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Q11-7E

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Intermediate Accounting (Kieso)
Found in: Page 586

Short Answer

(Different Methods of Depreciation) Jackel Industries presents you with the following information.

Description

Date Purchased

Cost

Salvage Value

Life in years

Depreciation Method

Accumulated depreciation to 12/31/18

Depreciation for 2019

Machine A

2/12/17

$142,500

$16,000

10

(a)

$33,350

(b)

Machine B

8/15/16

(c)

21,000

5

SL

29,000

(d)

Machine C

7/21/15

75,400

23,500

8

DDB

(e)

(f)

Machine D

10/12/(g)

219,000

69,000

5

SYD

70,000

(h)

Instructions

Complete the table for the year ended December 31, 2019. The company depreciates all assets using the half-year convention.

Answer

Depreciation for 2019 is as follows:

  1. $19,550
  2. $11,600
  3. $4,333
  4. $35,000
See the step by step solution

Step by Step Solution

Step-by-Step SolutionStep 1: Meaning of Depreciation

In financial accounting, depreciation could be a strategy for spreading out the cost of tangible resources over their functional lives. Essentially, it is the disintegration of the value of an asset, which happens over time due to continuous use and abrasion of the asset.

Step 2: Computing the table for the year ended December 31, 2019

Description

Date Purchased

Cost

Salvage Value

Life in years

Depreciation Method

Accumulated depreciation to 12/31/18

Depreciation for 2019

Machine A

2/12/17

$142,500

$16,000

10

  1. SYD

$33,350

(b) $19,550

Machine B

8/15/16

(c)

21,000

5

SL

29,000

(d) 11,600

Machine C

7/21/15

75,400

23,500

8

DDB

(e) 47,567

(f) 4,333

Machine D

10/12/17(g)

219,000

69,000

5

SYD

70,000

(h) 35,000

Working notes:

Machine A—Testing the methods

Straight-Line Method for 2017

$ 6,325

Straight-Line Method for 2018

$12,650

Total Straight Line

$18,975

Machine A—Testing the methods

Double-Declining Balance for 2017

$14,250

Double-Declining Balance for 2018

$25,650

Total Double Declining Balance

$39,900

Computing depreciation for 2017

Calculating depreciation for 2018

Machine A—Testing the methods

Sum-of-the-years-digits for 2017

$11,500

Sum-of-the-years-digits for 2018

$21,850

Total Sum-of-the-years-digits

$33,350

Calculating depreciation for 2017

Calculating depreciation for 2018 for life in 10 year

Calculating depreciation for 2018 for life in 9 year

So total depreciation for 2018 is $21,850 ($14,833+$21,191)

Machine A—Testing the methods

The method used must be SYD

Using SYD, 2019 Depreciation is

$19,550

Calculation of depreciation for life in 9 year

Calculation of depreciation for life in 8 year

So total depreciation is $19,500 ($10,350+$9,200)

Machine B-Computation of the cost

The asset has been depreciated for 21/2 years using the straight-line method.

Annual depreciation is then equal to $29,000 divided by 2.5 or $11,600. 11,600 times 5 plus the salvage value is equal to the cost. Cost is $79,000

Using SL, 2017 Depreciation is $11,600

Machine C—using the double-declining balance method of depreciation

Year

Depreciation expense

Calculation

2015’s depreciation is

$ 9,425

($75400 x .25 x 5)

2016’s depreciation is

$16,494

($75400 - $9,425) x .25

2017’s depreciation is

$12,370

($75400 - $25,919) x .25

2018’s depreciation is

$ 9,278

($75400 - $38,289) x .25

$47,567

So, Using DDB, 2019 Depreciation is $4,333 ($75,400 – $47,567 – $23,500)

Machine D—Computation of Year Purchased

First Half Year using SYD

$25,000

Second Year using SYD

$45,000

$70,000

Calculating depreciation for the first half-year using SYD

Calculating depreciation for Second Year using SYD for 5 years in life

Calculating depreciation for Second Year using SYD for 4 years in life

So, the total depreciation expense is $70,000

Thus the asset must have been purchased on October 12, 2017

Using SYD, 2019 Depreciation is $35,000

Calculating depreciation for 4 years in the life

Calculating depreciation for 3 years in the life

Most popular questions for Business-studies Textbooks

(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.

  1. On May 5, Machine A was sold for $13,000 cash. The company’s bookkeeper recorded this retirement in the following manner in the cash receipts journal.

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.

(Depreciation Basic Concepts) Burnitz Manufacturing Company was organized on January 1, 2017. In 2017, it has used in its reports to management the straight-line method of depreciating its plant assets.

On November 8, you are having a conference with Burnitz’s officers to discuss the depreciation method to be used for income tax and stockholder reporting. James Bryant, president of Burnitz, has suggested the use of a new method, which he feels is more suitable than the straight-line method for the needs of the company during the period of rapid expansion of production and capacity that he foresees. Following is an example in which the proposed method is applied to a fixed asset with an original cost of $248,000, an estimated useful life of 5 years, and a salvage value of approximately $8,000.

Year

Year of life used

Fraction rate

Depreciation expense

Accumulated depreciation at the end of year

Book value at the end of Year

1

1

1/15

$16,000

$ 16,000

$232,000

2

2

2/15

32,000

48,000

200,000

3

3

3/15

48,000

96,000

152,000

4

4

4/15

64,000

160,000

88,000

5

5

5/15

80,000

240,000

8,000

The president favors the new method because he has heard that:

  1. It will increase the funds recovered during the years near the end of the assets’ useful lives when maintenance and replacement disbursements are high.
  2. It will result in increased write-offs in later years and thereby will reduce taxes.

Instructions

  1. What is the purpose of accounting for depreciation?
  2. Is the president’s proposal within the scope of generally accepted accounting principles? In making your decision, discuss the circumstances, if any, under which use of the method would be reasonable and those, if any, under which it would not be reasonable.
  3. The president wants your advice on the following issues.
    1. Do depreciation charges recover or create funds? Explain.

(2) Assume that the Internal Revenue Service accepts the proposed depreciation method in this case. If the proposed method were used for stockholder and tax reporting purposes, how would it affect the availability of cash flows generated by operations?

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