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Chapter 11: Q11-6BE (page 594)

Dickinson Inc. owns the following assets.

Asset

Cost

Salvage

Estimated useful life

A

\(70,000

\)7,000

10 years

B

50,000

5,000

5 years

C

82,000

4,000

12 years

Compute the composite depreciation rate and the composite life of Dickinson’s assets.

Short Answer

Expert verified

Answer

Composite rate = 10.8%

Composite life = 8.5 years

Step by step solution

01

Step-by-Step SolutionStep 1: Meaning of Composite Depreciation

Composite depreciation combines a group of depreciating assets into a single entity rather than treating each item separately. In simple words, it is the application of straight-line depreciation to a portfolio. If an asset is sold, a debit is made to cash, and a credit is made to fixed assets.

02

Computing the composite depreciation rate and the composite life of Dickinson’s assets

Asset

Calculation

Depreciation Expense

A

$6,300

B

9,000

C

6,500

$21,800

Working notes:

For the calculation, part uses the formula as follows:

Depreciation expense=Cost of asset−Salvage valueUseful life

Calculating composite rate

Composite rate=Total depreciation expenseTotal cost of asset=$21,800$202,000=10.8%

Calculation of composite life

Composite life=Total asset−Total salvage valueTotal depreciation expense=$202,000−$16,000$21,800=$186,000$21,800=8.5 years

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Most popular questions from this chapter

Distinguish among depreciation, depletion, and amortization.

Everly Corporation acquires a coal mine at a cost of \(400,000. Intangible development costs total \)100,000. After extraction has occurred, Everly must restore the property (estimated fair value of the obligation is \(80,000), after which it can be sold for \)160,000. Everly estimates that 4,000 tons of coal can be extracted. If 700 tons are extracted the first year, prepare the journal entry to record depletion.

(Depreciation Computations—Five Methods) Jon Seceda Furnace Corp. purchased machinery for \(315,000 on May 1, 2017. It is estimated that it will have a useful life of 10 years, salvage value of \)15,000, production of 240,000 units, and working hours of 25,000. During 2018, Seceda Corp. uses the machinery for 2,650 hours, and the machinery produces 25,500 units.

Instructions

From the information given, compute the depreciation charge for 2018 under each of the following methods. (Round to the nearest dollar.)

  1. Straight-line.
  2. Units-of-output.
  3. Working hours.
  4. Sum-of-the-years’-digits.
  5. Declining-balance (use 20% as the annual rate)

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.)

(Depreciation Computation—Addition, Change in Estimate) In 1990, Herman Moore Company completed the construction of a building at a cost of \(2,000,000 and first occupied it in January 1991. It was estimated that the building will have a useful life of 40 years and a salvage value of \)60,000 at the end of that time.

Early in 2001, an addition to the building was constructed at a cost of \(500,000. At that time, it was estimated that the remaining life of the building would be, as originally estimated, an additional 30 years and that the addition would have a life of 30 years and a salvage value of \)20,000.

In 2019, it is determined that the probable life of the building and addition will extend to the end of 2050, or 20 years beyond the original estimate.

Instructions

  1. Using the straight-line method, compute the annual depreciation that would have been charged from 1991 through 2000.
  2. Compute the annual depreciation that would have been charged from 2001 through 2018.
  3. Prepare the entry, if necessary, to adjust the account balances because of the revision of the estimated life in 2019.
  4. Compute the annual depreciation to be charged, beginning with 2019.
See all solutions

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