, while underestimating can result in premature asset replacement.
Residual Value in Accounting
Residual value, or salvage value, is a key component in calculating depreciation. It's the anticipated amount that you could receive when selling or disposing of the asset at the end of its useful life. Here are some ways in which the residual value is used:
  • **Depreciable Base:** The difference between the asset's initial cost and its residual value determines the total value to be depreciated over the useful life.
  • **Tax Implications:** Accurate residual value estimates can impact how much profit or loss is reported when the asset is disposed of.
Predicting the residual value accurately is crucial. It requires consideration of market trends and the future utility of the asset. Estimations that are too high can result in insufficient depreciation expense being recorded over the life of the asset.

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Most popular questions from this chapter

Isolution Company acquired patent rights on January 4, 2007, for \(750,000. The patent has a useful life equal to its legal life of 15 years. On January 7, 2010, Isolution successfully defended the patent in a lawsuit at a cost of \)90,000. a. Determine the patent amortization expense for the current year ended December 31, 2010. b. Journalize the adjusting entry to recognize the amortization.

Easy Move Company made the following expenditures on one of its delivery trucks: Feb. 16. Replaced transmission at a cost of \(3,150. July 15. Paid \)1,100 for installation of a hydraulic lift. Oct. 3. Paid $72 to change the oil and air filter. Prepare journal entries for each expenditure.

On October 1, Hot Springs Co., a water distiller, acquired new bottling equipment with a list price (fair market value) of \(462,000. Hot Springs received a trade-in allowance of \)96,000 on the old equipment of a similar type and paid cash of \(366,000. The following information about the old equipment is obtained from the account in the equipment ledger: cost, \)336,000; accumulated depreciation on December 31, the end of the preceding fiscal year, \(220,000; annual depreciation, \)20,000. Assuming the exchange has commercial substance, 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.

A storage tank acquired at the beginning of the fiscal year at a cost of \(172,000 has an estimated residual value of \)20,000 and an estimated useful life of eight years. Determine the following: (a) the amount of annual depreciation by the straight-line method and (b) the amount of depreciation for the first and second years computed by the double-declining-balance method.

Sandblasting equipment acquired at a cost of \(85,000 has an estimated residual value of \)5,000 and an estimated useful life of 10 years. It was placed in service on October 1 of the current fiscal year, which ends on December 31. Determine the depreciation for the current fiscal year and for the following fiscal year by (a) the straight- line method and (b) the double-declining-balance method.
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