EXERCISE 11-5 (20–25 minutes)
(a)
($117,900 – $12,900)
= $21,000/yr. = $21,000 X 5/12 = $8,750
5
2014 Depreciation—Straight line = $8,750
(c)
Machine
Allocated to
Year
Total
2014
1
5/15 X $105,000 = $35,000
$14,583*
(d) 2014 40% X ($117,900) X 5/12 = $19,650
5/12 X $47,160 =
5/12 X $28,296 =
$39,300
EXERCISE 11-6 (20–30 minutes)
(a)
2014
Straight-line
$212,000 – $12,000
= $25,000/year
8
(b)
2014
Output
$212,000 – $12,000
= $5.00/output unit
40,000
(d)
8 + 7 + 6 + 5 + 4 + 3 + 2 + 1 = 36 OR
n (n + 1)
=
8(9)
= 36
2
2
Allocated to
Sum-of-the-years’-digits
Total
2014
2015
2016
Year 1
8/36 X $200,000 =
$44,444
$11,111
$33,333
$38,889
$29,167
$33,333
8,333
(e) Double-declining balance 2015: 1/8 X 2 = 25%.
2014: 25% X $212,000 X 3/12 = $13,250
EXERCISE 11-6 (Continued)
2nd full year [25% X ($212,000 – $53,000)] = $39,750
EXERCISE 11-7 (25–35 minutes)
Methods of Depreciation
Description
Date
Purchased
Cost
Salvage
Life
Method
Accum. Depr.
to 2015
2016 Depr.
A
2/12/14
$142,500
$16,000
10
(a) SYD
$33,350
(b) $19,550
B
8/15/13
(d) 11,600
C
(e) 47,567
(f) 4,333
D
(g) 10/12/14
(h) 35,000
Machine A—Testing the methods
Straight-Line Method for 2014
[($142,500 – $16,000) ÷
10] X 1/2
Sum-of-the-years-digits for 2014
[($142,500 – $16,000) X
10/55 X .5]
Sum-of-the-years-digits for 2015
($126,500 X 10/55 X 1/2) +
($126,500 X 9/55 X .5)
Using SYD, 2016 Depreciation is
EXERCISE 11-7 (Continued)
Machine B—Computation of the cost
Asset has been depreciated for 2 1/2 years using the straight-line
method.
Machine C—Using the double-declining balance method of depreciation
2012’s depreciation is
$ 9,425
($75,400 X .25 X .5)
2014’s depreciation is
$12,370
($75,400 – $25,919) X .25
2015’s depreciation is
$ 9,278
($75,400 – $38,289) X .25
Using DDB, 2016 Depreciation is $4,333 ($75,400 – $47,567 – $23,500)
Machine D—Computation of Year Purchased
First Half Year using SYD =
$25,000
[($219,000 – $69,000) X
EXERCISE 11-8 (20–25 minutes)
Old Machine
June 1, 2012
Purchase
$31,000
Freight
200
Installation
500
Total cost
$31,700
Annual depreciation charge: ($31,700 – $2,500) ÷ 10 = $2,920
Book value, old machine, June 1, 2016:
[$33,680 – $2,920 – ($3,140 X 3)] =
$21,340
Less: Fair value
Loss on exchange
Cost of removal
75
Total loss
$ 1,415
(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
New Machine
Basis of new machine
Cash paid ($35,000 – $20,000)
$15,000
Fair value of old machine
20,000
Installation cost
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
33,600
4,800
28,800
9
3,200
23,500
2,500
21,000
6
3,500
Composite life = $134,700 ÷ $16,300, or 8.26 years
Composite rate = $16,300 ÷ $152,600, or approximately 10.7%
(b)
Depreciation Expense ……………………………………………..
16,300
Assets ……………………………………………………….
Accumulated Depreciation—Plant Assets ………………..
14,200
Plant Assets …………………………………………………..
EXERCISE 11-10 (10–15 minutes)
Sum-of-the-years’-digits =
8 X 9
= 36
2
Using Y to stand for the years of remaining life:
Multiplying both sides by 36:
EXERCISE 11-11 (10–15 minutes)
(a) No correcting entry is necessary because changes in estimate are
(b) Revised annual charge
Book value as of 1/1/2015 [$60,000 – ($7,000 X 5)] = $25,000
Accumulated Depreciation—Machinery ……………
EXERCISE 11-12 (20–25 minutes)
(a) 1988–1997—($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
582,000
Annual depreciation
$ 18,188
EXERCISE 11-12 (Continued)
Addition
Book value: ($500,000 – $288,000**)
$ 212,000
Less: Salvage value
20,000
192,000
Remaining useful life
Annual depreciation
EXERCISE 11-13 (15–20 minutes)
(a) $2,200,000 ÷ 40 = $55,000
(b)
Loss on Disposal of Plant Assets …………………………..
80,000
Accumulated Depreciation—Buildings
Cash ……………………………………………………….
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—
Cash ……………………………………………………….
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
Less: Accumulated Depreciation
($55,000 X 20 – $80,000)
1,020,000
1,320,000
Remaining useful life
÷ 25 years
(Assume the cost of the new roof is debited to
Accumulated Depreciation—Equipment)
Book value of the building prior to the replacement of
roof $2,200,000 – ($55,000 X 20) =
$1,100,000
Cost of new roof
$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
$134,750
Add: New equipment:
Purchases
Freight
700
Installation
Less: Cost of equipment sold
23,000
December 31 balance
EXERCISE 11-14 (Continued)
(2) Sum-of-the-years’-digits: 10 + 9 + 8 + 7 + 6 + 5 + 4 + 3 + 2 + 1 = 55
OR
n(n + 1)
=
10(11)
= 55
2
2
EXERCISE 11-15 (25–35 minutes)
(a)
2009
2010–2015
Incl.
2016
Total
(1)
$192,000 – $16,800 = $175,200
$175,200 ÷ 12 = $14,600
per yr. ($40 per day)
2010–2015 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
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, 2014
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, 2015
Depreciation Expense ……………………………………………..
1,200,000
Accumulated Depreciation—Equipment …………..
1,200,000
New carrying amount
Useful life
Depreciation per year
(c) No entry necessary. Restoration of any impairment loss is not permitted.
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
Less: Fair value
Plus: Cost of disposal
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, 2014
Loss on Impairment ………………………………………………..
270,000
Accumulated Depreciation—Equipment …………..
270,000
Cost
Less: Accumulated depreciation
Less: Fair value
Loss on impairment
(b) It may be reported in the other expenses and losses section or it may
be highlighted as an unusual item in a separate section. It is not
reported as an extraordinary item.
(d) Management first had to determine whether there was an impairment.
To evaluate this step, management does a recoverability test. The
recoverability test estimates the future cash flows expected from use
EXERCISE 11-19 (15–20 minutes)
(a)
Depreciation Expense:
$84,000
= $2,800 per year
30 years
(b) Cost of Timber Sold: $9,000,000 – $1,800,000 = $7,200,000
$7,200,000 + $100,000 = $7,300,000
($7,300,000 ÷ 5,000,000 bd. ft.) X 900,000 bd. ft. = $1,314,000
EXERCISE 11-20 (10–15 minutes)
Cost per barrel of oil:
Initial payment =
$500,000
=
$2.00
250,000
Rental =
=
Premium = 5% of $55 =
Reconditioning of land =
=
.12
EXERCISE 11-21 (15–20 minutes)
(a) $1,300 – $300 = $1,000 per acre for timber
X 850,000 bd. ft. =
8,000 bd. ft. X 7,000 acres
X 850,000 bd. ft. = $106,250.
(c) Forda should capitalize the cost of $70,000 ($20 X 3,500 trees) and
adjust the depletion the next time the timber is harvested.
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 (15–25 minutes)
(a) Asset turnover:
$528.4
= .6159 times
$858 + $857.9
2
(a) Return on assets:
(c) 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)
2014
2015
(a)
Revenues
$200,000
$200,000
Operating expenses (excluding depreciation)
130,000
130,000
Depreciation [($27,000 – $6,000) ÷ 7]
3,000
3,000
Income before income taxes
2014
2015
(b)
Revenues
$200,000
$200,000
Operating expenses (excluding depreciation)
130,000
130,000
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:
*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)
(b) (1) $31,000 X 20% X 10/12 = $5,167 depreciation expense for book
purposes.
(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 determine the proper depreciation expense. The student is required to compute separately the
errors arising in determining or entering depreciation or in recording transactions affecting Semitrucks.
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)
Problem 11-7 (Time 25–35 minutes)
Purpose—to provide the student with a problem involving depletion and depreciation computations.
Problem 11-8 (Time 25–35 minutes)
Purpose—to provide the student with a comprehensive problem related to property, plant, and
equipment. The student must determine depreciable bases for assets, including capitalized interest,
and prepare depreciation entries using various methods of depreciation.
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
Time and Purpose of Problems (Continued)
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
of different depreciation methods. The purpose of computing the depreciation expense is to determine
SOLUTIONS TO PROBLEMS
PROBLEM 11-1
(a) 1. Depreciation Base Computation:
Purchase price………………………….
$85,000
Less: Purchase discount (2%) ……
1,700
Installation ……………………………….
3,800
Less: Salvage value …………………
2. Sum-of-the-years’-digits for 2015
Machine Year
Total
Depreciation
2014
2015
1
8/36 X $86,400 =
$19,200
$12,800*
$ 6,400**
2
7/36 X $86,400 =
$16,800
3. Double-declining-balance for 2014
($87,900 X 25% X 2/3) = $14,650
(b) An activity method.