EXERCISE 11.6 (Continued)
OR
1st full year (.25 X $212,000) = $53,000
EXERCISE 11.7 (25–35 minutes)
(a) Methods of Depreciation
Description
Date
Purchased
Cost
Salvage
Life
Method
Accum. Depr.
to 2021
2022 Depr.
A
2/12/20
$142,500
$16,000
10
(a) SYD
$33,350
(b) $19,550
B
8/15/19
(d) 11,600
C
7/21/18
(e) 47,567
D
(g) 10/15/20
(h) 35,000
$12,650
$18,975
$14,250
($142,500 X .2 (1/5 years) X
1/2)
$25,650
[($142,500 – $14,250) X .20]
$39,900
$11,500
$33,350
SYD
$19,550
($126,500 X 9/55 X 1/2) +
($126,500 X 8/55 X 1/2)
EXERCISE 11.7 (Continued)
(c) Machine B—Computation of the cost
(d) Using SL, 2020 Depreciation is $11,600.
(e) Machine C—Using the double-declining balance method of depreciation
2018’s depreciation is
$ 9,425
($75,400 X .25 X 1/2)
2021’s depreciation is
$ 9,278
($75,400 – $38,289) X .25
(g) Machine D—Computation of Year Purchased
2020 – First Half Year using SYD =
$25,000
[($219,000 – $69,000) X
5/15 X 1/2]
EXERCISE 11.8 (20–25 minutes)
Old Machine
June 1, 2018
Purchase
$31,000
Freight
200
Installation
500
Total cost
$31,700*
Book value, old machine, June 1, 2022:
[$33,680 – $2,920** – ($3,140*** X 3)] =
$21,340
Less: Fair value
Loss on exchange
Cost of removal
75
Total loss
(Note to instructor: The above computation is done to determine whether
there is a gain or loss from the exchange of the old machine with the new
machine and to show how the cost of removal might be reported. Also, if a
gain occurs, the gain is not deferred (1) because the exchange has
commercial substance and (2) the cost paid exceeds 25% of the total value
of the property received.)
New Machine
Basis of new machine
Cash paid ($35,000 – $20,000)
$15,000
Fair value of old machine
Installation cost
Total cost of new machine
EXERCISE 11.9 (15–20 minutes)
(a)
Asset
Cost
Estimated
Salvage
Depreciable
Cost
Estimated
Life
Depreciation
per Year
A
$ 40,500
$ 5,500
$ 35,000
10
$ 3,500
B
4,800
28,800
3,200
E
23,500
2,500
21,000
3,500
(b)
Depreciation Expense ……………………………………………..
16,300
Accumulated Depreciation—Plant
Assets ……………………………………………………….
16,300
(c)
Cash ………………………………………………………………………
Accumulated Depreciation—Plant Assets ………………..
14,200
Plant Assets …………………………………………………..
19,000
EXERCISE 11.10 (10–15 minutes)
Sum-of-the-years’-digits =
8 X (8 + 1)
= 36
2
EXERCISE 11.11 (10–15 minutes)
(a) No correcting entry is necessary because changes in estimate are
handled in the current and prospective periods.
(b) Revised annual charge
Book value as of 1/1/2021 [$60,000 – ($7,000* X 5)] = $25,000
Accumulated Depreciation—Machinery ……………
EXERCISE 11.12 (20–25 minutes)
(a) 1994–2003—($2,000,000 – $60,000) ÷ 40 = $48,500/yr.
(d) Revised annual depreciation
Building
Book value: ($2,000,000 – $1,358,000*)
$642,000
Salvage value
60,000
Remaining useful life
Annual depreciation
$ 18,188
EXERCISE 11.12 (Continued)
Addition
Book value: ($500,000 – $288,000**)
$ 212,000
Less: Salvage value
20,000
Remaining useful life
Annual depreciation
EXERCISE 11.13 (15–20 minutes)
(a) $2,200,000 ÷ 40 = $55,000
Note: The most appropriate entry would be to remove the old roof and
record a loss on disposal, because the cost of the old roof is given.
Another alternative would be to debit Accumulated Depreciation—
Buildings on the theory that the replacement extends the useful life of
the building. The entry in this case would be as follows:
EXERCISE 11.13 (Continued)
(c) No entry necessary.
(d) (Assume the cost of the old roof is removed)
Buildings ($2,200,000 – $160,000 + $300,000)
$2,340,000
(Assume the cost of the new roof is debited to
Book value of the building prior to the replacement of
$1,100,000
$1,400,000
Remaining useful life
EXERCISE 11.14 (20–25 minutes)
(a)
Maintenance and Repairs Expense ………………………….
500
Equipment ……………………………………………………..
500
(b)
The proper ending balance in the asset account is:
January 1 balance
Purchases
Freight
700
Less: Cost of equipment sold
December 31 balance
EXERCISE 11.14 (Continued)
(2) Sum-of-the-years’-digits: (10 + 9 + 8 + 7 + 6 + 5 + 4 + 3 + 2 + 1) = 55
EXERCISE 11-15 (25–35 minutes)
(a)
2015
2016–2021
Incl.
2022
Total
(1)
$192,000 – $16,800 = $175,200
$175,200 ÷ 12 = $14,600
per yr. ($40 per day)
133*/365 of $14,600 =
$ 5,320
2016–2021 Include. (6 X $14,600)
**68/365 of $14,600 =
$ 2,720
(2)
0
87,600
14,600
102,200
(3)
14,600
87,600
0
102,200
(4)
7,300
87,600
7,300
102,200
(5)
4/12 of $14,600
4,867
87,600
3/12 of $14,600
3,650
96,117
(6)
0
0
87,600
(b) The most accurate distribution of cost is given by methods 1 and 5 if
it is assumed that straight-line is satisfactory. Reasonable accuracy
EXERCISE 11.16 (10–15 minutes)
(a)
December 31, 2020
Loss on Impairment ………………………………………………..
3,200,000*
Accumulated Depreciation—Equipment …………..
3,200,000
Cost
$9,000,000
Less: Accumulated depreciation
Carrying amount
Less: Fair value
Loss on impairment
(b)
December 31, 2021
Depreciation Expense ……………………………………………..
1,200,000
Accumulated Depreciation—Equipment …………..
1,200,000
New carrying amount
$4,800,000
Useful life
Depreciation per year
EXERCISE 11.17 (15–20 minutes)
(a)
Loss on Impairment ………………………………………………..
3,220,000
Accumulated Depreciation—Equipment …………..
3,220,000
Cost
$9,000,000
Accumulated depreciation
1,000,000
Carrying amount
Less: Fair value
Plus: Cost of disposal
20,000
Loss on impairment
EXERCISE 11.17 (Continued)
(b) No entry necessary. Depreciation is not taken on assets intended to
be sold.
Recovery of Loss from Impairment ………………….
500,000
Less: Cost of disposal
Less: Carrying amount
Recovery of loss on impairment
EXERCISE 11.18 (15–20 minutes)
(a)
December 31, 2020
Loss on Impairment ………………………………………………..
270,000*
Accumulated Depreciation—Equipment …………..
270,000
Cost
$900,000
Less: Accumulated depreciation
Less: Fair value
Loss on impairment
(c) No entry necessary. Restoration of any impairment loss is not permitted.
(d) Management first had to determine whether there was an impairment.
To evaluate this step, management does a recoverability test. The
EXERCISE 11.19 (15–20 minutes)
(a)
Depreciation Expense:
$84,000
= $2,800 per year
30 years
EXERCISE 11.20 (10–15 minutes)
Cost per barrel of oil:
Initial payment =
$500,000
=
$2.00
250,000
18,000
Premium = 5% of $55 =
EXERCISE 11.21 (15–20 minutes)
(a) $1,300 – $300 = $1,000 per acre for timber
$1,000 X 7,000 acres
X 850,000 bd. ft. =
8,000 bd. ft. X 7,000 acres
X 850,000 bd. ft. = $106,250.
(b)
X 850,000 bd. ft. = $1,190.
56,000,000 bd. ft.
EXERCISE 11.22 (15–20 minutes)
Depletion base: $1,190,000 + $90,000 – $100,000 + $200,000 = $1,380,000
EXERCISE 11.23 (15–20 minutes)
(a)
($970,000 + $170,000 + $40,000* – $100,000)
= $.09 depletion per
unit
12,000,000
EXERCISE 11.24 (15–20 minutes)
(a) Asset turnover:
(b) Return on assets:
= 8.72%
(c) Profit margin on sales:
$80.7
= 15.65%
$515.7
(d) The asset turnover times the profit margin on sales provides the rate
of return on assets computed for Tootsie Roll as follows:
*EXERCISE 11.25 (20–25 minutes)
2020
2021
(a)
Revenues
$200,000
$200,000
Depreciation [($27,000 – $6,000) ÷ 7]
3,000
3,000
Income before income taxes
2020
2021
(b)
Revenues
$200,000
$200,000
Depreciation*
5,400
8,640
Taxable income
(c) Book purposes ($27,000 – $6,000) $21,000
Tax purposes (entire cost of asset) $27,000
(d) Differences will occur for the following reasons:
1. different depreciation methods.
*EXERCISE 11.26 (15–20 minutes)
(a) (1) ($31,000 – $1,000) X 1/10 X 10/12 = $2,500 depreciation expense
for book purposes.
*EXERCISE 11.26 (Continued)
(c) Differences will occur for the following reasons:
1. half-year convention used for tax purposes.
TIME AND PURPOSE OF PROBLEMS
Problem 11.1 (Time 25–30 minutes)
Purpose—to provide the student with an opportunity to compute depreciation expense using a number
Problem 11.2 (Time 25–35 minutes)
Purpose—to provide the student with an opportunity to compute depreciation expense using the
Problem 11.3 (Time 40–50 minutes)
Purpose—to provide the student with an opportunity to compute depreciation expense using a number
Problem 11.4 (Time 45–60 minutes)
Purpose—to provide the student with an opportunity to correct the improper accounting for semitrucks and
Problem 11.5 (Time 25–30 minutes)
Purpose—to provide the student with a problem involving the computation of estimated depletion and
Problem 11.6 (Time 25–30 minutes)
Purpose—to provide the student with a problem involving the proper accounting for depletion cost. This
Problem 11.7 (Time 25–35 minutes)
Time and Purpose of Problems (Continued)
Problem 11.8 (Time 25–35 minutes)
Problem 11.9 (Time 15–25 minutes)
Problem 11.10 (Time 45–60 minutes)
Purpose—to provide the student with an opportunity to solve a complex problem involving a number of
Problem 11.11 (Time 30–35 minutes)
Purpose—to provide the student with the opportunity to solve a moderate problem involving a machinery
*Problem 11.12 (Time 25–35 minutes)
Purpose—to provide the student with an opportunity to compute depreciation expense using a number
SOLUTIONS TO PROBLEMS
PROBLEM 11.1
(a) 1. Depreciation Base Computation:
Purchase price………………………….
$85,000
Installation ………………………
3,800
2. Sum-of-the-years’-digits for 2021
Machine Year
Total
Depreciation
2020
2021
1
8/36 X $86,400 =
$19,200
$12,800*
$ 6,400**
3. Double-declining-balance for 2020
[$87,900 X .25* X 8/12 (May – December)] = $14,650
PROBLEM 11.2
Depreciation Expense
2020
2021
(a)
Straight-line:
($89,000 – $5,000) ÷ 7 = $12,000/yr.
2020: $12,000 X 7/12
2021: 12/12× $12,000
(b)
($89,000 – $5,000) ÷ 525,000 units = $.16/unit
2020: $.16 X 55,000
2021: $.16 X 48,000
(c)
Working hours:
($89,000 – $5,000) ÷ 42,000 hrs. = $2.00/hr.
2020: $2.00 X 6,000
2021: $2.00 X 5,500
(d)
Sum-of-the-years’-digits:
(1 + 2 + 3 + 4 + 5 + 6 + 7) = 28 or
n(n + 1)
=
7(7 + 1 )
= 28*
2
2
2020: 7/28* X $84,000 X 7/12
12,250
2021: 7/28* X $84,000 X 5/12 = $ 8,750
6/28* X $84,000 X 7/12 = 10,500
$19,250
(e)
Declining-balance:
Rate = (1.0 ÷ 7) X 2 = 28.57%**
2020: 7/12 X .2857** X $89,000
PROBLEM 11.3
(a)
Depreciation Expense ……………………………………………..
3,900
Accumulated Depreciation—Machinery (A)
(5/55 X [$46,000 – $3,100]) …………………………..
3,900
Machinery (A) ($46,000 – $13,000) ……………………
Gain on Disposal of Machinery ………………………..
*([$31,200 + $3,900] – $33,000 = $2,100) …………
(b)
Depreciation Expense ……………………………………………..
6,720
Accumulated Depreciation—Machinery (B)
([$51,000 – $3,000] ÷ 15,000) X 2,100………………
6,720
(c)
Depreciation Expense ……………………………………………..
6,000
Accumulated Depreciation—Machinery (C)
([$80,000 – $15,000 – $5,000] ÷ 10) …………………
(d)
Machinery (E) ……………………………………………………….
Retained Earnings …………………………………………..
Retained Earnings ($28,000 X .20*) …………………………..
Accumulated Depreciation—Machinery (E) ………