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Chapter 11: Q7Q (page 582)

What basic questions must be answered before the amount of the depreciation charge can be computed?

Short Answer

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Answer

The method of depreciation, the useful life of the asset, and the method of cost apportionment must be answered before computing the amount of the depreciation expense

Step by step solution

01

Meaning of Depreciation

Depreciation is an expense incurred on an asset that has become obsolete due to erosion and abrasion.An asset can be depreciated in various ways, which help bring the asset’s exact value at the time of sale.

02

Explaining the basic questions that must be answered before computing the amount of depreciation charge

Three essential questions must be answered before the amount of depreciation charge can be calculated:

  1. How will the asset's depreciation be calculated?
  2. How long will the item be useful?
  3. What is the optimum technique of cost apportionment for this asset?

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Most popular questions from this chapter

At the end of the current year, Joshua Co. has a defined benefit obligation of \(335,000 and pension plan assets with a fair value of \)345,000. The amount of the vested benefits for the plan is \(225,000. Joshua has a liability gain of \)8,300 (beginning accumulated OCI is zero). What amount and account(s) related to its pension plan will be reported on the company’s statement of financial position?

(Depreciation Computations—Five Methods, Partial Periods) Muggsy Bogues Company purchased equipment for \(212,000 on October 1, 2017. It is estimated that the equipment will have a useful life of 8 years and a salvage value of \)12,000. Estimated production is 40,000 units and estimated working hours are 20,000. During 2017, Bogues uses the equipment for 525 hours and the equipment produces 1,000 units.

Instructions

Compute depreciation expense under each of the following methods. Bogues is on a calendar-year basis ending December 31.

  1. Straight-line method for 2017.
  2. Activity method (units of output) for 2017.
  3. Activity method (working hours) for 2017.
  4. Sum-of-the-years’-digits method for 2019.
  5. Double-declining-balance method for 2018.

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?

Andrea Torbert purchased a computer for \(8,000 on July 1, 2017. She intends to depreciate it over 4 years using the double-declining-balance method. Salvage value is \)1,000. Compute depreciation for 2018.

(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.)
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