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Chapter 9: Q3SE (page 526)

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.

Short Answer

Expert verified

Depreciation

Value at end of the first year

$6,400,000

$30,600,000

$11,200,000

$25,800,000

$14,800,000

$22,200,000

Step by step solution

01

Definition of Straight Line Method

The method of calculating depreciation under which each year of the asset's useful life reports the same depreciation is known as the straight-line method. The depreciation method under this method is calculated using salvage value, cost, and useful life.

02

Calculation of depreciation

a. Straight line

Depreciation=Cost-SalvagevalueEstimatedusefullifeinyears=$37,000,000-$5,000,0005=$6,400,000

b. Units of production method

Depreciation=Cost-SalvagevalueEstimatedusefullifeinmiles×Milesrunduringfirstyear=$37,000,000-$5,000,0004,000,000×1,400,000=$11,200,000

c. Double-declining method:

Depreciation=Cost×100%Usefullife×2=$37,000,000×100%5×2=$37,000,000×20%×2=$14,800,000

03

Book value at the end of the first year

Method

Book value

-

Depreciation

=

Value at end of the first year

Straight line

$37,000,000

-

$6,400,000

=

$30,600,000

Units of production

$37,000,000

-

$11,200,000

=

$25,800,000

Double declining method

$37,000,000

-

$14,800,000

=

$22,200,000

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Most popular questions from this chapter

Whitney Plumb Associates surveys American eating habits. The company’s accounts include Land, Buildings, Office Equipment, and Communication Equipment, with a separate Accumulated Depreciation account for each asset. During 2018, Whitney Plumb completed the following transactions:

Jan. 1 Purchased office equipment, \(117,000. Paid \)77,000 cash and financed the remainder with a note payable.

Apr. 1 Acquired land and communication equipment in a lump-sum purchase. Total cost was \(350,000 paid in cash. An independent appraisal valued the land at \)275,625 and the communication equipment at \(91,875.

Sep. 1 Sold a building that cost \)520,000 (accumulated depreciation of \(285,000 through December 31 of the preceding year). Whitney Plumb received \)390,000 cash from the sale of the building. Depreciation is computed on a straight-line basis. The building has a 40-year useful life and a residual value of \(25,000.

Dec. 31 Recorded depreciation as follows:

Communication equipment is depreciated by the straight-line method over a five-year life with zero residual value. Office equipment is depreciated using the double-declining-balance method over five years with a \)2,000 residual value.

Record the transactions in the journal of Whitney Plumb Associates.

Core Telecom provides communication services in Iowa, Nebraska, the Dakotas, and Montana. Core purchased goodwill as part of the acquisition of Surety Wireless Company, which had the following figures:

Book value of assets \( 700,000

Market value of assets 1,000,000

Market value of liabilities 510,000

Requirements

1. Journalize the entry to record Core’s purchase of Surety Wireless for \)280,000 cash plus a $420,000 note payable.

2. What special asset does Core’s acquisition of Surety Wireless identify? How should Core Telecom account for this asset after acquiring Surety Wireless? Explain in detail.

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

Question: On January 1, Orange Manufacturing paid $40,000 for a patent. Although it gives legal protection for 20 years, the patent is expected to provide a competitive advantage for only eight years. Assuming the straight-line method of amortization, record the journal entry for amortization for Year 1.

Whitney Plumb Associates surveys American eating habits. The company’s accounts include Land, Buildings, Office Equipment, and Communication Equipment, with a separate Accumulated Depreciation account for each asset. During 2018, Whitney Plumb completed the following transactions:

Jan. 1 Purchased office equipment, \(117,000. Paid \)77,000 cash and financed the remainder with a note payable.

Apr. 1 Acquired land and communication equipment in a lump-sum purchase. Total cost was \(350,000 paid in cash. An independent appraisal valued the land at \)275,625 and the communication equipment at \(91,875.

Sep. 1 Sold a building that cost \)520,000 (accumulated depreciation of \(285,000 through December 31 of the preceding year). Whitney Plumb received \)390,000 cash from the sale of the building. Depreciation is computed on a straight-line basis. The building has a 40-year useful life and a residual value of \(25,000.

Dec. 31 Recorded depreciation as follows:

Communication equipment is depreciated by the straight-line method over a five-year life with zero residual value. Office equipment is depreciated using the double-declining-balance method over five years with a \)2,000 residual value.

Record the transactions in the journal of Whitney Plumb Associates.
See all solutions

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