1 B EXERCISES E11-1B (Depreciation Computations SL, SYD, DDB) Vaughn Company purchases equipment on January 1, Year 1, at a cost of $500,000. The asset is expected to have a service life of 10 years and a salvage value of $50,000. (a) Compute the amount of depreciation for each of Years 1 through using the straight-line depreciation method. (b) Compute the amount of depreciation for each of Years 1 through using the sum-of-the-years - digits method. (c) Compute the amount of depreciation for each of Years 1 through using the double-declining balance method. (In performing your calculations, round constant percentage to the nearest onehundredth of a point and round answers to the nearest dollar.) E11-B (Depreciation Conceptual Understanding) Bayliner Company acquired a plant asset at the beginning of Year 1. The asset has an estimated service life of 5 years. An employee has prepared depreciation schedules for this asset using three different methods to compare the results of using one method with the results of using other methods. You are to assume that the following schedules have been correctly prepared for this asset using (1) the straight-line method, () the sum-of-the-years -digits method, and () the double-declining-balance method. Sum-of-the- Double-Declining- Year Straight-Line Years -Digits Balance 1 $15,000 $5,000 $4,000 15,000 0,000 0,400 15,000 15,000 1, ,000 10,000 7, ,000 5,000 1,01 Total $75,000 $75,000 $75,000 Answer the following questions. (a) What is the cost of the asset being depreciated? (b) What amount, if any, was used in the depreciation calculations for the salvage value for this asset? (c) Which method will produce the highest charge to income in Year? (d) Which method will produce the highest charge to income in Year 5? (e) Which method will produce the lowest book value for the asset at the end of Year? (f) If the asset is sold at the end of Year 4, which method would yield the lowest gain (or highest loss) on disposal of the asset? E11-B (Depreciation Computations SYD, DDB Partial Periods) Bonds Company purchased a new plant asset on April 1, 014, at a cost of $55,500. It was estimated to have a service life of 0 years and a salvage value of $0,000. Bonds s accounting period is the calendar year. (a) Compute the depreciation for this asset for 014 and 015 using the sum-of-the-years -digits method. (b) Compute the depreciation for this asset for 014 and 015 using the double-declining balance method. E11-4B (Depreciation Computations Five Methods) Wynn Furnace Corp. purchased machinery for $45,000 on May 1, 014. It is estimated that it will have a useful life of 10 years, scrap value of $45,000, production of 10,000 units, and working hours of 1,500. During 015 Wynn uses the machinery for,000 hours, and the machinery produces 5,000 units. From the information given, compute the depreciation charge for 015 under each of the following methods. (Round to three decimal places). (a) Straight-line. (b) Units-of-output. (c) Working hours. (d) Sum-of-the-years -digits. (e) Declining-balance. (Use 0% as the annual rate.) 1
2 Chapter 11 Depreciation, Impairments, and Depletion 4 E11-5B (Depreciation Computations Four Methods) Foster Corporation purchased a new machine for its assembly process on August 1, 014. The cost of this machine was $5,800. The company estimated that the machine would have a trade-in value of $5,800 at the end of its service life. Its life is estimated at 10 years, and its working hours are estimated at 4,000 hours. Year-end is December 1. Compute the depreciation expense under the following methods. Each of the following should be considered unrelated. (a) Straight-line depreciation for 014. (b) Activity method for 014, assuming that machine usage was 800 hours. (c) Sum-of-the-years -digits for 015. (d) Double-declining balance for 015. E11-B (Depreciation Computations Five Methods, Partial Periods) Scott Company purchased equipment for $50,000 on October 1, 014. It is estimated that the equipment will have a useful life of 8 years and a salvage value of $50,000. Estimated production is 0,000 units and estimated working hours 10,000. During 014 Scott uses the equipment for 900 hours, and the equipment produces 1,500 units. Compute depreciation expense under each of the following methods. Scott is on a calendar-year basis ending December 1. (a) Straight-line method for 014. (b) Activity method (units of output) for 014. (c) Activity method (working hours) for 014. (d) Sum-of-the-years -digits method for 01. (e) Double-declining balance method for 015. E11-7B (Different Methods of Depreciation) Jester Industries presents you with the following information. Accumulated Date Salvage Life in Depreciation Depreciation to Depreciation Description Purchased Cost Value Years Method 1/1/14 for 015 Machine A 7/10/11 $1,000 $,000 (a) $105,000 (b) Machine B 10/5/1 (c) 15,000 5 SYD 4,7 (d) Machine C 8//1 10,000 5, SL (e) (f) Machine D /1/(g) 148,000 5,000 5 DDB 9,00 (h) Complete the table for the year ended December 1, 015. The company depreciates all assets using the half-year convention. E11-8B (Depreciation Computation Replacement, Nonmonetary Exchange) Sachs Corporation bought a machine on October 1, 010, for $8,000, f.o.b. the place of manufacture. Freight to the point where it was set up was $00, and $700 was expended to install it. The machine s useful life was estimated at 10 years, with a salvage value of $4,000. On October 1, 01, an essential part of the machine is replaced, at a cost of $7,000, with one designed to reduce the cost of operating the machine. The cost of the old part and related depreciation cannot be determined with any accuracy. On October 1, 01, the company buys a new machine of greater capacity for $8,000, delivered, trading in the old machine which has a fair market value and trade-in allowance of $,000. To prepare the old machine for removal from the plant cost $75, and expenditures to install the new one were $,000. It is estimated that the new machine has a useful life of 10 years, with a salvage value of $10,000 at the end of that time. The exchange has commercial substance. Assuming that depreciation is to be computed on the straight-line basis, compute the annual depreciation on the new equipment that should be provided for the fiscal year beginning October 1, 014. E11-9B (Composite Depreciation) Presented below is information related to Gant Manufacturing Corporation. Asset Cost Estimated Salvage Estimated Life (in years) A $11,500 $1, B 100,800 14,400 9 C 108,000 10,800 9 D 57,000 4,500 7 E 70,500 7,500
3 B Exercises (a) Compute the rate of depreciation per year to be applied to the plant assets under the composite method. (b) Prepare the adjusting entry necessary at the end of the year to record depreciation for the year. (c) Prepare the entry to record the sale of asset D for cash of $14,400. It was used for years, and depreciation was entered under the composite method. E11-10B (Depreciation Computations, SYD) Vans Company purchased a piece of equipment at the beginning of 011. The equipment cost $80,000. It has an estimated service life of 8 years and an expected salvage value of $140,000. The sum-of-the-years -digits method of depreciation is being used. Someone has already correctly prepared a depreciation schedule for this asset. This schedule shows that $10,000 will be depreciated for a particular calendar year. Show calculations to determine for what particular year the depreciation amount for this asset will be $10,000. E11-11B (Depreciation Change in Estimate) Machinery purchased for $100,000 by Deer Co. in 010 was originally estimated to have a life of 10 years with a salvage value of $0,000 at the end of that time. Depreciation has been entered for 5 years on this basis. In 015, it is determined that the total estimated life should be 9 years with a salvage value of $,000 at the end of that time. Assume straight-line depreciation. (a) Prepare the entry to correct the prior years depreciation, if necessary. (b) Prepare the entry to record depreciation for 015. E11-1B (Depreciation Computation Addition, Change in Estimate) In 199, Lincoln Company completed the construction of a building at a cost of $4,000,000 and first occupied it in January It was estimated that the building will have a useful life of 40 years and a salvage value of $00,000 at the end of that time. Early in 00, an addition to the building was constructed at a cost of $1,500,000. At that time it was estimated that the remaining life of the building would be, as originally estimated, an additional years, and that the addition would have a life of years, and a salvage value of $0,000. In 01, it is determined that the probable life of the building and addition will extend to the end of 054 or 10 years beyond the original estimate. (a) Using the straight-line method, compute the annual depreciation that would have been charged from 1995 through 001. (b) Compute the annual depreciation that would have been charged from 00 through 015. (c) Prepare the entry, if necessary, to adjust the account balances because of the revision of the estimated life in 01. (d) Compute the annual depreciation to be charged beginning with 01. E11-1B (Depreciation Replacement, Change in Estimate) Buhner Company constructed a building at a cost of $,000,000 and occupied it beginning in January It was estimated at that time that its life would be 40 years, with no salvage value. In January 015, a new roof was installed at a cost of $500,000, and it was estimated then that the building would have a useful life of 5 years from that date. The cost of the old roof was $00,000. (a) What amount of depreciation should have been charged annually from the years 1995 to 014? (Assume straight-line depreciation.) (b) What entry should be made in 015 to record the replacement of the roof? (c) Prepare the entry in January 015, to record the revision in the estimated life of the building, if necessary. (d) What amount of depreciation should be charged for the year 015? E11-14B (Error Analysis and Depreciation, SL and SYD) Suzuki Company shows the following entries in its Equipment account for 015. All amounts are based on historical cost. Equipment Jan. 1 Balance 1,000 Mar. 15 Cost of equipment sold Apr. Purchases 81,000 (purchased prior Freight on equipment to 011) 0,000 purchased Installation costs,000 Nov. 1 Repairs 1,50
4 4 Chapter 11 Depreciation, Impairments, and Depletion (a) Prepare any correcting entries necessary. (b) Assuming that depreciation is to be charged for a full year on the ending balance in the asset account, compute the proper depreciation charge for 015 under each of the methods listed below. Assume an estimated life of 10 years, with no salvage value. The machinery included in the January 1, 015, balance was purchased in 01. (1) Straight-line. () Sum-of-the-years -digits E11-15B (Depreciation for Fractional Periods) On June 15, 01, Simply Company sells equipment that it purchased for $00,000 on April 10, 010. It was originally estimated that the equipment would have a life of 10 years and a salvage value of $5,000 at the end of that time, and depreciation has been computed on that basis. The company uses the straight-line method of depreciation. (a) Compute the depreciation charge on this equipment for 010, for 01, and the total charge for the period from 011 to 015, inclusive, under each of the six following assumptions with respect to partial periods. (1) Depreciation is computed for the exact period of time during which the asset is owned. (Use 5 days for the base.) () Depreciation is computed for the full year on the January 1 balance in the asset account. () Depreciation is computed for the full year on the December 1 balance in the asset account. (4) Depreciation for one-half year is charged on plant assets acquired or disposed of during the year. (5) Depreciation is computed on additions from the beginning of the month following acquisition and on disposals to the beginning of the month following disposal. () Depreciation is computed for a full period on all assets in use for over one-half year, and no depreciation is charged on assets in use for less than one-half year. (b) Briefly evaluate the methods above, considering them from the point of view of basic accounting theory as well as simplicity of application. E11-1B (Impairment) Presented below is information related to equipment owned by Davis Company at December 1, 014. Cost $,750,000 Accumulated depreciation to date 750,000 Expected future net cash flows 5,50,000 Fair value,00,000 Assume that Davis will continue to use this asset in the future. As of December 1, 014, the equipment has a remaining useful life of 4 years. (a) Prepare the journal entry (if any) to record the impairment of the asset at December 1, 014. (b) Prepare the journal entry to record depreciation expense for 015. (c) The fair value of the equipment at December 1, 015, is $,85,000. Prepare the journal entry (if any) necessary to record this increase in fair value. E11-17B (Impairment) Assume the same information as E11-1B, except that Davis intends to dispose of the equipment in the coming year. It is expected that the cost of disposal will be $15,000. (a) Prepare the journal entry (if any) to record the impairment of the asset at December 1, 014. (b) Prepare the journal entry (if any) to record depreciation expense for 015. (c) The asset was not sold by December 1, 015. The fair value of the equipment on that date is $,975,000. Prepare the journal entry (if any) necessary to record this increase in fair value. It is expected that the cost of disposal is still $15,000. E11-18B (Impairment) The management of Yastrzemski Inc. was discussing whether certain equipment should be written off as a charge to current operations because of obsolescence. This equipment has a cost of $1,00,000 with depreciation to date of $00,000 as of December 1, 014. On December 1, 014, management projected its future net cash flows from this equipment to be $700,000 and its fair value to be $00,000. The company intends to use this equipment in the future. (a) Prepare the journal entry (if any) to record the impairment at December 1, 014. (b) Where should the gain or loss (if any) on the write-down be reported in the income statement?
5 B Exercises 5 (c) At December 1, 015, the equipment s fair value increased to $700,000. Prepare the journal entry (if any) to record this increase in fair value. (d) What accounting issues did management face in accounting for this impairment? E11-19B (Depletion Computations Timber) Carter Timber Company owns 10,000 acres of timberland purchased in 00 at a cost of $,000 per acre. At the time of purchase the land without the timber was valued at $500 per acre. In 004, Carter built fire lanes and roads, with a life of 0 years, at a cost of $90,000. Every year Carter sprays to prevent disease at a cost of $8,000 per year and spends $4,000 to maintain the fire lanes and roads. During 005, Carter selectively logged and sold 700,000 board feet of timber, of the estimated,000,000 board feet. In 004, Carter planted new seedlings to replace the trees cut at a cost of $100,000. (a) Determine the depreciation expense and the cost of timber sold related to depletion for 005. (b) Carter has not logged since 005. If Carter logged and sold 900,000 board feet of timber in 01, when the timber cruise (appraiser) estimated 4,000,000 board feet, determine the cost of timber sold related to depletion for 01. E11-0B (Depletion Computations Oil) Hometown Oil Company has leased property on which oil has been discovered. Wells on this property produced,000 barrels of oil during the past year that sold at an average sales price of $90 per barrel. Total oil resources of this property are estimated to be 500,000 barrels. The lease provided for an outright payment of $1,00,000 to the lessor (owner) before drilling could be commenced and an annual rental of $51,00. A premium of 5% of the sales price of every barrel of oil removed is to be paid annually to the lessor. In addition, Hometown Oil (lessee) is to clean up all the waste and debris from drilling and to bear the costs of reconditioning the land for farming when the wells are abandoned. The estimated fair value, at the time of the lease, of this clean-up and reconditioning is $5,000. From the provisions of the lease agreement, compute the cost per barrel for the past year, exclusive of operating costs, to Hometown Oil Company. E11-1B (Depletion Computations Timber) Fisk Company owns a 8,000-acre tract of timber purchased in 007 at a cost of $1,500 per acre. At the time of purchase the land was estimated to have a value of $500 per acre without the timber. Fisk Company has not logged this tract since it was purchased. In 014, Fisk had the timber cruised. The cruise (appraiser) estimated that each acre contained 5,000 board feet of timber. In 014, Fisk built 10 miles of roads at a cost of $8,000 per mile. After the roads were completed, Fisk logged and sold,500 trees containing 1,000,000 board feet. (a) Determine the cost of timber sold related to depletion for 014. (b) If Fisk depreciates the logging roads on the basis of timber cut, determine the depreciation expense for 014. (c) If Fisk plants five seedlings at a cost of $ per seedling for each tree cut, how should Fisk treat the reforestation? E11-B (Depletion Computations Mining) Aaron Company purchased land on February 1, 014, at a cost of $,000,000. It estimated that a total of 50,000 tons of mineral was available for mining. After it has removed all the natural resources, the company will be required to restore the property to its previous state because of strict environmental protection laws. It estimates the fair value of this restoration obligation at $00,000. It believes it will be able to sell the property afterwards for $00,000. It incurred developmental costs of $500,000 before it was able to do any mining. In 014 resources removed totaled 10,000 tons. The company sold 5,000 tons. Compute the following information for 014. (Round to two decimals.) (a) Per unit mineral cost. (b) Total material cost of December 1, 014, inventory. (c) Total materials cost in cost of goods sold at December 1, 014. E11-B (Depletion Computations Mining) Levi Company purchased land on February 1, 014, at a cost of $5,000,000. It estimated that a total of 50,000 tons of ore is available for mining. After it has removed the ore, the company will be required by law to restore the property to its previous state. It estimates the fair value of this restoration obligation at $400,000. It believes it will be able to sell the property afterwards for $800,000. It incurred developmental costs of $1,000,000 before it was able to do any mining. In 014 resources removed totaled 0,000 tons. The company sold,000 tons.
6 Chapter 11 Depreciation, Impairments, and Depletion Compute the following information for 014. (Round to two decimals.) (a) The total amount of depletion for 014. (b) The amount that is changed as an expense for 014 for the cost of the minerals sold during E11-4B (Ratio Analysis) The 01 Annual Report of Brinker International contains the following information. (in millions) June 9, 011 June 7, 01 Total assets $1,484 $1,4 Total liabilities 1,045 1,1 Net sales,71,80 Net income Compute the following ratios for Brinker International for 01. (a) Asset turnover ratio. (b) Rate of return on assets. (c) Profit margin on sales. (d) How can the asset turnover ratio be used to compute the rate of return on assets? 8 *E11-5B (Book vs. Tax (MACRS) Depreciation) Package Corp. purchased a delivery truck on January 1, 014, at a cost of $54,000. The truck has a useful life of years with an estimated salvage value of $,000. The straight-line method is used for book purposes. For tax purposes the truck, having an MACRS class life of years, is classified as 5-year property; the MACRS tax rate tables are used to compute depreciation. In addition, assume that for 014 and 015 the company has revenues of $00,000 and operating expenses (excluding depreciation) of $440,000. (a) Prepare income statements for 014 and 015. (The final amount reported on the income statement should be income before income taxes.) (b) Compute taxable income for 014 and 015. (c) Determine the total depreciation to be taken over the useful life of the delivery truck for both book and tax purposes. (d) Explain why depreciation for book and tax purposes will generally be different over the useful life of a depreciable asset. 8 *E11-B (Book vs. Tax (MACRS) Depreciation) Blue Corp. purchased computer equipment on July 1, 014, for $1,000. The computer equipment has a useful life of 8 years and a salvage value of $1,000. For tax purposes, the MACRS class life is 5 years. (a) Assuming that the company uses the straight-line method for book and tax purposes, what is the depreciation expense reported in (1) the financial statements for 014 and () the tax return for 014? (b) Assuming that the company uses the double-declining-balance method for both book and tax purposes, what is the depreciation expense reported in (1) the financial statements for 014 and () the tax return for 014? (c) Why is depreciation for tax purposes different from depreciation for book purposes even if the company uses the same depreciation method to compute them both?