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Chapter 9: 21 E (page 488)

Changing an asset’s useful life and residual value Salem Hardware Consultants purchased a building for \(540,000 and depreciated it on a straight-line basis over a 40-year period. The estimated residual value is \)100,000.

After using the building for 15 years, Salem realized that wear and tear on the building would wear it out before 40 years and that the estimated residual value should be $88,000.

Starting with the 16th year, Salem began depreciating the building over a revised total life of 35 years using the new residual value. Journalize depreciation expense on the building for years 15 and 16.

Short Answer

Expert verified

Revised Depreciation is $8,200.

Step by step solution

01

Meaning of Depreciation

The expenses charged for the purpose of reporting the decline in the value of the fixed assets acquired by the company are known as depreciation expenses. Such expenses are reported in the statement reporting net income.

02

Calculating Revised Depreciation in the books of Salem Hardware Consultants

RevisedDepreciation=Bookvalue−RevisedresidualvalueRevisedresidualusefullife=$375,000−$88,00035=$8,200

Working note: Calculation of book value at beginning of 16th year:

Bookvalueatbeginningof16thyear=Cost−Cost−ResidualvalueUsefullife×15=$540,000−$540,000−$100,00040×15=$540,000−$165,000=$375,000

03

Journalize Depreciation Expenses in the book of Salem Hardware Consultants

Date

Particulars

Debit $

Credit $

31st Dec 2015

Depreciation Expenses Revised

8,200

Accumulation Depreciation

8,200

(To Depreciation expenses are revised)

31st Dec 2016

Depreciation Expenses

8,200

Accumulated Depreciation

8,200

(To depreciation expenses are revised for next year)

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Most popular questions from this chapter

What financial statements are property, plant, and equipment reported on, and how?

Making a lump-sum asset purchase

Concord Pet Care Clinic paid \(210,000 for a group purchase of land, building, and equipment. At the time of the acquisition, the land had a market value of \)110,000, the building \(88,000, and the equipment \)22,000. Journalize the lump-sum purchase of the three assets for a total cost of $210,000, the amount for which the business signed a note payable.

2. On January 1, Alamo Cranes purchased a crane for \(140,000. Alamo expects the crane to remain useful for six years (1,000,000 lifts) and to have a residual value of \)2,000. The company expects the crane to be used for 80,000 lifts the first year. Compute the first-year depreciation expense on the crane using the following methods: a. Straight-line b. Units-of-production (Round depreciation per unit to two decimals. Round depreciation expense to the nearest whole dollar.) Compute the first-year and second-year depreciation expense on the crane using the following method: c. Double-declining-balance (Round depreciation expense to the nearest whole dollar.)

Computing first-year depreciation and book value

On January 1, 2018, Air Canadians purchased a used airplane for \(37,000,000. Air Canadians expects the plane to remain useful for five years (4,000,000 miles) and to have a residual value of \)5,000,000. The company expects the plane to be flown 1,400,000 miles during the first year.

Requirements

1. Compute Air Canadians’s first-year depreciation expense on the plane using the following methods:

a. Straight-line

b. Units-of-production

c. Double-declining-balance

2. Show the airplane’s book value at the end of the first year for all three methods.

Discarding of a fully depreciated asset On June 15, 2017, Family Furniture discarded equipment that cost \(27,000, a residual value of \)0, and was fully depreciated. Journalize the disposal of the equipment
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