CHAPTER 11
SOLUTIONS TO B EXERCISES
E11-1B (15–20 minutes)
(a) Straight-line method depreciation for each of Years 1 through 3 =
$500,000 – $50,000
= $45,000
10
(b)
Sum-of-the-years’-digits =
10 X 11
= 55
2
(c)
Double-declining balance method
depreciation rate =
100%
X 2 = 20.00%
10
E11-2B (20–25 minutes)
(a) If there is any salvage value and the amount is unknown (as is the case
here), the cost would have to be determined by looking at the data for
E11-2B (Continued)
(b) $85,000 cost [from (a)] – $75,000 total depreciation = $10,000 salvage
value.
(e) The method that produces the lowest book value at the end of Year 3
would be the method that yields the highest accumulated depreciation at
the end of Year 3, which is DDB.
(f) The method that will yield the lowest gain (or highest loss) if the asset is
sold at the end of Year 4 is the method which will yield the highest book
value at the end of Year 4, which is the double-declining balance method
in this case.
E11-3B (15–20 minutes)
(a)
20 (20 + 1)
= 210
2
E11-3B (Continued)
(b)
100%
= 5%; 5% X 2 = 10%
20
E11-4B (15–25 minutes)
(a) $345,000 – $45,000 = $300,000; $300,000 ÷ 10 yrs. = $30,000
(d)
10 + 9 + 8 + 7 + 6 + 5 + 4 + 3 + 2 + 1 = 55 or
n(n + 1)
=
10(11)
= 55
2
2
(e)
$345,000 X 20% X 1/3 =
$23,000
[$345,000 – ($345,000 X 20%)] X 20% X 2/3 =
E11-5B (20–25 minutes)
(a)
($235,800 – $25,800)
= $21,000/yr. = $21,000 X 5/12 = $8,750
10
($235,800 – $25,800)
(c)
Machine
Allocated to
Year
Total
2014
2015
2015 Depreciation—sum-of-the-years’-digits = $36,591
(d) 2014 40% X ($235,800) X 5/12 = $39,300
E11-6B (20–30 minutes)
(a)
2014
Straight-line
$250,000 – $50,000
= $25,000/year
8
3 months—depreciation $6,250 = ($25,000 X 3/12)
(b)
2014
Output
$250,000 – $50,000
= $10.00/output unit
1,500 units X $10.00 = $15,000
900 hours X $20.00 = $18,000
(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
7/36 X $200,000 =
6/36 X $200,000 =
E11-6B (Continued)
(e) Double-declining balance 2005: 1/8 X 2 = 25%
2014: 25% X $250,000 X 3/12 = $15,625
OR
1st full year (25% X $250,000) = $62,500
E11-7B (25–35 minutes)
Methods of Depreciation
Description
Date
Purchased
Cost
Salvage
Life
Method
Accum. Depr.
to 2014
2015 Depr.
A
7/10/09
$216,000
$36,000
6
(a)
$105,000
(b) $
C
E11-7B (Continued)
Machine A—Testing the methods
(a) Straight-Line Method for 2011
$ 15,000
[($216,000 – $36,000) ÷
6] X 1/2
Straight-Line Method for 2012-14
$ 90,000
[($216,000 – $36,000) ÷
6] X 3
($216,000 X .333 X .5)
($180,000 X .333)
($120,000 X .333
Sum-of-the-Years-Digits for 2011
$ 25,714
[($216,000 – $36,000) X
6/21 X .5]
Sum-of-the-Years-Digits for 2012
$ 47,143
($180,000 X 5/21 X 1/2)
Sum-of-the-Years-Digits for 2013
$ 38,571
($180,000 X 5/21 X 1/2) +
($180,000 X 4/21 X 1/2)
($180,000 X 3/21 X 1/2)
($180,000 X 6/21 X 1/2) +
(b) Using SL, 2015 Depreciation is
$30,000
($216,000 – 36,000)/6
Machine B—Computation of the cost
(c) Asset has been depreciated for 1 1/2 years using the SYD method.
E11-7B (Continued)
(d) Using SYD, 2015 Depreciation is $23,333.
Sum-of-the-Years-Digits for 2015
$23,333
($100,000 X 4/15 X 1/2) +
($100,000 X 3/15 X 1/2)
(f) Using SL, 2015 Depreciation is $20,500
Thus the asset must have been purchased on February 12, 2014
$47,360
Machine D—Computation of Year Purchased
E11-8B (20–25 minutes)
Old Machine
October 1, 2010
Purchase…………………………………
$68,000
Freight ……………………………………
300
Installation ………………………………
E11-8B (Continued)
Book value, old machine, October 1, 2016:
[$76,000 – $19,500 – ($7,500 X 3)] = ……………………….
$34,000
Fair value ……………………………………………………………….
Loss on exchange ………………………………………………….
Cost of removal ………………………………………………………
75
(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
New Machine
Basis of new machine
Cash paid ($86,000 – $22,000) ………
$64,000
Fair value of old machine …………….
Installation cost ………………………….
Depreciation for the year beginning October 1, 2016 = ($89,000 – $10,000) ÷ 10
= $7,900.
E11-9B (15–20 minutes)
(a)
Asset
Cost
Estimated
Salvage
Depreciable
Cost
Estimated
Life
Depreciation
per Year
A
$121,500
$16,500
$105,000
10
$10,500
B
100,800
14,400
86,400
9
9,600
C
108,000
10,800
97,200
9
D
4,500
52,500
7
7,500
E
70,500
7,500
63,000
6
$53,700
E11-9B (Continued)
(b)
Depreciation Expense—Plant Assets ………………………..
48,900
Accumulated Depreciation—Plant
Assets …………………………………………………………
(c)
Cash ……………………………………………………………………….
14,400
Accumulated Depreciation—Plant Assets ………………….
42,600
Plant Assets …………………………………………………..
E11-10B (10–15 minutes)
Sum-of-the-years’-digits =
8 X 9
= 36
2
E11-11B (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 1/1/2015 [$100,000 – ($8,000 X 5)] = $60,000
E11-12B (20–25 minutes)
(a) 1995–2001—($4,000,000 – $200,000) ÷ 40 = $95,000/yr.
(c) No adjusting entry required.
(d) Revised annual depreciation
Building
Book value: ($4,000,000 – $1,995,000*) …………..
Salvage value ………………………………………………..
Remaining useful life …………………………………….
Annual depreciation ………………………………………
Addition
Book value: ($1,500,000 – $647,500**)…………….
$852,500
Salvage value ………………………………………………..
20,000
832,500
Remaining useful life …………………………………….
Annual depreciation ………………………………………
E11-13B (15–20 minutes)
(a) $3,000,000 ÷ 40 = $75,000
(b)
Loss on Disposal of Plant Assets …………………………….
100,000
Accumulated Depreciation—Building
($200,000 X 20/40) ………………………………………………..
100,000
500,000
Cash …………………………..………………………………….
Accumulated Depreciation—Building ………………………
500,000
Cash …………………………..………………………………….
Note: The most appropriate entry would be to remove the old roof and record
a loss on disposal, because the cost of old roof is given. Another alternative
would be to debit Accumulated Depreciation on the theory that the
(d) (Assuming the cost of old roof is removed:)
Building ($3,000,000 – $200,000 + $500,000) ………………….
$3,300,000
Accumulated Depreciation ($75,000 X 20 – $100,000) …….
1,400,000
1,900,000
Remaining useful life …………………………………………………..
accumulated depreciation:)
roof $3,000,000 – ($75,000 X 20) = ………………………………
$1,500,000
Cost of new roof ………………………………………………………….
500,000
$2,000,000
Remaining useful life …………………………………………………..
E11-14B (20–25 minutes)
(a)
Repair Expense……………………………………………………….
1,250
Equipment ………………………………………………………
1,250
(b)
The proper ending balance in the asset account is:
January 1 balance ……………………………….
$212,000
Add: New equipment:
Purchases ……………………………………..
Freight …………………………………………..
Installation …………………………..………..
Less: Cost of equipment sold ……………..
December 31 balance …………………………..
8/55 X $192,000 = ……………………………………………….
For equipment purchased in 2015: 10/55 X $84,500 = …..
Total …………………………………………………………………
(1) Straight-line: $276,500 ÷ 10 = $27,650
E11-15B (25–35 minutes)
(a)
2010
2011–2015
Incl.
2016
Total
1.
$300,000 – $25,000 = $275,000
$275,000 ÷ 10 = $27,500 per yr.
$169,973
3.
8/12 of $27,500
6/12 of $27,500
(b) The most accurate distribution of cost is given by methods 1 and 5 if it is
assumed that straight-line depreciation is satisfactory. Reasonable
E11-16B (10–15 minutes)
(a)
December 31, 2014
Loss on Impairment ………………………………………………..
2,400,000
Accumulated Depreciation—Equipment ……………….
2,400,000
Cost
$6,750,000
Accumulated depreciation
750,000
Carrying amount
Fair value
Loss in impairment
E11-16B (Continued)
(b)
December 31, 2015
Depreciation Expense ……………………………………………..
900,000
Accumulated Depreciation—Equipment ……………….
900,000
New carrying amount
$3,600,000
Useful life
Depreciation per year
(c) No entry necessary. Restoration of any impairment loss is not permitted.
E11-17B (15–20 minutes)
(a)
Loss on Impairment ………………………………………………..
2,415,000
Accumulated Depreciation—Equipment ……………..
2,415,000
Cost
$6,750,000
Accumulated depreciation
750,000
Carrying amount
Less: Fair value
Plus: Cost of disposal
15,000
Loss on impairment
(b) No entry necessary. Depreciation not taken on assets intended to be sold.
(c)
Accumulated Depreciation—Equipment ……………………
375,000
Recovery of Loss on Impairment ……………………..
375,000
Fair value………………………………………………………………..
Less: Cost of disposal ……………………………………………
Carrying amount ……………………………………………………..
E11-18B (15–20 minutes)
(a)
December 31, 2014
Loss on Impairment ………………………………………………..
300,000
Accumulated Depreciation—Equipment ……………….
300,000
Cost
$1,200,000
Accumulated depreciation
300,000
Carrying amount
Fair value
600,000
(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.
(c) No entry necessary. Restoration of any impairment loss is not permitted.
(d) Management first had to determine whether there was an impairment. To
E11-19B (15–20 minutes)
(a)
Depreciation expense:
$90,000
= $3,000 per year
30 years
Cost of timber sold: $2,000 – $500 = $1,500
Note: The spraying costs as well as the costs to maintain the fire lanes and
roads are expensed each period and are not part of the depletion base.
E11-20B (10–15 minutes)
Cost per barrel of oil:
Initial payment =
$1,200,000
=
$2.40
500,000
Rental =
=
E11-21B (15–20 minutes)
(a) $1,500 – $500 = $1,000 per acre for timber
$1,000 X 8,000 acres
X 1,000,000 bd. ft. =
5,000 bd. ft. X 8,000 acres
X 1,000,000 bd. ft. = $200,000
40,000,000 bd. ft.
40,000,000 bd. ft.
E11-22B (15–20 minutes)
Depletion base: $2,000,000 + $200,000 – $300,000 + $500,000 = $2,400,000
Depletion rate: $2,400,000 ÷ 50,000 = $48/ton
E11-23B (15–20 minutes)
(a)
$5,000,000 + $1,000,000 + $400,000* – $800,000
= $112 depletion per ton
50,000
= 1.932 times
E11-24B (15–20 minutes)
(a) Asset turnover ratio:
E11-24B (Continued)
(c) Profit margin on sales:
$138
= 4.89%
$2,820
X
Asset Turnover
X
*E11-25B (20–25 minutes)
2015
2014
(a)
Revenues …………………………..………………………..
$600,000
$600,000
Operating expenses (excluding depreciation)…
440,000
440,000
Depreciation [($54,000 – $6,000) ÷ 6] ………………
8,000
8,000
Income before income taxes ………………………….
$152,000
$152,000
2015
2014
(b)
Revenues …………………………..………………………..
$600,000
Operating expenses (excluding depreciation)…
Depreciation* ……………………………………………….
Taxable income …………………………………………….
$149,200
(c) Book purposes ($54,000 – $6,000) $48,000
Tax purposes (entire cost of asset) $54,000
*E11-26B (15–20 minutes)
(a) 1. ($21,000 – $1,000) X 1/8 X 6/12 = $1,250 depreciation expense for
book purposes.
2. $21,000 X 1/5 X 1/2 = $2,100 depreciation for tax purposes.