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Chapter 11: Q14Q (page 583)
Charlie Parker, president of Spinners Company, has recently noted that depreciation increases cash provided by operations and therefore depreciation is a good source of funds. Do you agree? Discuss.
Answer
No, depreciation does not provide cash; revenues do.
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Fernandez Corporation purchased a truck at the beginning of 2017 for \(50,000. The truck is estimated to have a salvage value of \)2,000 and a useful life of 160,000 miles. It was driven 23,000 miles in 2017 and 31,000 miles in 2018. Compute depreciation expense for 2017 and 2018.
(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.
(Depreciation—Replacement, Change in Estimate) Greg Maddox Company constructed a building at a cost of \(2,200,000 and occupied it beginning in January 1998. It was estimated at that time that its life would be 40 years, with no salvage value.
In January 2018, a new roof was installed at a cost of \)300,000, and it was estimated then that the building would have a useful life of 25 years from that date. The cost of the old roof was $160,000.
Instructions
(Depreciation—Conceptual Understanding) Rembrandt Company acquired a plant asset at the beginning of Year 1. The asset has an estimated service life of 5 years. An employee has prepared depreciation schedules for this asset using three different methods to compare the results of using one method with the results of using other methods. You are to assume that the following schedules have been correctly prepared for this asset using (1) the straight-line method, (2) the sum-of-the years’-digits method, and (3) the double-declining-balance method.
Year | Straight-Line | Sum-of-the Years’-Digits | Double-Declining Balance |
1 | \( 9,000 | \) 15,000 | \(20,000 |
2 | 9,000 | 12,000 | 12,000 |
3 | 9,000 | 9,000 | 7,200 |
4 | 9,000 | 6,000 | 4,320 |
5 | 9,000 | 3,000 | 1,480 |
Total | \)45,000 | \(45,000 | \)45,000 |
Instructions
Answer the following questions.
(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.
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