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Chapter 11: Q11-7IFRS (page 607)

Ortiz purchased a piece of equipment that cost \(202,000 on January 1, 2017. The equipment has the following components.

Component

Cost

Residual Value

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 depreciation expense for this equipment at December 31, 2017.

Short Answer

Expert verified

Answer

Total depreciation expense is $21,800.

Step by step solution

01

Step-by-Step SolutionStep 1: Meaning of Residual Value

An estimated worth of a fixed asset when it is no longer useful or after its lease term has expired, is known as residual value. The definition of residual value varies per industry, but the essential idea remains the same.

02

Computing depreciation expenses

Component

Calculation

Depreciation Expense

A

$70,000−$7,00010

$ 6,300

B

$50,000−$5,0005

9,000

C

$82,000−$4,00012

6,500

$21,800

Notes:

The formula used in depreciation expense is as shown below.

Depreciation=Cost oasset−Residual valueUseful life

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Most popular questions from this chapter

The plant manager of a manufacturing firm suggested in a conference of the company’s executives that accountants should speed up depreciation on the machinery in the finishing department because improvements were rapidly making those machines obsolete, and a depreciation fund big enough to cover their replacement is needed. Discuss the accounting concept of depreciation and the effect on a business concern of the depreciation recorded for plant assets, paying particular attention to the issues raised by the plant manager.

McDonald’s Corporation

McDonald’s is the largest and best-known global food-service retailer, with more than 32,000 restaurants in 118 countries. On any day, McDonald’s serves approximately 1 percent of the world’s population. The following is information related to McDonald’s property and equipment.

McDonald’s Corporation

Summary of Significant Accounting Policies Section

Property and Equipment. Property and equipment are stated at cost, with depreciation and amortization provided using the straight-line method over the following estimated useful lives: buildings—up to 40years; leasehold improvements—the lesser of useful lives of assets or lease terms, which generally include option periods; and equipment—three to 12 years.

[In the notes to the financial statements:]

Property and Equipment

Net property and equipment consisted of:

December 31

(In millions) 2014 2013

Land \( 5,788.4 \)5,849.3

Buildings and improvements on owned land 14,322.4 14,715.6

Buildings and improvements on leased land 13,284.0 13,825.2

Equipment, signs and seating 5,113.8 5,376.8

Other 617.5 588.7

39,126.1 40,355.6

Accumulated depreciation and amortization (14,568.6) (14,608.3)

Net property and equipment \(24,557.5 \)25,747.3

Depreciation and amortization expense for property and equipment was

(in millions): 2014—\(1,539.3; 2013—\)1,498.8; 2012—\(1,402.2.

[In its 6-year summary, McDonald’s provides the following information.]

(in millions) 2014 2012 2013

Cash provided by operations \)6,370 \(7,121 \)6,966

Capital expenditures 2,583 2,825 3,049

Instructions

  1. What method of depreciation does McDonald’s use?
  2. Does depreciation and amortization expense cause cash flow from operations to increase? Explain.
  3. What does the schedule of cash flow measures indicate?

Use the information for Lockard Company given in BE11-2. (a) Compute 2017 depreciation expense using the sum-of-the-years’-digits method. (b) Compute 2017 depreciation expense using the sum-of-the-years’-digits method, assuming the machinery was purchased on April 1, 2017.

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.

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.

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

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