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Chapter 11: Q1E (page 584)

(Depreciation Computations—SL, SYD, DDB) Deluxe Ezra Company purchases equipment on January 1, Year 1, at a cost of \(469,000. The asset is expected to have a service life of 12 years and a salvage value of \)40,000.

Instructions

  1. Compute the amount of depreciation for each of Years 1 through 3 using the straight-line depreciation method.
  2. Compute the amount of depreciation for each of Years 1 through 3 using the sum-of-the-years’-digits method.
  3. Compute the amount of depreciation for each of Years 1 through 3 using the double-declining-balance method. (In performing your calculations, round constant percentage to the nearest one-hundredth of a point and round answers to the nearest dollar.)

Short Answer

Expert verified
  1. Straight-line depreciation = $35,750
  2. Depreciation for Year 1,2 and 3 is $66,000,$60500 and $55,000

3. Depreciation for Year 1, 2 and 3 is $390,818, $65,149 and $54,289

Step by step solution

01

Meaning of Straight-Line Depreciation

Straight-line depreciation is the simplest way to assess depreciation over time.By allocating identical amounts to the asset's accounting periods over its useful life, it makes the asset's expense predictable along with smoothing net income.

02

(a) Computing the amount of depreciation for each of Years 1 through 3 using the straight-line depreciation method

Straight-line method depreciation for each of Years 1 through 3 =$35,750

Working notes:

Calculating the amount of depreciation

Straightlinedepreciation=Equipmentcost-SalvagevalueServicelife=$469,000-$40,00012=$429,00012=$35,750



03

(b) Computing the amount of depreciation for each of Years 1 through 3 using the sum-of-the-years’-digits method

Calculating the sum of years’ digit

Sumofyearsdigit=Servicelife×(Servicelife+1)2=12×132=78

Calculating depreciation for Year 1

Depreciation=NumberofyearsSumofyears×(Assetvalue-Salvagevalue)=1278×($469,000-$40,000)=1278×$429,000=$66,000

Calculating depreciation for Year 2

Depreciation=NumberofyearsSumofyears×(Assetvalue-Salvagevalue)=1178×($469,000-$40,000)=1178×$429,000=$60,500

Calculating depreciation for Year 3

Depreciation=NumberofyearsSumofyears×(Assetvalue-Salvagevalue)=1078×($469,000-$40,000)=1078×$429,000=$55,000



04

(c) Computing the amount of depreciation for each of Years 1 through 3 using the double-declining-balance method

Calculating double-declining-balance rate

Doubledecliningbalacemethodrate=TotalpercenatgeYears×2=100%12×2=16.67%

Calculating depreciation for Year 1

Depreciation=Equipmentvalue×Doubledecliningbalancemethodrate=$469,000×16.67%=$78,182

Calculating the book value of the asset after one year

Bookvalue=Equipmentcost-Depreciationof Year1=$469,000-$78,182=$390,818

Calculating depreciation for Year 2

Depreciation=(Equipmentcost-DepreciationofYear1)×Doubledecliningrate=($469,000-$78,182)×16.67%=$390,818×16.67%=$65,149

Calculating depreciation for Year 3

Depreciation=(Equipmentcost-DepreciationofYear1-DepreciationofYear2)×Doubledecliningrate=($469,000-$78,182-$65,149)×16.67%=$325,65×16.67%=$54,289

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Most popular questions from this chapter

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.

Under what conditions is it appropriate for a business to use the composite method of depreciation for its plant assets? What are the advantages and disadvantages of this method?

(Comprehensive Fixed-Asset Problem) Darby Sporting Goods Inc. has been experiencing growth in the demand for its products over the last several years. The last two Olympic Games greatly increased the popularity of basketball around the world. As a result, a European sports retailing consortium entered into an agreement with Darby’s Roundball Division to purchase basketballs and other accessories on an increasing basis over the next 5 years.

To be able to meet the quantity commitments of this agreement, Darby had to obtain additional manufacturing capacity. A real estate firm located an available factory in close proximity to Darby’s Roundball manufacturing facility, and Darby agreed to purchase the factory and used machinery from Encino Athletic Equipment Company on October 1, 2016. Renovations were necessary to convert the factory for Darby’s manufacturing use.

The terms of the agreement required Darby to pay Encino \(50,000 when renovations started on January 1, 2017, with the balance to be paid as renovations were completed. The overall purchase price for the factory and machinery was \)400,000. The building renovations were contracted to Malone Construction at \(100,000. The payments made, as renovations progressed during 2017, are shown below. The factory was placed in service on January 1, 2018.

1/1

4/1

10/1

12/31

Encino

\)50,000

\(90,000

\)110,000

\(150,000

Malone

30,000

30,000

40,000

On January 1, 2017, Darby secured a \)500,000 line-of-credit with a 12% interest rate to finance the purchase cost of the factory and machinery, and the renovation costs. Darby drew down on the line-of-credit to meet the payment schedule shown above; this was Darby’s only outstanding loan during 2017.

Bob Sprague, Darby’s controller, will capitalize the maximum allowable interest costs for this project. Darby’s policy regarding purchases of this nature is to use the appraisal value of the land for book purposes and prorate the balance of the purchase price over the remaining items. The building had originally cost Encino \(300,000 and had a net book value of \)50,000, while the machinery originally cost \(125,000 and had a net book value of \)40,000 on the date of sale. The land was recorded on Encino’s books at \(40,000. An appraisal, conducted by independent appraisers at the time of acquisition, valued the land at \)290,000, the building at \(105,000, and the machinery at \)45,000.

Angie Justice, chief engineer, estimated that the renovated plant would be used for 15 years, with an estimated salvage value of \(30,000. Justice estimated that the productive machinery would have a remaining useful life of 5 years and a salvage value of \)3,000. Darby’s depreciation policy specifies the 200% declining-balance method for machinery and the 150% decliningbalance method for the

plant. One-half year’s depreciation is taken in the year the plant is placed in service, and one-half year is allowed when the property is disposed of or retired. Darby uses a 360-day year for calculating interest costs.

Instructions

  1. Determine the amounts to be recorded on the books of Darby Sporting Goods Inc. as of December 31, 2017, for each of the following properties acquired from Encino Athletic Equipment Company.
    1. Land.
    2. Buildings.
    3. Machinery.
  2. Calculate Darby Sporting Goods Inc.’s 2018 depreciation expense, for book purposes, for each of the properties acquired from Encino Athletic Equipment Company.
  3. Discuss the arguments for and against the capitalization of interest costs.

What is a modified accelerated cost recovery system (MACRS)? Speculate as to why this system is now required for tax purposes.

(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?
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