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Chapter 9: Q6SE (page 527)

Changing the estimated life of an asset

Assume that Smith’s Auto Sales paid $45,000 for equipment with a 15-year life and zero expected residual value. After using the equipment for six years, the company determines that the asset will remain useful for only five more years.

Requirements

1. Record depreciation expense on the equipment for Year 7 by the straight-line method.

2. What is accumulated depreciation at the end of Year 7?

Short Answer

Expert verified
  1. Depreciation for the 7th year is $5,400.
  2. Accumulated depreciation up to the 7th year is $23,400.

Step by step solution

01

Definition of Depreciation

The expenses charged to report 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

Depreciation expenses on the equipment for 7th year

Depreciationfor7thyear=Cost-Salvagevalue-AccumulateddepreciationUsefullife=$45,000-$0-$18,0005=$5,400

Working note: Calculation of Accumulated depreciation up to 6 year:

Accumulateddepreciationupto6thyear=Cost-SalvagevalueUsefullife×6=$45,000-$015×6=$18,000

03

Accumulated depreciation at the end of the 7th year

Particular

Amount $

Depreciation for 7th year

$5,400

Add: Accumulated depreciation up to 6th year

18,000

Accumulated depreciation

$23,400

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Most popular questions from this chapter

What is depreciation? Define useful life, residual value, and depreciable cost.

Journalizing partial-year depreciation and asset disposals and exchanges.

During 2018, Mora Corporation completed the following transactions:

Jan. 1 Traded in old office equipment with book value of \(55,000 (cost of \)127,000 and accumulated depreciation of \(72,000) for new equipment. Mora also paid \)70,000 in cash. Fair value of new equipment is \(133,000. Assume the exchange had commercial substance.

Apr. 1 Sold equipment that cost \)18,000 (accumulated depreciation of \(8,000 through December 31 of the preceding year). Mora received \)6,100 cash from the sale of the equipment. Depreciation is computed on a straightline basis. The equipment has a five-year useful life and a residual value of \(0. Dec. 31 Recorded depreciation as follows:

Office equipment is depreciated using the double-declining-balance method over four years with a \)9,000 residual value.

Record the transactions in the journal of Mora Corporation.

Computing the asset turnover ratio Biagas, Inc. had net sales of \(55,600,000 for the year ended May 31, 2018. Its beginning and ending total assets were \)52,800,000 and $98,500,000, respectively. Determine Biagas’s asset turnover ratio for year ended May 31, 2018.

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.

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

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

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

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

Dec. 31 Recorded depreciation as follows:

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

Record the transactions in the journal of Whitney Plumb Associates.
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