PROBLEM 11-2
Depreciation Expense
2014
2015
(a)
Straight-line:
($89,000 – $5,000) ÷ 7 = $12,000/yr.
2014: $12,000 X 7/12
$7,000
2015: $12,000
$12,000
(b)
2014: $.16 X 55,000
2015: $.16 X 48,000
(c)
Working hours:
($89,000 – $5,000) ÷ 42,000 hrs. = $2.00/hr.
2014: $2.00 X 6,000
12,000
2015: $2.00 X 5,500
(d)
Sum-of-the-years’-digits:
1 + 2 + 3 + 4 + 5 + 6 + 7 = 28 or
n(n + 1)
=
7(8)
= 28
2
2
2014: 7/28 X $84,000 X 7/12
12,250
2015: 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 = 2/7
2015: 5/12 X $10,595
$21,190*
*Difference due to rounding.
PROBLEM 11-3
(a)
Depreciation Expense ……………………………………………..
3,900
Accumulated Depreciation—Machinery (A)
(5/55 X [$46,000 – $3,100]) …………………………..
3,900
Accumulated Depreciation—Machinery (A) ………………
35,100
Machinery (A) ($46,000 – $13,000) ……………………
33,000
Gain on Disposal of Machinery ………………………..
2,100
(b)
Depreciation Expense ……………………………………………..
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) …………………
6,000
(d)
Machinery (E) ……………………………………………………….
28,000
Retained Earnings …………………………………………..
28,000
Accumulated Depreciation—Machinery (E) ………
5,600
*($28,000 X .20)
Copyright © 2013 John Wiley & Sons, Inc. Kieso, Intermediate Accounting, 15/e, Solutions Manual (For Instructor Use Only) 11–43
Net
Income
Overstated
(Understated)
$ 3,000
(1,200)
1,800
2Truck #1: $18,000/5
1
2
As Adjusted
Retained
Earnings
dr, (cr.)
$ 3,000
19,800
22,800
Acc. Dep.,
Trucks dr,
(cr.)
$(30,200)
9,000
(19,800)
(41,000)
$18,000
(21,000)
$ 3,000
Trucks dr.
(cr.)
$94,000
40,000
(30,000)
_______
104,000
Book value of Truck #3 [$30,000 – ($30,000/5 X 1 1/2 yrs.)] = $30,000 – $9,000 =
Per Company Books
Retained
Earnings
dr. (cr.)
$21,000
21,000
Acc. Dep.
Trucks dr.
(cr.)
$(30,200)
(21,000)
(51,200)
1Implied fair value of Truck #3 ($40,000 – $22,000)
Trucks dr.
(cr.)
$ 94,000
22,000
________
116,000
Balance
Purchase Truck #5
Trade Truck #3
Depreciation
Balances
Income effect
Loss on Trade
(a)
1/1/12
7/1/12
12/31/12
12/31/12
Sale of Truck #1
Disposal of Truck #4
PROBLEM 11-4 (Continued)
3Book value of Truck #1 [$18,000 – ($18,000/5 X 4 yrs.)] =
$18,000 – $14,400 ……………………………………………………
= $3,600
Cash received on sale ……………………………………………………..
= 3,500
Loss on sale …………………………………………………………..
$ 100
$22,000/5
=
$24,000/5
=
Truck #5:
$40,000/5
=
Total
5Book value of Truck #4 $24,000 – [($24,000/5 X 3 yrs.)] …….
= $9,600
Cash received ($700 + $2,500) ………………………………………….
= 3,200
Loss on disposal …………………………………………………….
$6,400
6Truck #2:
$22,000/5 X 1/2
=
$ 2,200
Truck #4:
$24,000/5 X 1/2
=
2,400
$40,000/5
$42,000/5 X 1/2
=
4,200
Total
7Truck #2:
(fully dep.)
=
$40,000/5
=
Truck #6:
$42,000/5
=
Total
(b)
Compound journal entry December 31, 2015:
Accumulated Depreciation—Trucks ………………………
66,550
Trucks …………………………………………………………
Retained Earnings ………………………………………..
Depreciation Expense ………………………………….
PROBLEM 11-4 (Continued)
Summary of Adjustments:
Per
Books
As
Adjusted
Adjustment
Dr. or (Cr.)
Trucks
$152,000
$104,000
$(48,000)
Accumulated Depreciation
$129,150
$ 62,600
$ 66,550
Totals
$ 67,850
$ 63,300
$ (4,550)
Depreciation Expense, 2015
$ 30,400
$ 16,400
$(14,000)
PROBLEM 11-5
(a) Estimated depletion:
Estimated Depletion
Depletion
Base
Estimated
Yield
Per
Ton
1ST & 11th
Yrs.
Each of Yrs.
2-10 Incl.
$870,000*
120,000 tons
$7.25
$43,500**
$87,000***
Estimated depreciation:
Asset
Cost
Per ton
Mined
1st
Yr.
Yrs.
2–5
6th
Yr.
Yrs.
7–10
11th
Yr.
Building
$36,000
$.30*
$1,800
$3,600
$3,600
$3,600
$1,800
(b) Depletion: $7.25 X 5,000 tons = $36,250
Depreciation:
Building $.30 X 5,000 =
$1,500
Machinery $.50 X 5,000 =
Total depreciation
PROBLEM 11-6
(a)
Original cost
$550 X 3,000 =
$1,650,000
Deduct residual value of land
$200 X 3,000 =
600,000
1,050,000
Cost of logging road
150,000
$1,200,000
500,000 ft.
(b)
Inventory ……………………………………………………….
240,000
Timber ……………………………………………………….
240,000
Depletion, 2014: 20% X 500,000 bd. ft. = 100,000 bd. ft.;
100,000 bd. ft. X $2.40 = $240,000
(c)
Loss of timber
[$1,050,000 – ($1,050,000 X 20%)] …………………….
$ 840,000
Cost of salvaging timber ……………………………………
Less: Recovery ($3 X 400,000 bd. ft.) ………………….
$ 340,000
Loss of land value ……………………………………………..
600,000
Logging equipment ……………………………………………
300,000
Extraordinary loss due to the eruption
PROBLEM 11-7
Instructors should note the changing depletion base in this problem.
2014
Computation of depletion base for 2014
Timber
Cost per acre
$1,700
Land cost
800
Timber cost
$ 900
10,000 acres
Road cost
Total depletion base
Estimated depletion for 2014
$9,250,000
X 0.08
(540,000/6,750,000)
Depletion expense for 2014
$ 740,000
Depreciation of removable equipment
Cost
Salvage value
Depreciable base
Annual depreciation using SL ($216,000/15)
Depreciation expense for 2014
(9/12 X $14,400)
2015
Depletion base for 2015
Base for 2014
$9,250,000
Less: Depletion for 2014
740,000
Plus: Seedling Planting Costs
120,000
Depletion base for 2015
$8,630,000
Depletion base for 2015
$8,630,000
Times
(774,000/6,450,000)
Depletion for 2015
$1,035,600
Depreciation expense for 2015
$ 14,400
PROBLEM 11-7 (Continued)
2016
Depletion Base for 2016
Base for 2015
$ 8,630,000
Less: Depletion for 2015
1,035,600
Plus: Seedling Planting Costs
Depletion Base for 2016
$ 7,744,400
Depletion Base for 2016
Times
(650,000/6,500,000)
Depletion for 2016
Depreciation Expense for 2016
$ 14,400
PROBLEM 11-8
(a) The amounts to be recorded on the books of Darby Sporting Goods
Inc. as of December 31, 2014, for each of the properties acquired from
Encino Athletic Equipment Company are calculated as follows:
Cost Allocations to Acquired Properties
Appraisal
Value
Remaining
Purchase
Price
Allocations
Renovations
Capitalized
Interest
Total
(1) Land
$290,000
$290,000
(2) Buildings
Supporting Calculations
1Balance of purchase price to be allocated.
Total purchase price …………………………………………………..
$400,000
Less: Land appraisal …………………………………………………..
Machinery
PROBLEM 11-8 (Continued)
2Capitalizable interest.
Expenditures
Capitalization
Period
Weighted-Average
Accumulated Expenditures
Date
Amount
1/1
$ 50,000
12/12
$ 50,000
4/1
90,000
$500,000
$175,000
Note to instructor: If the interest is allocated between the building and the
machinery, $14,700 ($21,000 X 105/150) would be allocated to the building
and $6,300 ($21,000 X 45/150) would be allocated to the machinery.
(b) Darby Sporting Goods Inc.’s 2015 depreciation expense, for book
purposes, for each of the properties acquired from Encino Athletic
Equipment Company is as follows:
1.
Land: No depreciation.
= Cost X Rate X 1/2 year
3.
Machinery: Depreciation rate
= 2.00 X 1/5 = .40
PROBLEM 11-8 (Continued)
(c) Arguments for the capitalization of interest costs include the following.
1. Diversity of practices among companies and industries called for
standardization in practices.
2. Total interest costs should be allocated to enterprise assets and
PROBLEM 11-9
(a) Carrying value of asset: $10,000,000 – $2,500,000* = $7,500,000.
*($10,000,000 ÷ 8) X 2
(b) Depreciation Expense …………………………………….. 1,400,000**
Accumulated Depreciation—Equipment ….. 1,400,000
**($5,600,000 ÷ 4)
(c) No depreciation is recorded on impaired assets to be disposed of.
Recovery of impairment losses are recorded.
PROBLEM 11-10
(1)
$80,000
Allocated in proportion to appraised values
(1/10 X $800,000).
(2)
$720,000
Allocated in proportion to appraised values
(9/10 X $800,000).
(3)
Fifty years
annual depreciation ($13,600).
(4)
$13,600
Same as prior year since it is straight-line depreciation.
(5)
$91,000
[Number of shares (2,500) times fair value ($30)]
plus demolition cost of existing building ($16,000).
(6)
None
No depreciation before use.
(7)
$40,000
Fair value.
(8)
$6,000
Cost ($40,000) times percentage (1/10 X 150%).
(9)
$5,100
equals $34,000. Multiply $34,000 times 15%.
(10)
$168,000
Total cost ($182,900) less repairs and maintenance
($14,900).
(11)
$36,000
(12)
$10,500
one-third of a year.
PROBLEM 11-10 (Continued)
(13)
$52,000
obtain $46,260, and then add the $5,740 down payment.
Annual payment ($6,000) times present value of annuity
due at 8% for 11 years (7.710) plus down payment ($5,740).
This can be found in an annuity due table since the
(14)
$2,600
Cost ($52,000) divided by estimated life (20 years).
PROBLEM 11-11
(a)
(1)
Straight-line Method:
$90,000 – $6,000
= $16,800 a year
5 years
(2)
Activity Method:
$90,000 – $6,000
= $.84 per hour
100,000 hours
2014
15,000 hrs. X $.84 =
(3) Sum-of-the-Years’-Digits: 5 + 4 + 3 + 2 + 1 = 15
Year
2012
5/15 X ($90,000 – $6,000) =
$28,000
2015
2/15 X $84,000 =
(4) Double-Declining-Balance Method: Each year is 20% of its total
life. Double the rate to 40%.
Year
2012
40% X $90,000 =
2015
40% X ($90,000 – $70,560) =
(b) (1) Straight-line Method:
Year
2012
$90,000 – $6,000
X 9/12 =
$12,600
5 years
2015
Full year
PROBLEM 11-11 (Continued)
(2) Sum-of-the-Years’-Digits Method:
2012
(5/15 X $84,000) X 9/12 =
$21,000
2013
(5/15 X $84,000) X 3/12 =
$ 7,000
(4/15 X $84,000) X 9/12 =
16,800
23,800
2014
(4/15 X $84,000) X 3/12 =
(3/15 X $84,000) X 9/12 =
12,600
18,200
2015
(3/15 X $84,000) X 3/12 =
(2/15 X $84,000) X 9/12 =
12,600
2016
(2/15 X $84,000) X 3/12 =
(1/15 X $84,000) X 9/12 =
2017
(1/15 X $84,000) X 3/12 =
(3) Double-Declining Balance Method:
Year
Cost
Accum.
Depr. at
beg. of
year
Book
Value at
beg. of
year
Depr.
Expense
2012
$90,000
—
$90,000
$27,000 (1)
2013
25,200 (2)
2016
5,443 (5)
(1) $90,000 X 40% X 9/12
(2) ($90,000 – $27,000) X 40%
*PROBLEM 11-12
(a) The straight-line method would provide the highest total net income
Computations of depreciation expense and accumulated depreciation under
various assumptions:
(1) Straight-line:
$1,260,000 – $60,000
= $240,000
5 years
Year
Depreciation
Expense
Accumulated
Depreciation
2013
$240,000
$ 240,000
2014
$ 480,000
2015
$ 720,000
$720,000
(2) Double-declining-balance:
Year
Depreciation
Expense
Accumulated
Depreciation
2013
$504,000
(40% X $1,260,000)
$ 504,000
2014
(40% X $756,000)
$ 806,400
2015
(40% X $453,600)
$ 987,840
$987,840
(3) Sum-of-the-years’-digits:
Year
Depreciation
Expense
Accumulated
Depreciation
2013
$400,000
(5/15 X $1,200,000)
$ 400,000
2014
(4/15 X $1,200,000)
$ 720,000
2015
(3/15 X $1,200,000)
$ 960,000
*PROBLEM 11-12 (Continued)
(4) Units-of-output:
Year
Depreciation
Expense
Accumulated
Depreciation
2013
$288,000
($24* X 12,000)
$288,000
2015
($24 X 10,000)
$792,000
$792,000
(b) General MACRS method:
Total Cost
MACRS
Rates (%)*
Annual
Depreciation
Accumulated
Depreciation
2013
$1,260,000
X
14.29
=
$180,054
$180,054
2014
X
=
2015
X
=
*Taken from the MACRS rates schedule.
Optional straight-line method:
Total Cost
Depreciation
Rate
Annual
Depreciation
Accumulated
Depreciation
2013
$1,260,000
X
(1/7 X 1/2)
=
$ 90,000
$ 90,000
2014
X
=
$270,000
2015
X
=
$450,000
TIME AND PURPOSE OF CONCEPTS FOR ANALYSIS
CA 11-1 (Time 25–35 minutes)
Purpose—to provide the student with an understanding of the basic objective of depreciation accounting.
In addition, the case involves a reverse sum-of-the-years’-digits situation and the student is to comment
CA 11-2 (Time 20–25 minutes)
Purpose—to provide the student with a basic understanding of the difference between the unit and
CA 11-3 (Time 25–35 minutes)
Purpose—to provide the student with an understanding of a number of unstructured situations involving
depreciation accounting. The first situation considers whether depreciation should be recorded during a
CA 11-4 (Time 25–35 minutes)
Purpose—to provide the student with an understanding of the objectives of depreciation and the
theoretical basis for accelerated depreciation methods.
CA 11-5 (Time 20–25 minutes)