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Chapter 11: Q11-7BE (page 594)

Holt Company purchased a computer for \(8,000 on January 1, 2016. Straight-line depreciation is used, based on a 5-year life and a \)1,000 salvage value. In 2018, the estimates are revised. Holt now feels the computer will be used until December 31, 2019, when it can be sold for $500. Compute the 2018 depreciation.

Short Answer

Expert verified

Answer

Depreciation for 2018 = $2,350

Step by step solution

01

Step-by-Step SolutionStep 1: Meaning of Depreciation

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

02

Computation of depreciation expense

Calculation of annual depreciation

Depreciation expense=Cost of asset−Salvage valueUseful life=$8,000−$1,0005=$1,400

Calculating book value on January 1, 2018

Book value=Cost of asset−2×Depreciation expense=$8,000−2×$1,400=$5,200

Calculating depreciation expense for 2018

Depreciation expense=Book value−Estimated value2=$5,200−$5002=$2,350

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Most popular questions from this chapter

(Depletion, Timber, and Unusual Loss) Conan O’Brien Logging and Lumber Company owns 3,000 acres of timberland on the north side of Mount Leno, which was purchased in 2005 at a cost of \(550 per acre. In 2017, O’Brien began selectively logging this timber tract. In May 2017, Mount Leno erupted, burying the timberland of O’Brien under a foot of ash. All of the timber on the O’Brien tract was downed. In addition, the logging roads, built at a cost of \)150,000, were destroyed, as well as the logging equipment, with a net book value of \(300,000.

At the time of the eruption, O’Brien had logged 20% of the estimated 500,000 board feet of timber. Prior to the eruption, O’Brien estimated the land to have a value of \)200 per acre after the timber was harvested. O’Brien includes the logging roads in the depletion base.

O’Brien estimates it will take 3 years to salvage the downed timber at a cost of \(700,000. The timber can be sold for pulp wood at an estimated price of \)3 per board foot. The value of the land is unknown, but must be considered nominal due to future uncertainties.

Instructions

  1. Determine the depletion cost per board foot for the timber harvested prior to the eruption of Mount Leno.
  2. Prepare the journal entry to record the depletion prior to the eruption.
  3. If this tract represents approximately half of the timber holdings of O’Brien, determine the amount of the unusual loss due to the eruption of Mount Leno for the year ended December 31, 2017.

List (a) the similarities and (b) the differences in the accounting treatments of depreciation and cost depletion.

(Depreciation Concepts) As a cost accountant for San Francisco Cannery, you have been approached by Phil Perriman, canning room supervisor, about the 2017 costs charged to his department. In particular, he is concerned about the line item “depreciation.” Perriman is very proud of the excellent condition of his canning room equipment. He has always been vigilant about keeping all equipment serviced and well oiled. He is sure that the huge charge to depreciation is a mistake; it does not at all reflect the cost of minimal wear and tear that the machines have experienced over the last year. He believes that the charge should be considerably lower.

The machines being depreciated are six automatic canning machines. All were put into use on January 1, 2017. Each cost \(625,000, having a salvage value of \)55,000 and a useful life of 12 years. San Francisco depreciates this and similar assets using double-declining-balance depreciation. Perriman has also pointed out that if you used straight-line depreciation, the charge to his department would not be so great.

Instructions

Write a memo dated January 22, 2017, to Phil Perriman to clear up his misunderstanding of the term “depreciation.” Also, calculate year-1 depreciation on all machines using both methods. Explain the theoretical justification for double-declining-balance and why, in the long run, the aggregate charge to depreciation will be the same under both methods.

Presented below is information related to equipment owned by Pujols Company at December 31, 2017.

Cost (residual value \(0)

\)9,000,000

Accumulated depreciation to date

1,000,000

Value-in-use

5,500,000

Fair value less cost of disposal

4,400,000

Assume that Pujols will continue to use this asset in the future. As of December 31, 2017, the equipment has a remaining useful life of 8 years. Pujols uses straight-line depreciation.

Instructions

  1. Prepare the journal entry (if any) to record the impairment of the asset at December 31, 2017.
  2. Prepare the journal entry to record depreciation expense for 2018.
  3. The recoverable amount of the equipment at December 31, 2018, is $6,050,000. Prepare the journal entry (if any) necessary to record this increase.

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