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Chapter 11: Q1Q (page 582)
Distinguish among depreciation, depletion, and amortization.
Answer
The differences between the terms depreciation, depletion, and amortization are that they imply a cost allocation of different types of assets.
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Explain how gains or losses on impaired assets should be reported in income.
(Depletion, Timber, and Unusual Loss) Conan O’Brien Logging and Lumber Company owns 3,000 acres of timberland on the north side of Mount Leno, which was purchased in 2005 at a cost of \(550 per acre. In 2017, O’Brien began selectively logging this timber tract. In May 2017, Mount Leno erupted, burying the timberland of O’Brien under a foot of ash. All of the timber on the O’Brien tract was downed. In addition, the logging roads, built at a cost of \)150,000, were destroyed, as well as the logging equipment, with a net book value of \(300,000.
At the time of the eruption, O’Brien had logged 20% of the estimated 500,000 board feet of timber. Prior to the eruption, O’Brien estimated the land to have a value of \)200 per acre after the timber was harvested. O’Brien includes the logging roads in the depletion base.
O’Brien estimates it will take 3 years to salvage the downed timber at a cost of \(700,000. The timber can be sold for pulp wood at an estimated price of \)3 per board foot. The value of the land is unknown, but must be considered nominal due to future uncertainties.
Instructions
(Depreciation—SYD, Act., SL, and DDB) The following data relate to the Machinery account of Eshkol, Inc. at December 31, 2017.
Machinery | ||||
A | B | C | D | |
Original cost | \(46,000 | \)51,000 | \(80,000 | \)80,000 |
Year purchased | 2012 | 2013 | 2014 | 2016 |
Useful life | 10 years | 15,000 hours | 15 years | 10 years |
Salvage value | \( 3,100 | \) 3,000 | \( 5,000 | \) 5,000 |
Depreciation method | Sum-of-the year digits | Activity | Straight-line | Double-declining balance |
Accum. depr. through 2017 | \(31,200 | \)35,200 | \(15,000 | \)16,000 |
*In the year an asset is purchased, Eshkol, Inc. does not record any depreciation expense on the asset. In the year an asset is retired or traded in, Eshkol, Inc. takes a full year’s depreciation on the asset.
The following transactions occurred during 2018.
Cash 13,000
Machinery (Machine A) 13,000
b. On December 31, it was determined that Machine B had been used 2,100 hours during 2018.
c. On December 31, before computing depreciation expense on Machine C, the management of Eshkol, Inc. decided the useful life remaining from January 1, 2018, was 10 years.
d. On December 31, it was discovered that a machine purchased in 2017 had been expensed completely in that year. This machine cost \)28,000 and has a useful life of 10 years and no salvage value. Management has decided to use the double-declining-balance method for this machine, which can be referred to as “Machine E.”
Instructions
Prepare the necessary correcting entries for the year 2018. Record the appropriate depreciation expense on the above-mentioned machines. No entry is necessary for Machine D.
What basic questions must be answered before the amount of the depreciation charge can be computed?
(Unit, Group, and Composite Depreciation) The certified public accountant is frequently called upon by management for advice regarding methods of computing depreciation. Of comparable importance, although it arises less frequently, is the question of whether the depreciation method should be based on consideration of the assets as units, as a group, or as having a composite life.
Instructions
(1) units and
(2) a group or as having a composite life.
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