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Chapter 11: Q11-5BE (page 584)

Cominsky Company purchased a machine on July 1, 2018, for \(28,000. Cominsky paid \)200 in title fees and county property tax of \(125 on the machine. In addition, Cominsky paid \)500 shipping charges for delivery, and \(475 was paid to a local contractor to build and wire a platform for the machine on the plant floor. The machine has an estimated useful life of 6 years with a salvage value of \)3,000. Determine the depreciation base of Cominsky’s new machine. Cominsky uses straightline depreciation.

Short Answer

Expert verified

Answer

Depreciation base is $26,300.

Step by step solution

01

Step-by-Step SolutionStep 1: Meaning of Depreciation

Depreciation can be stated as a decline in the value of an asset over a useful period. All assets depreciate over time, except for land, whose value increases with the passage of time. Among various methods of depreciation, straight-line depreciation is considered to be the simplest and error-free method.

02

Determining the depreciation base of Cominsky’s new machine

Cost of machine

$28,000

Add: Title fees

$200

Property tax

$125

Shipping charges

$500

Paid to contractor

$475

$29,300

Less: Salvage value

$3,000

Depreciation base

$26,300

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Most popular questions from this chapter

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.)

Some believe that accounting depreciation measures the decline in the value of fixed assets. Do you agree? Explain.

Last year, Wyeth Company recorded an impairment on an asset held for use. Recent appraisals indicate that the asset has increased in value. Should Wyeth record this recovery in value?

Mandall Company constructed a warehouse for \(280,000 on January 2, 2017. Mandall estimates that the warehouse has a useful life of 20 years and no residual value. Construction records indicate that \)40,000 of the cost of the warehouse relates to its heating, ventilation, and air conditioning (HVAC) system, which has an estimated useful life of only 10 years. What is the first year of depreciation expense using straightline component depreciation under IFRS?

(a) \(28,000. (c) \)16,000.

(b) \(14,000. (d) \)4,000.

(Depreciation and Error Analysis) A depreciation schedule for semi-trucks of Ichiro Manufacturing Company was requested by your auditor soon after December 31, 2018, showing the additions, retirements, depreciation, and other data affecting the income of the company in the 4-year period 2015 to 2018, inclusive. The following data were ascertained.

Balance of Trucks account, Jan. 1, 2015

Truck No. 1 purchased Jan. 1, 2012, cost

\(18,000

Truck No. 2 purchased July 1, 2012, cost

22,000

Truck No. 3 purchased Jan. 1, 2014, cost

30,000

Truck No. 4 purchased July 1, 2014, cost

24,000

Balance, Jan. 1, 2015

\)94,000

The Accumulated Depreciation—Trucks account previously adjusted to January 1, 2015, and entered in the ledger, had a balance on that date of \(30,200 (depreciation on the four trucks from the respective dates of purchase, based on a 5-year life, no salvage value). No charges had been made against the account before January 1, 2015.

Transactions between January 1, 2015, and December 31, 2018, which were recorded in the ledger, are as follows.

July 1, 2015 Truck No. 3 was traded for a larger one (No. 5), the agreed purchase price of which was \)40,000. Ichiro. paid the automobile dealer \(22,000 cash on the transaction. The entry was a debit to Trucks and a credit to Cash, \)22,000. The transaction has commercial substance.

Jan. 1, 2016 Truck No. 1 was sold for \(3,500 cash; entry debited Cash and credited Trucks, \)3,500.

July 1, 2017 A new truck (No. 6) was acquired for \(42,000 cash and was charged at that amount to the Trucks account. (Assume truck No. 2 was not retired.)

July 1, 2017 Truck No. 4 was damaged in a wreck to such an extent that it was sold as junk for \)700 cash. Ichiro received \(2,500 from the insurance company. The entry made by the bookkeeper was a debit to Cash, \)3,200, and credits to Miscellaneous Income, \(700, and Trucks, \)2,500.

Entries for straight-line depreciation had been made at the close of each year as follows: 2015, \(21,000; 2016, \)22,500; 2017, \(25,050; and 2018, \)30,400.

Instructions

  1. For each of the 4 years, compute separately the increase or decrease in net income arising from the company’s errors in determining or entering depreciation or in recording transactions affecting trucks, ignoring income tax considerations.
  2. Prepare one compound journal entry as of December 31, 2018, for adjustment of the Trucks account to reflect the correct balances as revealed by your schedule, assuming that the books have not been closed for 2018.
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