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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

Making a lump-sum purchase of assets Maplewood Properties bought three lots in a subdivision for a lump-sum price. An independent appraiser valued the lots as follows:

Lot

Appraised Value

1

\(144,000

2

96,000

3

240,000

Maplewood paid \)355,000 in cash. Record the purchase in the journal, identifying each lot’s cost in a separate Land account. Round decimals to two places, and use the computed percentages throughout.

Accounting for depletion of natural resources Ajax Petroleum holds huge reserves of oil assets. Assume that at the end of 2018, Ajax Petroleum’s cost of oil reserves totaled $27,000,000, representing 3,000,000 barrels of oil.

Requirements

  1. Which method does Ajax Petroleum use to compute depletion?
  2. Suppose Ajax Petroleum removed and sold 500,000 barrels of oil during 2019. Journalize depletion expense for 2019.

Question:Western Bank & Trust purchased land and a building for the lump sum of $3,000,000. To get the maximum tax deduction, Western allocated 90% of the purchase price to the building and only 10% to the land. A more realistic allocation would have been 70% to the building and 30% to the land.

Requirements

1. Explain the tax advantage of allocating too much to the building and too little to the land.

2. Was Western’s allocation ethical? If so, state why. If not, why not? Identify who was harmed.

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

On January 3, 2018, Speedy Delivery Service purchased a truck at a cost of \(67,000. Before placing the truck in service, Speedy spent \)3,000 painting it, \(1,200 replacing tires, and \)3,500 overhauling the engine. The truck should remain in service for five years and have a residual value of $5,100. The truck’s annual mileage is expected to be 20,000 miles in each of the first four years and 12,800 miles in the fifth year—92,800 miles in total. In deciding which depreciation method to use, Alec Rivera, 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. Speedy 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 Speedy uses the truck. Identify the depreciation method that meets the company’s objectives.

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.
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