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Chapter 11: Q1Q (page 582)

Distinguish among depreciation, depletion, and amortization.

Short Answer

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Answer

The differences between the terms depreciation, depletion, and amortization are that they imply a cost allocation of different types of assets.

Step by step solution

01

Meaning of Depreciation 

Depreciation is a branch of accounting that systematically spreads or divides the cost or other principal value of a fixed assetover its expected useful life by charging regular expenses or revenues.

02

Explaining the distinction between depreciation, depletion, and amortization

The phrases depreciation, depletion, and amortization differ in that they all refer to the cost allocation of different categories of assets. Depreciation shows that the carrying value of tangible plant assets has dropped. The word depletion is used when natural resources (wasting assets) such as lumber, oil, coal, and lead are involved. Amortization is the term used to describe the process of intangible assets such as patents or copyrights expiring.

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Most popular questions from this chapter

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

(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

  1. What amount of depreciation should have been charged annually from the years 1998 to 2017? (Assume straight-line depreciation.)
  2. What entry should be made in 2018 to record the replacement of the roof?
  3. Prepare the entry in January 2018 to record the revision in the estimated life of the building if necessary.
  4. What amount of depreciation should be charged for the year 2018?

(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.

  1. Straight-line.
  2. Units-of-output.
  3. Working hours.
  4. Sum-of-the-years’-digits.
  5. Declining-balance (twice the straight-line rate).

(Depreciation Choice—Ethics) Jerry Prior, Beeler Corporation’s controller, is concerned that net income may be lower this year. He is afraid upper-level management might recommend cost reductions by laying off accounting staff, including him.

Prior knows that depreciation is a major expense for Beeler. The company currently uses the double-declining-balance method for both financial reporting and tax purposes, and he’s thinking of selling equipment that, given its age, is primarily used when there are periodic spikes in demand. The equipment has a carrying value of \(2,000,000 and a fair value of \)2,180,000. The gain on the sale would be reported in the income statement. He doesn’t want to highlight this method of increasing income. He thinks, “Why don’t I increase the estimated useful lives and the salvage values? That will decrease depreciation expense and require less extensive disclosure, since the changes are accounted for prospectively. I may be able to save my job and those of my staff.”

Instructions

Answer the following questions.

  1. Who are the stakeholders in this situation?
  2. What are the ethical issues involved?
  3. What should Prior do?

(Depreciation Computations—SYD, DDB—Partial Periods) Judds Company purchased a new plant asset on April 1, 2017, at a cost of \(711,000. It was estimated to have a service life of 20 years and a salvage value of \)60,000. Judds’ accounting period is the calendar year.

Instructions

  1. Compute the depreciation for this asset for 2017 and 2018 using the sum-of-the-years’-digits method.
  2. Compute the depreciation for this asset for 2017 and 2018 using the double-declining-balance method.
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