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Chapter 11: Q11-2BE (page 584)

Lockard Company purchased machinery on January 1, 2017, for \(80,000. The machinery is estimated to have a salvage value of \)8,000 after a useful life of 8 years. (a) Compute 2017 depreciation expense using the straight-line method. (b) Compute 2017 depreciation expense using the straight-line method assuming the machinery was purchased on September 1, 2017.

Short Answer

Expert verified

Answer

  1. Depreciation expense = $9,000.
  2. Depreciation expense = $3,000.

Step by step solution

01

Step-by-Step SolutionStep 1: Meaning of Straight-Line Depreciation

Straight-line depreciation is the simplest way to calculate depreciation expense. There is uniform depreciation from year to year and it recognizes less depreciationat the beginning compared to other depreciation methods.

02

(a) Computing depreciation for 2017

Depreciation expense=Cost of asset−Salvage valueUseful life=$80,000−$8,0008=$9,000

03

(b) Computing depreciation for 2017

Depreciation expense=Cost of asset−Salvage valueUseful life×Number of monthMonth in a year=$80,000−$8,0008×412=$3,000

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Most popular questions from this chapter

(Depreciation for Fractional Periods) On March 10, 2019, Lost World Company sells equipment that it purchased for \(192,000 on August 20, 2012. It was originally estimated that the equipment would have a life of 12 years and a salvage value of \)16,800 at the end of that time, and depreciation has been computed on that basis. The company uses the straight line method of depreciation.

Instructions

  1. (a) Compute the depreciation charge on this equipment for 2012, for 2019, and the total charge for the period from 2013 to 2018, inclusive, under each of the six following assumptions with respect to partial periods.
    1. Depreciation is computed for the exact period of time during which the asset is owned. (Use 365 days for base and record depreciation through March 9, 2019.)
    2. Depreciation is computed for the full year on the January 1 balance in the asset account.
    3. Depreciation is computed for the full year on the December 31 balance in the asset account.
    4. Depreciation for one-half year is charged on plant assets acquired or disposed of during the year.
    5. Depreciation is computed on additions from the beginning of the month following acquisition and on disposals to the beginning of the month following disposal.
    6. Depreciation is computed for a full period on all assets in use for over one-half year, and no depreciation is charged on assets in use for less than one-half year. (Use 365 days for base.)
  2. (b) Briefly evaluate the methods above, considering them from the point of view of basic accounting theory as well as simplicity of application.

On January 1, 2016, Locke Company, a small machine-tool manufacturer, acquired for \(1,260,000 a piece of new industrial equipment. The new equipment had a useful life of 5 years, and the salvage value was estimated to be \)60,000. Locke estimates that the new equipment can produce 12,000 machine tools in its first year. It estimates that production will decline by 1,000 units per year over the remaining useful life of the equipment.

The following depreciation methods may be used:

  1. straight-line,
  2. double-declining-balance,
  3. sum-of-the-years’-digits, and
  4. units-of-output. For tax purposes, the class life is 7 years.

Use the MACRS tables for computing depreciation.

Instructions

  1. Which depreciation method would maximize net income for financial statement reporting for the 3-year period ending December 31, 2018? Prepare a schedule showing the amount of accumulated depreciation at December 31, 2018, under the method selected. Ignore present value, income tax, and deferred income tax considerations.
  2. Which depreciation method (MACRS or optional straight-line) would minimize net income for income tax reporting for the 3-year period ending December 31, 2018? Determine the amount of accumulated depreciation at December 31, 2018. Ignore present value considerations.

Explain how estimation of service lives can result in unrealistically high carrying values for fixed assets.

In its 2014 annual report, Campbell Soup Company reports beginning-of-the-year total assets of \(8,113 million, end-of-the-year total assets of \)8,323 million, total sales of \(8,268 million, and net income of \)807 million.

(a) Compute Campbell’s asset turnover.

(b) Compute Campbell’s profit margin on sales.

(c) Compute Campbell’s return on assets using

(1) asset turnover and profit margin and

(2) net income. (Round to two decimal places.)

In its 2014 annual report, Campbell Soup Company reports beginning-of-the-year total assets of \(8,113 million, end-of-the-year total assets of \)8,323 million, total sales of \(8,268 million, and net income of \)807 million. (a) Compute Campbell’s asset turnover. (b) Compute Campbell’s profit margin on sales. (c) Compute Campbell’s return on assets using (1) asset turnover and profit margin and (2) net income. (Round to two decimal places.)
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