578 Chapter 17 • DepreCiation
Review exeRcises
Note: Round answers to the nearest cent when necessary.
Calculate the total cost, total depreciation, and annual depreciation for the following assets
by using the straight-line method.
Cost
Shipping
Charges
Setup
Charges
Total
Cost
Salvage
Value
Estimated
Useful Life
(years)
Total
Depreciation
Annual
Depreciation
1.
$45,000
$150
$500
$45,650
$3,500
10
$42,150
$4,215.00
2.
$88,600
$625
$2,500
$91,725
$9,000
7
$82,725
$11,817.86
9. The Fluffy Laundromat purchased new washing machines and dryers for $57,000. Shipping
charges were $470, and installation amounted to $500. The machines are expected to last 5 years
and have a residual value of $2,000. If Fluffy elects to use the straight-line method of depreciation,
prepare a depreciation schedule for these machines.
The Fluffy Laundromat
Straight-Line Depreciation Schedule
Laundry Equipment
End of
Year
Annual
Depreciation
Accumulated
Depreciation
Book
Value
3
11,194
44,776
13,194
5
11,194
55,970
Total cost =57,000 +470 +500
=$57,970
tryitexerciSe 4
Prestige Limousine Service purchased a limousine with an expected useful life of 75,000 miles.
The cost of the limousine was $54,500, and the residual value was $7,500. If the limousine was
driven the following number of miles per year, prepare a depreciation schedule by using the units-
of-production method. After finding the depreciation per mile, round this dollar amount to three
17
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$160,000
5
$140,000
$28,000.00
4.
$900,000
0
$15,500
$100,000
5.
$220,000
$400
0
$24,500
10
6.
$76,200
$1,600
$850
$78,650
$4,500
$74,150
$6,740.91
7.
$470,000
$416,000
$52,000.00
8.
$34,800
$600
$1,900
$8,100
6
SeCtion i • traDitional DepreCiation—MethoDS USeD for finanCial StateMent reporting 579
10. White Mountain Supply Company purchases warehouse shelving for $18,600. Shipping charges
were $370, and assembly and setup amounted to $575. The shelves are expected to last for
7years and have a scrap value of $900. Using the straight-line method of depreciation,
a. What is the annual depreciation expense of the shelving?
b. What is the accumulated depreciation after the third year?
c. What is the book value of the shelving after the fifth year?
Complete Exercises 11–16 as they relate to the sum-of-the-years’ digits method of
depreciation.
Useful Life
(years)
Sum-of-the-
Years’ Digits
Depreciation Rate Fraction
Year 1 Year 3 Year 5
11. 5 15
5
15
3
15
1
15
17. Vanguard Manufacturing, Inc., purchased production-line machinery for $445,000. It is expected
to last for 6 years and have a trade-in value of $25,000. Using the sum-of-the-years’ digits
method, prepare a depreciation schedule for Vanguard.
Vanguard Manufacturing, Inc.
SYD Depreciation Schedule
Production-Line Machinery
End of
Year
Total
Depreciation
Depreciation
Rate Fraction
Annual
Depreciation
Accumulated
Depreciation
Book
Value
(new) $445,000
Original cost $445,000
T
rade-in value −25,00
0
Total depreciation $420,000
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18.
6
16.67
200
33.34
10
150
15.00
20.
4
25.00
200
50.00
21.
8
150
22.
3
150
50.00
23.
20
200
24. A U-Haul franchise bought new trucks for $180,000. The trucks are expected to have an 8-year
useful life and a trade-in value of $35,000. Prepare a depreciation schedule by using the 150%
declining-balance method for the trucks.
U-Haul
150% Declining-Balance Depreciation Schedule
Truck Fleet
End of
Year
Beginning
Book Value
Depreciation
Rate
Depreciation
for the Year
Accumulated
Depreciation
Ending
Book Value
(new) $180,000.00
1
$180,000.00
.1875
$33,750.00
$33,750.00
146,250.00
2
3
4
5
6
.1875
8
Complete Exercises 25–30 as they relate to the units-of-production method of depreciation.
Round to the nearest tenth of a cent when necessary.
Asset Cost
Salvage
Value
Units of
Useful Life
Depreciation
per Unit
25.
Pump
$15,000
$2,800
100,000 gallons
$.122
26.
Automobile
$27,400
$3,400
60,000 miles
.40
27.
Assembly robot
$900,000
$20,000
4,000,000 units
.22
28.
$9,000
$1,800
Air compressor
$6,500
30.
$135,000
$10,000
225,000 miles
31. Thunderbird Manufacturing purchased a new stamping machine for $45,000 with a salvage
value of $5,000. For depreciation purposes, the machine is expected to have a useful life of
250,000units of production. Complete the following depreciation schedule by using the
units-of-production method:
Thunderbird Manufacturing
Units-of-Production Depreciation Schedule
Stamping Machine
End of
Year
Depreciation
per Unit
Units
Produced
Annual
Depreciation
Accumulated
Depreciation
Book
Value
(new) $45,000
50,000
70,000
3
45,000
66,000
5
30,000
Total cost = 45,000 − 5,000 = $40,000
D
epreciation per unit =
40,000
250,000
=$.1
6
Since 1945, u-haul has been
the first choice of do-it-yourself
Major competitors include Avis
Budget Group, Inc.; Penske Truck
Leasing; Public Storage Inc.; Extra
Space Storage Inc.; and Sovran Self
Storage Inc.
LH Images/Alamy
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SeCtion i • traDitional DepreCiation—MethoDS USeD for finanCial StateMent reporting 581
32. You are the accountant for Raleigh Industries, a manufacturer of plastic gears for electric motors.
The company’s production facility in Pittsburgh has a cost of $3,800,000, an estimated residual
value of $400,000, and an estimated useful life of 40 years. You are using the straight-line
method of depreciation for this asset.
a. What is the amount of the annual depreciation?
b. What is the book value of the property at the end of the twentieth year of use?
c. If at the start of the twenty-first year you revise your estimate so that the remaining useful life
is 15 years and the residual value is $120,000, what should be the depreciation expense for
each of the remaining 15 years?
Business Decision: Replacing an asset
33. Supreme Auto Service opened a new service center three decades ago. At the time the center
was preparing to open, new equipment was purchased totaling $388,000. Residual value of the
equipment was estimated to be $48,000 after 20 years. The company accountant has been using
straight-line depreciation on the equipment.
a. How much was the annual depreciation for the original equipment?
b. If the hydraulic lift had originally cost $11,640, what would its residual value be after
20years?
c. After six years of operation, the original hydraulic lift was replaced with a new model that
cost $22,000. Book value was allowed for the old machine as a trade-in. What was the old
hydraulic lift’s book value when the replacement machine was bought?
d. What was the book value of the equipment inventory at the six-year point, substituting the
new hydraulic lift for the original after the new lift had joined the inventory?
AAMCo has been the recognized
leader in the transmission business for
over 40years and has expanded its
services into the $200 billion general
and Puerto Rico.
To purchase an AAMCO franchise
requires a down payment of $75,000
and a total capital investment of
between $183,000 and $193,000.
Twenty-five percent of franchisees
own more than one franchise unit.
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seCtion ii • asset Cost reCovery systems—irs-presCriBeD methoDs for inCome tax reporting 587
Review exeRcises
1. Ink Masters Printing purchased a new printing press for $660,000 on February 9, 2010. The
pressis used for business 90% of the time. As the accountant for the company, you elected
to take a $100,000 Section 179 deduction. The press also qualified for a special depreciation
allowance. (See Table 17-4.)
a. What was the basis for depreciation of the printing press?
b. What was the amount of the third year’s depreciation using MACRS?
2. Trident Developers purchased a computer system for $75,000 on April 27, 2014. The computer
system is used for business 100% of the time. The accountant for the company elected to take
a $10,000 Section 179 deduction, and the asset qualified for a special depreciation allowance.
(seeTable 17-4)
ExamplE6
CalCulate the perioDiC Depletion Cost
of natural resourCes
black gold oil, inc., purchased a parcel of land containing an estimated 1.5 million bar-
rels of crude oil for $16,000,000. Two oil wells were drilled at a cost of $3,400,000. The
residual value of the property and equipment is $2,500,000. Calculate the periodic deple-
tion cost for the first year of operation if 325,000 barrels were extracted.
SolutionStrategy
Step 1. Average depletion cost per unit =
Total cost of resource −Residual value
Estimated total units available
tryitexerciSe 6
The Canmore Mining Company paid $5,330,000 for a parcel of land, including the mining rights.
In addition, the company spent $900,000 on labor and equipment to prepare the site for mining
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588 Chapter 17 • DepreCiation
a. What was the basis for depreciation of the computer system?
b. What was the amount of the first year’s depreciation using MACRS?
3. Mid-State Construction built roads and a bridge at Atlantis World in Orlando, Florida, at a
cost of $15,000,000. Atlantis World uses MACRS for tax purposes. No Section 179 or special
depreciation allowances were taken.
a. What is the second year’s depreciation deduction?
b. What is the ninth year’s depreciation deduction?
4. Sunnyland Orange Groves planted fruit trees valued at $375,000 on February 12, 2014. The
accountant for the company took a $75,000 Section 179 deduction, and the asset is entitled to a
special depreciation allowance.
a. What is the basis for depreciation of the fruit trees?
b. What is the property class for this asset under MACRS?
c. What is the percentage for the sixth year of depreciation for this property?
d. What is the amount of the depreciation expense in the final year of write-off?
5. Island Hoppers Airways of Hawaii purchased a new commercial airplane for $2,400,000. The air-
plane is used for business 100% of the time. No Section 179 or special allowances are available
for this asset. As the accountant for the company, prepare a depreciation schedule for the asset by
using MACRS.
6. All-That-Glitters Mining Company paid $49,250,000 for a parcel of land, including the
gold mining rights. In addition, the company spent $7,462,500 to prepare the site for mining
operations. It is estimated that the residual value of the asset will be $5,300,000. Geologists
estimate the site contains a total of 225,000 ounces of gold.
a. What is the average depletion cost per ounce?
b. If 16,200 ounces were mined in the first year of operation, what is the amount of the
depletioncost?
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seCtion ii • asset Cost reCovery systems—irs-presCriBeD methoDs for inCome tax reporting 589
7. Sequoia Timber Company purchased land containing an estimated 6,500,000 board feet of lumber
for $3,700,000. The company invested another $300,000 to construct access roads and a company
depot. The residual value of the property and equipment is estimated to be $880,000.
a. What is the average depletion cost per board foot of lumber?
b. If 782,000 board feet were cut in the second year of operation, what is the amount of the
depletion cost for that year?
business Decision: inTangible wRiTe-offs
8. As you have seen in this chapter, companies depreciate, or write off, the expense of tangible
assets such as trucks and equipment over a period of their useful lives. Many companies also
have intangible assets that must be accounted for as an expense over a period of time.
Intangible assets are resources that benefit the company but do not have any physical sub-
stance. Some examples are copyrights, franchises, patents, trademarks, and leases. In account-
ing, intangible assets are written off in a procedure known as asset amortization. This is much
like straight-line depreciation, but there is no salvage value.
You are the accountant for Front Line Pharmaceuticals, Inc. In January 2000, the company
purchased the patent rights for a new medication from Novae, Inc., for $9,000,000. The
patent had 15 years remaining as its useful life. In January 2005, Front Line Pharmaceuticals
successfully defended its right to the patent in a lawsuit that cost $550,000 in legal fees.
a. Using the straight-line method, calculate the patent’s annual amortization expense for the
years before the lawsuit.
b. Calculate the revised annual amortization expense for the remaining years after the lawsuit.
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