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Chapter 11: Q3BE (page 584)

Use the information for Lockard Company given in BE11-2. (a) Compute 2017 depreciation expense using the sum-of-the-years’-digits method. (b) Compute 2017 depreciation expense using the sum-of-the-years’-digits method, assuming the machinery was purchased on April 1, 2017.

Lockard Company purchased machinery on January 1, 2017, for \(80,000. The machinery is estimated to have a salvage value of \)8,000 after a useful life of 8 years.

Short Answer

Expert verified
  1. Depreciation = $16,000
  2. Depreciation = $12,000

Step by step solution

01

Step-by-Step SolutionStep 1: Meaning of Depreciation

The term depreciation refers to the loss of value in assets due to abrasion and erosion over time. Companies use different methods to value their assets, but straight-line depreciation is the easiest one to apply.

02

(a) Computing depreciation for 2017

Calculating the sum of year digit

Sum of year digit=n(n+1)2=8(8+1)2=36

role="math" localid="1652950543635" Depreciation=Cost of asset−Salvage value×Number of yearSum of year digits=$80,000−$8,000×836=$72,000×836=$16,000


03

(b) Computing depreciation for the machinery was purchased on April 1, 2017.

Depreciation=[(Cost of asset−Salvage value)×Number of yearSum of year digits]×Number of monthMonth in​ year=[($80,000−$8,000)×836]×912=$16,000×912=$12,000

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Most popular questions from this chapter

(Depletion and Depreciation—Mining) Khamsah Mining Company has purchased a tract of mineral land for \(900,000. It is estimated that this tract will yield 120,000 tons of ore with sufficient mineral content to make mining and processing profitable. It is further estimated that 6,000 tons of ore will be mined the first and last year and 12,000 tons every year in between. (Assume 11 years of mining operations.) The land will have a salvage value of \)30,000.

The company builds necessary structures and sheds on the site at a cost of \(36,000. It is estimated that these structures can serve 15 years but, because they must be dismantled if they are to be moved, they have no salvage value. The company does not intend to use the buildings elsewhere. Mining machinery installed at the mine was purchased secondhand at a cost of \)60,000. This machinery cost the former owner $150,000 and was 50% depreciated when purchased. Khamsah Mining estimates that about half of this machinery will still be useful when the present mineral resources have been exhausted, but that dismantling and removal costs will just about offset its value at that time. The company does not intend to use the machinery elsewhere. The remaining machinery will last until about one-half the present estimated mineral ore has been removed and will then be worthless. Cost is to be allocated equally between these two classes of machinery.

Instructions

  1. As chief accountant for the company, you are to prepare a schedule showing estimated depletion and depreciation costs for each year of the expected life of the mine.
  2. Also compute the depreciation and depletion for the first year assuming actual production of 5,000 tons. Nothing occurred during the year to cause the company engineers to change their estimates of either the mineral resources or the life of the structures and equipment.

In the extractive industries, businesses may pay dividends in excess of net income. What is the maximum permissible? How can this practice be justified?

Lockard Company purchased machinery on January 1, 2017, for \(80,000. The machinery is estimated to have a salvage value of \)8,000 after a useful life of 8 years. (a) Compute 2017 depreciation expense using the straight-line method. (b) Compute 2017 depreciation expense using the straight-line method assuming the machinery was purchased on September 1, 2017.

Last year, Wyeth Company recorded an impairment on an asset held for use. Recent appraisals indicate that the asset has increased in value. Should Wyeth record this recovery in value?

Toro Co. has equipment with a carrying amount of \(700,000. The value-in-use of the equipment is \)705,000, and its fair value less costs of disposal is $590,000. The equipment is expected to be used in operations in the future. What amount (if any) should Toro report as an impairment to its equipment?
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