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Chapter 11: Q10E (page 586)

(Depreciation Computations, SYD) Five Satins Company purchased a piece of equipment at the beginning of 2014. The equipment cost \(430,000. It has an estimated service life of 8 years and an expected salvage value of \)70,000. The sum of-the-years’-digits method of depreciation is being used. Someone has already correctly prepared a depreciation schedule for this asset. This schedule shows that \(60,000 will be depreciated for a particular calendar year.

Instructions

Show calculations to determine for what particular year the depreciation amount for this asset will be \)60,000.

Short Answer

Expert verified

Answer

In 2016 the depreciation amount for this asset will be $60,000.

Step by step solution

01

Meaning of Sum of Year’s Digit Method

In this method of accelerated depreciation, the total of the year's digits is multiplied by the number of years. During depreciation, a fraction of the whole year’s worth is subtracted from the object's value.

02

Showing calculations to determine for what particular year the depreciation amount for this asset will be $60,000.

Computation of depreciable cost

Depreciablecost=Costoftheasset-Salvagevalue=$430,000-$70,000=$360,000

Calculating the sum of year digits

Sumofyear'sdigit=nn+12=88+12=8×92=36

Computation of depreciation by using the sum of year digits method

Year

Depreciation base

Remaining life of the asset

Depreciation fraction

Depreciation

expense

Accumulated

depreciation

2014

$360,000

8

836

$80,000

$80,000

2015

$360,000

7

736

$70,000

$150,000

2016

$360,000

6

636

$60,000

$210,000

2017

$360,000

5

536

$50,000

$260,000

2018

$360,000

4

436

$40,000

$300,000

2019

$360,000

3

336

$30,000

$330,000

2020

$360,000

2

236

$20,000

$350,000

2021

$360,000

1

136

$10,000

$360,000

Thus, the amount of $60,000 depreciation will be equal I the year 2016.

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Most popular questions from this chapter

(Book vs. Tax (MACRS) Depreciation) Futabatei Enterprises purchased a delivery truck on January 1, 2017, at a cost of \(27,000. The truck has a useful life of 7 years with an estimated salvage value of \)6,000. The straight-line method is used for book purposes. For tax purposes, the truck, having an MACRS class life of 7 years, is classified as 5-year property; the optional MACRS tax rate tables are used to compute depreciation. In addition, assume that for 2017 and 2018 the company has revenues of \(200,000 and operating expenses (excluding depreciation) of \)130,000.

Instructions

  1. Prepare income statements for 2017 and 2018. (The final amount reported on the income statement should be income before income taxes.)
  2. Compute taxable income for 2017 and 2018.
  3. Determine the total depreciation to be taken over the useful life of the delivery truck for both book and tax purposes.
  4. Explain why depreciation for book and tax purposes will generally be different over the useful life of a depreciable asset.

(Depreciation—Change in Estimate) Machinery purchased for \(60,000 by Tom Brady Co. in 2013 was originally estimated to have a life of 8 years with a salvage value of \)4,000 at the end of that time. Depreciation has been entered for 5 years on this basis. In 2018, it is determined that the total estimated life should be 10 years with a salvage value of $4,500 at the end of that time. Assume straight-line depreciation.

Instructions

  1. Prepare the entry to correct the prior years’ depreciation, if necessary.
  2. Prepare the entry to record depreciation for 2018.

Fernandez Corporation purchased a truck at the beginning of 2017 for \(50,000. The truck is estimated to have a salvage value of \)2,000 and a useful life of 160,000 miles. It was driven 23,000 miles in 2017 and 31,000 miles in 2018. Compute depreciation expense for 2017 and 2018.

Walkin Inc. is considering the write-down of its long-term plant because of a lack of profitability. Explain to the management of Walkin how to determine whether a write-down is permitted.

Brazil Group purchases a vehicle at a cost of \(50,000 on January 2, 2017. Individual components of the vehicle and useful lives are as follows.

Cost

Useful Lives

Tires

\) 6,000

2 years

Transmission

10,000

5 years

Trucks

34,000

10 years

Instructions

(Assume no residual (salvage) value.)

  1. Compute depreciation expense for 2017, assuming Brazil depreciates the vehicle as a single unit.
  2. Compute depreciation expense for 2017, assuming Brazil uses component depreciation.
  3. Why might a company want to use component depreciation to depreciate its assets?
See all solutions

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