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Chapter 9: Q5SE (page 527)

Calculating partial-year depreciation

On February 28, 2017, Rural Tech Support purchased a copy machine for \(53,400. Rural Tech Support expects the machine to last for six years and have a residual value of \)3,000. Compute depreciation expense on the machine for the year ended December 31, 2017, using the straight-line method.

Short Answer

Expert verified

Depreciation expenses of the business entity are$7,000.

Step by step solution

01

Definition of Straight-Line Method

The deprecation method that reports the same depreciation over each year's useful asset life is known as the straight-line method.

02

Depreciation using straight-line method

Depreciation=Cost-ResidualvalueUsefullife×1012=$53,400-$3,0006×1012=$7,000

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Most popular questions from this chapter

Arca Salvage, Inc. purchased equipment for \(10,000. Arca recorded total depreciation of \)8,000 on the equipment. Assume that Arca exchanged the old equipment for new equipment, paying \(4,000 cash. The fair market value of the new equipment is \)5,000. Journalize Arca’s exchange of equipment. Assume this exchange has commercial substance.

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Question: What is a lump-sum purchase, and how is it accounted for?

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.

Determining asset cost, preparing depreciation schedules (3 methods), and identifying depreciation results that meet management objectives

On January 3, 2018, Rapid Delivery Service purchased a truck at a cost of \(100,000. Before placing the truck in service, Rapid spent \)3,000 painting it, \(600 replacing tires, and \)10,400 overhauling the engine. The truck should remain in service for five years and have a residual value of $12,000. The truck’s annual mileage is expected to be 32,000 miles in each of the first four years and 8,000 miles in the fifth year—136,000 miles in total. In deciding which depreciation method to use, Andy Sargeant, the general manager, requests a depreciation schedule for each of the depreciation methods (straight-line, units-of-production, and double-declining-balance).

Requirements

1. Prepare a depreciation schedule for each depreciation method, showing asset cost, depreciation expense, accumulated depreciation, and asset book value.

2. Rapid prepares financial statements using the depreciation method that reports the highest net income in the early years of asset use. Consider the first year that Rapid uses the truck. Identify the depreciation method that meets the company’s objectives.
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