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Chapter 11: Q12Q (page 583)
If Remmers, Inc. uses the composite method and its composite rate is 7.5% per year, what entry should it make when plant assets that originally cost \(50,000 and have been used for 10 years are sold for \)14,000?
No gain or loss is recognized under the composite method.
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Tan Chin Company purchases a building for \(11,300,000 on January 2, 2017. An engineer’s report shows that of the total purchase price, \)11,000,000 should be allocated to the building (with a 40-year life), \(150,000 to 15-year property, and \)150,000 to 5-year property. No residual (salvage) value should be considered. Compute depreciation expense for 2017 using component depreciation.
Silverman Company purchased machinery for \(162,000 on January 1, 2017. It is estimated that the machinery will have a useful life of 20 years, salvage value of \)15,000, production of 84,000 units, and working hours of 42,000. During 2017, the company uses the machinery for 14,300 hours, and the machinery produces 20,000 units. Compute depreciation under the straight-line, units-of-output, working hours, sum-of-the-years’-digits, and double-declining-balance methods.
(Depreciation for Partial Periods—SL, Act., SYD, and Declining-Balance) The cost of equipment purchased by Charleston, Inc., on June 1, 2017, is \(89,000. It is estimated that the machine will have a \)5,000 salvage value at the end of its service life. Its service life is estimated at 7 years, its total working hours are estimated at 42,000, and its total production is estimated at 525,000 units. During 2017, the machine was operated 6,000 hours and produced 55,000 units. During 2018, the machine was operated 5,500 hours and produced 48,000 units.
Instructions Compute depreciation expense on the machine for the year ending December 31, 2017, and the year ending December 31, 2018, using the following methods.
Electroboy Enterprises, Inc. operates several stores throughout the western United States. As part of an operational and financial reporting review in a response to a downturn in its markets, the company’s management has decided to perform an impairment test on five stores (combined). The five stores’ sales have declined due to aging facilities and competition from a rival that opened new stores in the same markets. Management has developed the following information concerning the five stores as of the end of fiscal 2016.
Original cost \(36million Accumulated depreciation \)10 million Estimated remaining useful life 4 years Estimated expected future annual cash flows (not discounted) \(4.0 million per year Appropriate discount rate 5 percent |
Accounting
Analysis
Assume that you are a financial analyst and you participate in a conference call with Electroboy management in early 2017 (before Electroboy closes the books on fiscal 2016). During the conference call, you learn that management is considering selling the five stores, but the sale won’t likely be completed until the second quarter of fiscal 2017. Briefly discuss what implications this would have for Electroboy’s 2016 financial statements. Assume the same facts as in part (b) above.
Principles
Electroboy management would like to know the accounting for the impaired asset in periods subsequent to the impairment. Can the assets be written back up? Briefly discuss the conceptual arguments for this accounting.
It has been suggested that plant and equipment could be replaced more quickly if depreciation rates for income tax and accounting purposes were substantially increased. As a result, business operations would receive the benefit of more modern and more efficient plant facilities. Discuss the merits of this proposition.
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