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11.15. EXERCISES

E11-1 (Depreciation Computations—SL, SYD, DDB) Lansbury Company purchases equipment on January 1, Year 1, at a cost of $518,000. The asset is expected to have a service life of 12 years and a salvage value of $50,000.

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.)

E11-2 (Depreciation—Conceptual Understanding) Hasselback Company acquired a plant asset at the beginning of Year 1. The asset has an estimated service life of 5 years. An employee has prepared depreciation schedules for this asset using three different methods to compare the results of using one method with the results of using other methods. You are to assume that the following schedules have been correctly prepared for this asset using (1) the straight-line method, (2) the sum-of-the-years'-digits method, and (3) the double-declining-balance method.



Instructions

Answer the following questions.

  1. What is the cost of the asset being depreciated?

  2. What amount, if any, was used in the depreciation calculations for the salvage value for this asset?

  3. Which method will produce the highest charge to income in Year 1?

  4. Which method will produce the highest charge to income in Year 4?

  5. Which method will produce the highest book value for the asset at the end of Year 3?

  6. If the asset is sold at the end of Year 3, which method would yield the highest gain (or lowest loss) on disposal of the asset?

E11-3 (Depreciation Computations—SYD, DDB—Partial Periods) Cosby Company purchased a new plant asset on April 1, 2010, at a cost of $774,000. It was estimated to have a service life of 20 years and a salvage value of $60,000. Cosby's accounting period is the calendar year.

Instructions

  1. Compute the depreciation for this asset for 2010 and 2011 using the sum-of-the-years'-digits method.

  2. Compute the depreciation for this asset for 2010 and 2011 using the double-declining-balance method.

E11-4 (Depreciation Computations—Five Methods) Wenner Furnace Corp. purchased machinery for $279,000 on May 1, 2010. It is estimated that it will have a useful life of 10 years, salvage value of $15,000, production of 240,000 units, and working hours of 25,000. During 2011 Wenner Corp. uses the machinery for 2,650 hours, and the machinery produces 25,500 units.

Instructions

From the information given, compute the depreciation charge for 2011 under each of the following methods. (Round to the nearest dollar.)

  1. Straight-line.

  2. Units-of-output.

  3. Working hours.

  4. Sum-of-the-years'-digits.

  5. Double-declining-balance.

E11-5 (Depreciation Computations—Four Methods) Maserati Corporation purchased a new machine for its assembly process on August 1, 2010. The cost of this machine was $150,000. The company estimated that the machine would have a salvage value of $24,000 at the end of its service life. Its life is estimated at 5 years and its working hours are estimated at 21,000 hours. Year-end is December 31.

Instructions

Compute the depreciation expense under the following methods. Each of the following should be considered unrelated.

  1. Straight-line depreciation for 2010.

  2. Activity method for 2010, assuming that machine usage was 800 hours.

  3. Sum-of-the-years'-digits for 2011.

  4. Double-declining-balance for 2011.

E11-6 (Depreciation Computations—Five Methods, Partial Periods) Agazzi Company purchased equipment for $304,000 on October 1, 2010. It is estimated that the equipment will have a useful life of 8 years and a salvage value of $16,000. Estimated production is 40,000 units and estimated working hours are 20,000. During 2010, Agazzi uses the equipment for 525 hours and the equipment produces 1,000 units.

Instructions

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

  1. Straight-line method for 2010.

  2. Activity method (units of output) for 2010.

  3. Activity method (working hours) for 2010.

  4. Sum-of-the-years'-digits method for 2012.

  5. Double-declining-balance method for 2011.

E11-7 (Different Methods of Depreciation) Jeeter Industries presents you with the following information.



Instructions

Complete the table for the year ended December 31, 2011. The company depreciates all assets using the half-year convention.

E11-8 (Depreciation Computation—Replacement, Nonmonetary Exchange) Goldman Corporation bought a machine on June 1, 2008, for $31,800, f.o.b. the place of manufacture. Freight to the point where it was set up was $200, and $500 was expended to install it. The machine's useful life was estimated at 10 years, with a salvage value of $2,500. On June 1, 2009, an essential part of the machine is replaced, at a cost of $2,700, with one designed to reduce the cost of operating the machine. The cost of the old part and related depreciation cannot be determined with any accuracy.

On June 1, 2012, the company buys a new machine of greater capacity for $35,000, delivered, trading in the old machine which has a fair market value and trade-in allowance of $20,000. To prepare the old machine for removal from the plant cost $75, and expenditures to install the new one were $1,500. It is estimated that the new machine has a useful life of 10 years, with a salvage value of $4,000 at the end of that time. The exchange has commercial substance.

Instructions

Assuming that depreciation is to be computed on the straight-line basis, compute the annual depreciation on the new equipment that should be provided for the fiscal year beginning June 1, 2012.

E11-9 (Composite Depreciation) Presented below is information related to Morrow Manufacturing Corporation.

AssetCostEstimated SalvageEstimated Life (in years)
A$40,500$5,50010
B33,6004,8009
C36,0003,6008
D19,0001,5007
E23,5002,5006


Instructions

  1. Compute the rate of depreciation per year to be applied to the plant assets under the composite method.

  2. Prepare the adjusting entry necessary at the end of the year to record depreciation for the year.

  3. Prepare the entry to record the sale of Asset D for cash of $5,000. It was used for 6 years, and depreciation was entered under the composite method.

E11-10 (Depreciation Computations, SYD) Pippen Company purchased a piece of equipment at the beginning of 2007. The equipment cost $502,000. It has an estimated service life of 8 years and an expected salvage value of $70,000. The sum-of-the-years'-digits method of depreciation is being used. Someone has already correctly prepared a depreciation schedule for this asset. This schedule shows that $60,000 will be depreciated for a particular calendar year.

Instructions

Show calculations to determine for what particular year the depreciation amount for this asset will be $60,000.

E11-11 (Depreciation—Change in Estimate) Machinery purchased for $52,000 by Carver Co. in 2006 was originally estimated to have a life of 8 years with a salvage value of $4,000 at the end of that time. Depreciation has been entered for 5 years on this basis. In 2011, it is determined that the total estimated life should be 10 years with a salvage value of $4,500 at the end of that time. Assume straight-line depreciation.

Instructions

  1. Prepare the entry to correct the prior years' depreciation, if necessary.

  2. Prepare the entry to record depreciation for 2011.

E11-12 (Depreciation Computation—Addition, Change in Estimate) In 1983, Abraham Company completed the construction of a building at a cost of $1,900,000 and first occupied it in January 1984. It was estimated that the building will have a useful life of 40 years and a salvage value of $60,000 at the end of that time.

Early in 1994, an addition to the building was constructed at a cost of $470,000. At that time it was estimated that the remaining life of the building would be, as originally estimated, an additional 30 years, and that the addition would have a life of 30 years, and a salvage value of $20,000.

In 2012, it is determined that the probable life of the building and addition will extend to the end of 2043 or 20 years beyond the original estimate.

Instructions

  1. Using the straight-line method, compute the annual depreciation that would have been charged from 1984 through 1993.

  2. Compute the annual depreciation that would have been charged from 1994 through 2011.

  3. Prepare the entry, if necessary, to adjust the account balances because of the revision of the estimated life in 2012.

  4. Compute the annual depreciation to be charged beginning with 2012.

E11-13 (Depreciation—Replacement, Change in Estimate) Peloton Company constructed a building at a cost of $2,400,000 and occupied it beginning in January 1991. It was estimated at that time that its life would be 40 years, with no salvage value.

In January 2011, 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 $180,000.

Instructions

  1. What amount of depreciation should have been charged annually from the years 1991 to 2010? (Assume straight-line depreciation.)

  2. What entry should be made in 2011 to record the replacement of the roof?

  3. Prepare the entry in January 2011, to record the revision in the estimated life of the building, if necessary.

  4. What amount of depreciation should be charged for the year 2011?

E11-14 (Error Analysis and Depreciation, SL and SYD) Kawasaki Company shows the following entries in its Equipment account for 2011. All amounts are based on historical cost.



Instructions

  1. Prepare any correcting entries necessary.

  2. Assuming that depreciation is to be charged for a full year on the ending balance in the asset account, compute the proper depreciation charge for 2011 under each of the methods listed below. Assume an estimated life of 10 years, with no salvage value. The machinery included in the January 1, 2011, balance was purchased in 2009.

    1. Straight-line.

    2. Sum-of-the-years'-digits.

E11-15 (Depreciation for Fractional Periods) On March 10, 2012, No Doubt Company sells equipment that it purchased for $240,000 on August 20, 2005. It was originally estimated that the equipment would have a life of 12 years and a salvage value of $21,000 at the end of that time, and depreciation has been computed on that basis. The company uses the straight-line method of depreciation.

Instructions

  1. Compute the depreciation charge on this equipment for 2005, for 2012, and the total charge for the period from 2006 to 2011, inclusive, under each of the six following assumptions with respect to partial periods.

    1. Depreciation is computed for the exact period of time during which the asset is owned. (Use 365 days for the base.)

    2. Depreciation is computed for the full year on the January 1 balance in the asset account.

    3. Depreciation is computed for the full year on the December 31 balance in the asset account.

    4. Depreciation for one-half year is charged on plant assets acquired or disposed of during the year.

    5. Depreciation is computed on additions from the beginning of the month following acquisition and on disposals to the beginning of the month following disposal.

    6. Depreciation is computed for a full period on all assets in use for over one-half year, and no depreciation is charged on assets in use for less than one-half year.

  2. Briefly evaluate the methods above, considering them from the point of view of basic accounting theory as well as simplicity of application.

E11-16 (Impairment) Presented below is information related to equipment owned by Pujols Company at December 31, 2010.

Cost$9,000,000
Accumulated depreciation to date1,000,000
Expected future net cash flows7,000,000
Fair value4,400,000


Assume that Pujols will continue to use this asset in the future. As of December 31, 2010, the equipment has a remaining useful life of 4 years.

Instructions

  1. Prepare the journal entry (if any) to record the impairment of the asset at December 31, 2010.

  2. Prepare the journal entry to record depreciation expense for 2011.

  3. The fair value of the equipment at December 31, 2011, is $5,100,000. Prepare the journal entry (if any) necessary to record this increase in fair value.

E11-17 (Impairment) Assume the same information as E11-16, except that Pujols intends to dispose of the equipment in the coming year. It is expected that the cost of disposal will be $20,000.

Instructions

  1. Prepare the journal entry (if any) to record the impairment of the asset at December 31, 2010.

  2. Prepare the journal entry (if any) to record depreciation expense for 2011.

  3. The asset was not sold by December 31, 2011. The fair value of the equipment on that date is $5,100,000. Prepare the journal entry (if any) necessary to record this increase in fair value. It is expected that the cost of disposal is still $20,000.

E11-18 (Impairment) The management of Sprague Inc. was discussing whether certain equipment should be written off as a charge to current operations because of obsolescence. This equipment has a cost of $900,000 with depreciation to date of $400,000 as of December 31, 2010. On December 31, 2010, management projected its future net cash flows from this equipment to be $300,000 and its fair value to be $280,000. The company intends to use this equipment in the future.

Instructions

  1. Prepare the journal entry (if any) to record the impairment at December 31, 2010.

  2. Where should the gain or loss (if any) on the write-down be reported in the income statement?

  3. At December 31, 2011, the equipment's fair value increased to $300,000. Prepare the journal entry (if any) to record this increase in fair value.

  4. What accounting issues did management face in accounting for this impairment?

E11-19 (Depletion Computations—Timber) Hernandez Timber Company owns 9,000 acres of timber-land purchased in 1999 at a cost of $1,400 per acre. At the time of purchase the land without the timber was valued at $400 per acre. In 2000, Hernandez built fire lanes and roads, with a life of 30 years, at a cost of $87,000. Every year Hernandez sprays to prevent disease at a cost of $3,000 per year and spends $7,000 to maintain the fire lanes and roads. During 2001, Hernandez selectively logged and sold 700,000 board feet of timber, of the estimated 3,000,000 board feet. In 2002, Hernandez planted new seedlings to replace the trees cut at a cost of $100,000.

Instructions

  1. Determine the depreciation expense and the cost of timber sold related to depletion for 2001.

  2. Hernandez has not logged since 2001. If Hernandez logged and sold 900,000 board feet of timber in 2012, when the timber cruise (appraiser) estimated 5,000,000 board feet, determine the cost of timber sold related to depletion for 2012.

E11-20 (Depletion Computations—Oil) Federer Drilling Company has leased property on which oil has been discovered. Wells on this property produced 18,000 barrels of oil during the past year that sold at an average sales price of $65 per barrel. Total oil resources of this property are estimated to be 250,000 barrels.

The lease provided for an outright payment of $600,000 to the lessor (owner) before drilling could be commenced and an annual rental of $31,500. A premium of 5% of the sales price of every barrel of oil removed is to be paid annually to the lessor. In addition, Federer (lessee) is to clean up all the waste and debris from drilling and to bear the costs of reconditioning the land for farming when the wells are abandoned. The estimated fair value, at the time of the lease, of this clean-up and reconditioning is $30,000.

Instructions

From the provisions of the lease agreement, compute the cost per barrel for the past year, exclusive of operating costs, to Federer Drilling Company.

E11-21 (Depletion Computations—Timber) Jonas Lumber Company owns a 7,000-acre tract of timber purchased in 2003 at a cost of $1,300 per acre. At the time of purchase the land was estimated to have a value of $300 per acre without the timber. Jonas Lumber Company has not logged this tract since it was purchased. In 2010, Jonas had the timber cruised. The cruise (appraiser) estimated that each acre contained 8,000 board feet of timber. In 2010, Jonas built 10 miles of roads at a cost of $8,400 per mile. After the roads were completed, Jonas logged and sold 3,500 trees containing 880,000 board feet.

Instructions

  1. Determine the cost of timber sold related to depletion for 2010.

  2. If Jonas depreciates the logging roads on the basis of timber cut, determine the depreciation expense for 2010.

  3. If Jonas plants five seedlings at a cost of $4 per seedling for each tree cut, how should Jonas treat the reforestation?

E11-22 (Depletion Computations—Mining) Henrik Mining Company purchased land on February 1, 2010, at a cost of $1,250,000. It estimated that a total of 60,000 tons of mineral was available for mining. After it has removed all the natural resources, the company will be required to restore the property to its previous state because of strict environmental protection laws. It estimates the fair value of this restoration obligation at $90,000. It believes it will be able to sell the property afterwards for $100,000. It incurred developmental costs of $200,000 before it was able to do any mining. In 2010 resources removed totaled 30,000 tons. The company sold 24,000 tons.

Instructions

Compute the following information for 2010.

  1. Per unit mineral cost.

  2. Total material cost of December 31, 2010, inventory.

  3. Total materials cost in cost of goods sold at December 31, 2010.

E11-23 (Depletion Computations—Minerals) At the beginning of 2010, Callaway Company acquired a mine for $850,000. Of this amount, $100,000 was ascribed to the land value and the remaining portion to the minerals in the mine. Surveys conducted by geologists have indicated that approximately 12,000,000 units of the ore appear to be in the mine. Callaway incurred $170,000 of development costs associated with this mine prior to any extraction of minerals. It also determined that the fair value of its obligation to prepare the land for an alternative use when all of the mineral has been removed was $40,000. During 2010, 2,500,000 units of ore were extracted and 2,200,000 of these units were sold.

Instructions

Compute the following.

  1. The total amount of depletion for 2010.

  2. The amount that is charged as an expense for 2010 for the cost of the minerals sold during 2010.

E11-24 (Ratio Analysis) The 2007 Annual Report of Eastman Kodak contains the following information.



Instructions

Compute the following ratios for Eastman Kodak for 2007.

  1. Asset turnover ratio.

  2. Rate of return on assets.

  3. Profit margin on sales.

  4. How can the asset turnover ratio be used to compute the rate of return on assets?

*E11-25 (Book vs. Tax (MACRS) Depreciation) Annunzio Enterprises purchased a delivery truck on January 1, 2010, at a cost of $41,000. The truck has a useful life of 7 years with an estimated salvage value of $6,000. The straight-line method is used for book purposes. For tax purposes the truck, having an MACRS class life of 7 years, is classified as 5-year property; the MACRS tax rate tables are used to compute depreciation. In addition, assume that for 2010 and 2011 the company has revenues of $200,000 and operating expenses (excluding depreciation) of $130,000.

Instructions

  1. Prepare income statements for 2010 and 2011. (The final amount reported on the income statement should be income before income taxes.)

  2. Compute taxable income for 2010 and 2011.

  3. Determine the total depreciation to be taken over the useful life of the delivery truck for both book and tax purposes.

  4. Explain why depreciation for book and tax purposes will generally be different over the useful life of a depreciable asset.

*E11-26 (Book vs. Tax (MACRS) Depreciation) Elwood Inc. purchased computer equipment on March 1, 2010, for $36,000. The computer equipment has a useful life of 10 years and a salvage value of $3,000. For tax purposes, the MACRS class life is 5 years.

Instructions

  1. Assuming that the company uses the straight-line method for book and tax purposes, what is the depreciation expense reported in (1) the financial statements for 2010 and (2) the tax return for 2010?

  2. Assuming that the company uses the double-declining-balance method for both book and tax purposes, what is the depreciation expense reported in (1) the financial statements for 2010 and (2) the tax return for 2010?

  3. Why is depreciation for tax purposes different from depreciation for book purposes even if the company uses the same depreciation method to compute them both?

See the book's companion website, www.wiley.com/college/kieso, for a set of B Exercises.


  

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