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Chapter 11: Q11-7E (page 586)

(Different Methods of Depreciation) Jackel Industries presents you with the following information.

Description

Date Purchased

Cost

Salvage Value

Life in years

Depreciation Method

Accumulated depreciation to 12/31/18

Depreciation for 2019

Machine A

2/12/17

\(142,500

\)16,000

10

(a)

$33,350

(b)

Machine B

8/15/16

(c)

21,000

5

SL

29,000

(d)

Machine C

7/21/15

75,400

23,500

8

DDB

(e)

(f)

Machine D

10/12/(g)

219,000

69,000

5

SYD

70,000

(h)

Instructions

Complete the table for the year ended December 31, 2019. The company depreciates all assets using the half-year convention.

Short Answer

Expert verified

Answer

Depreciation for 2019 is as follows:

  1. $19,550
  2. $11,600
  3. $4,333
  4. $35,000

Step by step solution

01

Step-by-Step SolutionStep 1: Meaning of Depreciation

In financial accounting, depreciation could be a strategy for spreading out the cost of tangible resources over their functional lives. Essentially, it is the disintegration of the value of an asset, which happens over time due to continuous use and abrasion of the asset.

02

Computing the table for the year ended December 31, 2019

Description

Date Purchased

Cost

Salvage Value

Life in years

Depreciation Method

Accumulated depreciation to 12/31/18

Depreciation for 2019

Machine A

2/12/17

$142,500

$16,000

10

  1. SYD

$33,350

(b) $19,550

Machine B

8/15/16

(c)

21,000

5

SL

29,000

(d) 11,600

Machine C

7/21/15

75,400

23,500

8

DDB

(e) 47,567

(f)4,333

Machine D

10/12/17(g)

219,000

69,000

5

SYD

70,000

(h) 35,000

Working notes:

Machine A—Testing the methods

Straight-Line Method for 2017

$ 6,325

Straight-Line Method for 2018

$12,650

Total Straight Line

$18,975

Depreciation=Cost of asset−Salvage valueUseful life×12=$142,500−$16,00010×12=$6,325

Machine A—Testing the methods

Double-Declining Balance for 2017

$14,250

Double-Declining Balance for 2018

$25,650

Total Double Declining Balance

$39,900

Computing depreciation for 2017

Depreciation=Cost×Declining rate×Number in monthMonth in a year=$142,500×0.2×0.5=$14,250

Calculating depreciation for 2018

Depreciation=Cost−Depreciaton of 2017×Declining rate=$142,500−$14,250×0.2=$25,650

Machine A—Testing the methods

Sum-of-the-years-digits for 2017

$11,500

Sum-of-the-years-digits for 2018

$21,850

Total Sum-of-the-years-digits

$33,350

Calculating depreciation for 2017

Depreciation=Cost −Salvage value×Number of yearSum of years digit×Number of​monthNumber of month in a year=$142,500−$16,000×1055×0.5=$126,500×1055×0.5=$11,500

Calculating depreciation for 2018 for life in 10 year

Depreciation=Cost −Salvage value×Number of yearSum of years digit×Number of​monthNumber of month in a year=$142,500−$16,000×1055×12=$126,500×1055×12=$11,500

Calculating depreciation for 2018 for life in 9 year

Depreciation=Cost −Salvage value×Number of yearSum of years digit×Number of​monthNumber of month in a year=$142,500−$16,000×955×0.5=$126,500×955×0.5=$10,350

So total depreciation for 2018 is $21,850 ($14,833+$21,191)

Machine A—Testing the methods

The method used must be SYD

Using SYD, 2019 Depreciation is

$19,550

Calculation of depreciation for life in 9 year

Depreciation=Cost −Salvage value×Number of yearSum of years digit×Number of​monthNumber of month in a year=$142,500−$16,000×955×12=$126,500×955×12=$10,350

Calculation of depreciation for life in 8 year

Depreciation=Cost −Salvage value×Number of yearSum of years digit×Number of​monthNumber of month in a year=$142,500−$16,000×855×0.5=$126,500×855×0.5=$9,200

So total depreciation is $19,500 ($10,350+$9,200)

Machine B-Computation of the cost

The asset has been depreciated for 21/2years using the straight-line method.

Annual depreciation is then equal to $29,000 divided by 2.5 or $11,600. 11,600 times 5 plus the salvage value is equal to the cost. Cost is $79,000

Cost=Annual depreciation×Life in years+Salvage value=$11,600×5+$21,000=$79,000

Using SL, 2017 Depreciation is $11,600

Machine C—using the double-declining balance method of depreciation

Year

Depreciation expense

Calculation

2015’s depreciation is

$ 9,425

($75400 x .25 x 5)

2016’s depreciation is

$16,494

($75400 - $9,425) x .25

2017’s depreciation is

$12,370

($75400 - $25,919) x .25

2018’s depreciation is

$ 9,278

($75400 - $38,289) x .25

$47,567

So,Using DDB, 2019 Depreciation is $4,333 ($75,400 – $47,567 – $23,500)

Machine D—Computation of Year Purchased

First Half Year using SYD

$25,000

Second Year using SYD

$45,000

$70,000

Calculating depreciation for the first half-year using SYD

Depreciation=Cost −Salvage value×Number of yearSum of years digit×Number of​monthNumber of month in a year=$219,000−$69,000×515×.5=$150,000×515×.5=$25,000

Calculating depreciation for Second Year using SYD for 5 years in life

Depreciation=Cost −Salvage value×Number of yearSum of years digit×Number of​monthNumber of month in a year=$219,000−$69,000×515×.5=$150,000×515×.5=$25,000

Calculating depreciation for Second Year using SYD for 4 years in life

Depreciation=Cost −Salvage value×Number of yearSum of years digit×Number of​monthNumber of month in a year=$219,000−$69,000×415×.5=$150,000×415×.5=$20,000

So, the total depreciation expense is $70,000

Thus the asset must have been purchased on October 12, 2017

Using SYD, 2019 Depreciation is $35,000

Calculating depreciation for 4 years in the life

Depreciation=Cost −Salvage value×Number of yearSum of years digit×Number of​monthNumber of month in a year=$219,000−$69,000×415×.5=$150,000×415×.5=$20,000

Calculating depreciation for 3 years in the life

Depreciation=Cost −Salvage value×Number of yearSum of years digit×Number of​monthNumber of month in a year=$219,000−$69,000×315×.5=$150,000×315×.5=$15,000

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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—Strike, Units-of-Production, Obsolescence) The following are three different and unrelated situations involving depreciation accounting. Answer the question(s) at the end of each situation.

Situation I: Recently, Broderick Company experienced a strike that affected a number of its operating plants. The controller of this company indicated that it was not appropriate to report depreciation expense during this period because the equipment did not depreciate and an improper matching of costs and revenues would result. She based her position on the following points.

1. It is inappropriate to charge the period with costs for which there are no related revenues arising from production.

2. The basic factor of depreciation in this instance is wear and tear. Because equipment was idle, no wear and tear occurred.

Instructions

Comment on the appropriateness of the controller’s comments.

Situation II: Etheridge Company manufactures electrical appliances, most of which are used in homes. Company engineers have designed a new type of blender which, through the use of a few attachments, will perform more functions than any blender currently on the market. Demand for the new blender can be projected with reasonable probability. In order to make the blenders, Etheridge needs a specialized machine that is not available from outside sources. It has been decided to make such a machine in Etheridge’s own plant.

Instructions

  1. Discuss the effect of projected demand in units for the new blenders (which may be steady, decreasing, or increasing) on the determination of a depreciation method for the machine.
  2. What other matters should be considered in determining the depreciation method? (Ignore income tax considerations.)

Situation III: Haley Paper Company operates a 300-ton-per-day kraft pulp mill and four sawmills in Wisconsin. The company is in the process of expanding its pulp mill facilities to a capacity of 1,000 tons per day and plans to replace three of its older, less efficient sawmills with an expanded facility. One of the mills to be replaced did not operate for most of 2017 (current year), and there are no plans to reopen it before the new sawmill facility becomes operational.

In reviewing the depreciation rates and discussing the salvage values of the sawmills that were to be replaced, it was noted that if present depreciation rates were not adjusted, substantial amounts of plant costs on these three mills would not be depreciated by the time the new mill came on stream.

Instructions

What is the proper accounting for the four sawmills at the end of 2017?

(Depreciation Choice—Ethics) Jerry Prior, Beeler Corporation’s controller, is concerned that net income may be lower this year. He is afraid upper-level management might recommend cost reductions by laying off accounting staff, including him.

Prior knows that depreciation is a major expense for Beeler. The company currently uses the double-declining-balance method for both financial reporting and tax purposes, and he’s thinking of selling equipment that, given its age, is primarily used when there are periodic spikes in demand. The equipment has a carrying value of \(2,000,000 and a fair value of \)2,180,000. The gain on the sale would be reported in the income statement. He doesn’t want to highlight this method of increasing income. He thinks, “Why don’t I increase the estimated useful lives and the salvage values? That will decrease depreciation expense and require less extensive disclosure, since the changes are accounted for prospectively. I may be able to save my job and those of my staff.”

Instructions

Answer the following questions.

  1. Who are the stakeholders in this situation?
  2. What are the ethical issues involved?
  3. What should Prior do?

Jurassic Company owns machinery that cost \(900,000 and has accumulated depreciation of \)380,000. The present value of expected future net cash flows from the use of the asset are expected to be \(500,000. The fair value less cost of disposal of the equipment is \)400,000. Prepare the journal entry, if any, to record the impairment loss.

(Depreciation Computations—Four Methods) Robert Parish Corporation purchased a new machine for its assembly process on August 1, 2017. The cost of this machine was \(117,900. The company estimated that the machine would have a salvage value of \)12,900 at the end of its service life. Its life is estimated at 5 years, and its working hours are estimated at 21,000 hours. Year-end is December 31.

Instructions

Compute the depreciation expense under the following methods. Each of the following should be considered unrelated.

  1. Straight-line depreciation for 2017.
  2. Activity method for 2017, assuming that machine usage was 800 hours.
  3. Sum-of-the-years’-digits for 2018.
  4. Double-declining balance for 2018.
See all solutions

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