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Q11p.

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Intermediate Accounting (Kieso)
Found in: Page 595

Short Answer

(Depreciation for Partial Periods—SL, Act., SYD, and DDB) On January 1, 2015, a machine was purchased for $90,000. The machine has an estimated salvage value of $6,000 and an estimated useful life of 5 years. The machine can operate for 100,000 hours before it needs to be replaced. The company closed its books on December 31 and operates the machine as follows: 2015, 20,000 hours; 2016, 25,000 hours; 2017, 15,000 hours; 2018, 30,000 hours; and 2019, 10,000 hours.

Instructions

(a) Compute the annual depreciation charges over the machine’s life assuming a December 31 year-end for each of the following depreciation methods.

  1. Straight-line method.
  2. Activity method.
  3. Sum-of-the-years’-digits method.
  4. Double-declining-balance method.

(b) Assume a fiscal year-end of September 30. Compute the annual depreciation charges over the asset’s life applying each of the following methods.

  1. Straight-line method.
  2. Sum-of-the-years’-digits method.
  3. Double-declining-balance method

The basic formula to calculate depreciation expense is:

See the step by step solution

Step by Step Solution

Step 1: Meaning of Depreciation

Depreciation is a branch of accounting that deals with systematically spreading or dividing the cost or other principal value of a fixed asset over its expected useful life by charging regular expenses or revenues.

Step 2: (a 1) Computing depreciation under the straight-line method

Calculating depreciation expense

Step 3: (a2) Computing depreciation using the activity method

Calculating depreciation expense

Year

Calculation

Result

2015

$16,800

2016

21,000

2017

12,600

2018

25,200

2019

8,400

Step 4: (a 3) Computing depreciation using the Sum-of-years digits method

Calculating the sum of years’ digit

Year

Calculation

Result

2015

$28,000

2016

22,400

2017

16,800

2018

11,200

2019

5,600

Step5: (a 4) Computing depreciation using the Double-declining-balance method

Double-Declining-Balance Method: Each year is 20% of its total life. Double the rate to 40%.

Step 6: (b 1) Computing depreciation using the Straight-line method

Calculating depreciation expense for 2015

Year

Calculation

Result

2015

For 9 months

$12,000

2016

Full year

16,800

2017

Full year

16,800

2018

Full year

16,800

2019

Full year

16,800

2020

4,200

 Step 7: (b 2) Computing depreciation using the Sum-of-the-years’-digits method.

Calculating depreciation expense

Step 8: (b 3) Computing depreciation using the Double-declining-balance method

Most popular questions for Business-studies Textbooks

(Depreciation and Error Analysis) A depreciation schedule for semi-trucks of Ichiro Manufacturing Company was requested by your auditor soon after December 31, 2018, showing the additions, retirements, depreciation, and other data affecting the income of the company in the 4-year period 2015 to 2018, inclusive. The following data were ascertained.

Balance of Trucks account, Jan. 1, 2015

Truck No. 1 purchased Jan. 1, 2012, cost

$18,000

Truck No. 2 purchased July 1, 2012, cost

22,000

Truck No. 3 purchased Jan. 1, 2014, cost

30,000

Truck No. 4 purchased July 1, 2014, cost

24,000

Balance, Jan. 1, 2015

$94,000

The Accumulated Depreciation—Trucks account previously adjusted to January 1, 2015, and entered in the ledger, had a balance on that date of $30,200 (depreciation on the four trucks from the respective dates of purchase, based on a 5-year life, no salvage value). No charges had been made against the account before January 1, 2015.

Transactions between January 1, 2015, and December 31, 2018, which were recorded in the ledger, are as follows.

July 1, 2015 Truck No. 3 was traded for a larger one (No. 5), the agreed purchase price of which was $40,000. Ichiro. paid the automobile dealer $22,000 cash on the transaction. The entry was a debit to Trucks and a credit to Cash, $22,000. The transaction has commercial substance.

Jan. 1, 2016 Truck No. 1 was sold for $3,500 cash; entry debited Cash and credited Trucks, $3,500.

July 1, 2017 A new truck (No. 6) was acquired for $42,000 cash and was charged at that amount to the Trucks account. (Assume truck No. 2 was not retired.)

July 1, 2017 Truck No. 4 was damaged in a wreck to such an extent that it was sold as junk for $700 cash. Ichiro received $2,500 from the insurance company. The entry made by the bookkeeper was a debit to Cash, $3,200, and credits to Miscellaneous Income, $700, and Trucks, $2,500.

Entries for straight-line depreciation had been made at the close of each year as follows: 2015, $21,000; 2016, $22,500; 2017, $25,050; and 2018, $30,400.

Instructions

  1. For each of the 4 years, compute separately the increase or decrease in net income arising from the company’s errors in determining or entering depreciation or in recording transactions affecting trucks, ignoring income tax considerations.
  2. Prepare one compound journal entry as of December 31, 2018, for adjustment of the Trucks account to reflect the correct balances as revealed by your schedule, assuming that the books have not been closed for 2018.
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