11 Depreciation, Impairments, and Depletion EXERCISES 11.1
EXERCISES
E11-1 (L01) EXCEL (Depreciation Computations—SL, SYD, DDB) Deluxe Ezra Company purchases equipment on January 1, Year 1, at a cost of $469,000. The asset is expected to have a service life of 12 years and a salvage value of $40,000.
Instructions
(a) Compute the amount of depreciation for each of Years 1 through 3 using the straight-line depreciation method.
(b) Compute the amount of depreciation for each of Years 1 through 3 using the sum-of-the-years’-digits method.
(c) Compute the amount of depreciation for each of Years 1 through 3 using the double-declining-balance method. (In performing your calculations, round constant percentage to the nearest one-hundredth of a point and round answers to the nearest dollar.)
E11-2 (L01) (Depreciation—Conceptual Understanding) Rembrandt 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, (2) the sum-of-theyears’- digits method, and (3) the double-declining-balance method…
Instructions
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 1?
(d) Which method will produce the highest charge to income in Year 4?
(e) Which method will produce the highest book value for the asset at the end of Year 3?
(f) If the asset is sold at the end of Year 3, which method would yield the highest gain (or lowest loss) on disposal of the asset?
E11-3 (L01,2) (Depreciation Computations—SYD, DDB—Partial Periods) Judds Company purchased a new plant asset on April 1, 2017, at a cost of $711,000. It was estimated to have a service life of 20 years and a salvage value of $60,000. Judds’ accounting period is the calendar year.
Instructions
(a) Compute the depreciation for this asset for 2017 and 2018 using the sum-of-the-years’-digits method.
(b) Compute the depreciation for this asset for 2017 and 2018 using the double-declining-balance method.
E11-4 (L01,2) EXCEL (Depreciation Computations—Five Methods) Jon Seceda Furnace Corp. purchased machinery for $315,000 on May 1, 2017. It is estimated that it will have a useful life of 10 years, salvage value of $15,000, production of 240,000 units, and working hours of 25,000. During 2018, Seceda Corp. uses the machinery for 2,650 hours, and the machinery produces 25,500 units.
Instructions
From the information given, compute the depreciation charge for 2018 under each of the following methods. (Round to the nearest dollar.)
(a) Straight-line. (d) Sum-of-the-years’-digits.
(b) Units-of-output. (e) Declining-balance (use 20% as the annual rate).
(c) Working hours.
E11-5 (L01,2) (Depreciation Computations—Four Methods) Robert Parish Corporation purchased a new machine for its assembly process on August 1, 2017. The cost of this machine was $117,900. The company estimated that the machine would have a salvage value of $12,900 at the end of its service life. Its life is estimated at 5 years, and its working hours are estimated at 21,000 hours. Year-end is December 31.
Instructions
Compute the depreciation expense under the following methods. Each of the following should be considered unrelated.
(a) Straight-line depreciation for 2017.
(b) Activity method for 2017, assuming that machine usage was 800 hours.
(c) Sum-of-the-years’-digits for 2018.
(d) Double-declining-balance for 2018.
E11-6 (L01,2) (Depreciation Computations—Five Methods, Partial Periods) Muggsy Bogues Company purchased equipment for $212,000 on October 1, 2017. It is estimated that the equipment will have a useful life of 8 years and a salvage value of $12,000. Estimated production is 40,000 units and estimated working hours are 20,000. During 2017, Bogues uses the equipment for 525 hours and the equipment produces 1,000 units.
Instructions
Compute depreciation expense under each of the following methods. Bogues is on a calendar-year basis ending December 31.
(a) Straight-line method for 2017.
(b) Activity method (units of output) for 2017. (c) Activity method (working hours) for 2017.
(d) Sum-of-the-years’-digits method for 2019.
(e) Double-declining-balance method for 2018.
E11-7 (L01,2) (Different Methods of Depreciation) Jackel Industries presents you with the following information.
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Instructions
Complete the table for the year ended December 31, 2019. The company depreciates all assets using the half-year convention.
E11-8 (L01,2) (Depreciation Computation—Replacement, Nonmonetary Exchange) George Zidek Corporation bought a machine on June 1, 2015, for $31,000, f.o.b. the place of manufacture. Freight to the point where it was set up was $200, and $500 was expended to install it. The machine’s useful life was estimated at 10 years, with a salvage value of $2,500. On June 1, 2016, an essential part of the machine is replaced, at a cost of $1,980, 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 June 1, 2019, the company buys a new machine of greater capacity for $35,000, delivered, trading in the old machine which has a fair value and trade-in allowance of $20,000. To prepare the old machine for removal from the plant cost $75, and expenditures to install the new one were $1,500. It is estimated that the new machine has a useful life of 10 years, with a salvage value of $4,000 at the end of that time. (The exchange has commercial substance.)
Instructions
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 June 1, 2019. (Round to the nearest dollar.)
E11-9 (L02) (Composite Depreciation) Presented below is information related to LeBron James Manufacturing Corporation.
Asset Cost Estimated Salvage Estimated Life (in years)
A $40,500 $5,500 10
B 33,600 4,800 9
C 36,000 3,600 9
D 19,000 1,500 7
E 23,500 2,500 6
Instructions
(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 $4,800. It was used for 6 years, and depreciation was entered under the composite method.
E11-10 (L01) (Depreciation Computations, SYD) Five Satins Company purchased a piece of equipment at the beginning of 2014. The equipment cost $430,000. It has an estimated service life of 8 years and an expected salvage value of $70,000. The sumof- the-years’-digits method of depreciation is being used. Someone has already correctly prepared a depreciation schedule for this asset. This schedule shows that $60,000 will be depreciated for a particular calendar year.
Instructions
Show calculations to determine for what particular year the depreciation amount for this asset will be $60,000.
E11-11 (L01,2) (Depreciation—Change in Estimate) Machinery purchased for $60,000 by Tom Brady Co. in 2013 was originally estimated to have a life of 8 years with a salvage value of $4,000 at the end of that time. Depreciation has been entered for 5 years on this basis. In 2018, it is determined that the total estimated life should be 10 years with a salvage value of $4,500 at the end of that time. Assume straight-line depreciation.
Instructions
(a) Prepare the entry to correct the prior years’ depreciation, if necessary.
(b) Prepare the entry to record depreciation for 2018.
E11-12 (L01,2) (Depreciation Computation—Addition, Change in Estimate) In 1990, Herman Moore Company completed the construction of a building at a cost of $2,000,000 and first occupied it in January 1991. It was estimated that the building will have a useful life of 40 years and a salvage value of $60,000 at the end of that time.
Early in 2001, an addition to the building was constructed at a cost of $500,000. At that time, it was estimated that the remaining life of the building would be, as originally estimated, an additional 30 years, and that the addition would have a life of 30 years and a salvage value of $20,000.
In 2019, it is determined that the probable life of the building and addition will extend to the end of 2050, or 20 years beyond the original estimate.
Instructions
(a) Using the straight-line method, compute the annual depreciation that would have been charged from 1991 through
2000.
(b) Compute the annual depreciation that would have been charged from 2001 through 2018.
(c) Prepare the entry, if necessary, to adjust the account balances because of the revision of the estimated life in 2019.
(d) Compute the annual depreciation to be charged, beginning with 2019.
E11-13 (L01,2) (Depreciation—Replacement, Change in Estimate) Greg Maddox Company constructed a building at a cost of $2,200,000 and occupied it beginning in January 1998. It was estimated at that time that its life would be 40 years, with no salvage value.
In January 2018, a new roof was installed at a cost of $300,000, and it was estimated then that the building would have a useful life of 25 years from that date. The cost of the old roof was $160,000.
Instructions
(a) What amount of depreciation should have been charged annually from the years 1998 to 2017? (Assume straight-line depreciation.)
(b) What entry should be made in 2018 to record the replacement of the roof?
(c) Prepare the entry in January 2018 to record the revision in the estimated life of the building, if necessary.
(d) What amount of depreciation should be charged for the year 2018?
E11-14 (L01) (Error Analysis and Depreciation, SL and SYD) Mike Devereaux Company shows the following entries in its Equipment account for 2018. All amounts are based on historical cost.
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Instructions
(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 2018 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, 2018, balance was purchased in 2016.
(1) Straight-line. (2) Sum-of-the-years’-digits.
E11-15 (L01,2) (Depreciation for Fractional Periods) On March 10, 2019, Lost World Company sells equipment that it purchased for $192,000 on August 20, 2012. It was originally estimated that the equipment would have a life of 12 years and a salvage value of $16,800 at the end of that time, and depreciation has been computed on that basis. The company uses the straightline method of depreciation.
Instructions
(a) Compute the depreciation charge on this equipment for 2012, for 2019, and the total charge for the period from 2013 to 2018, 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 365 days for base and record depreciation through March 9, 2019.)
(2) Depreciation is computed for the full year on the January 1 balance in the asset account.
(3) Depreciation is computed for the full year on the December 31 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.
(6) 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. (Use 365 days for base.)
(b) Briefly evaluate the methods above, considering them from the point of view of basic accounting theory as well as simplicity of application.
E11-16 (L03) (Impairment) Presented below is information related to equipment owned by Suarez Company at December 31, 2017.
Cost $9,000,000
Accumulated depreciation to date 1,000,000
Expected future net cash flows 7,000,000
Fair value 4,800,000
Assume that Suarez will continue to use this asset in the future. As of December 31, 2017, the equipment has a remaining useful life of 4 years.
Instructions
(a) Prepare the journal entry (if any) to record the impairment of the asset at December 31, 2017.
(b) Prepare the journal entry to record depreciation expense for 2018.
(c) The fair value of the equipment at December 31, 2018, is $5,100,000. Prepare the journal entry (if any) necessary to record this increase in fair value.
