11 Depreciation, Impairments, and Depletion PROBLEMS 11
PROBLEMS
P11-1 (L02) EXCEL GROUPWORK (Depreciation for Partial Period—SL, SYD, and DDB) Alladin Company purchased
Machine #201 on May 1, 2017. The following information relating to Machine #201 was gathered at the end of May…
It is expected that the machine could be used for 10 years, after which the salvage value would be zero. Alladin intends to use the machine for only 8 years, however, after which it expects to be able to sell it for $1,500. The invoice for Machine #201 was paid May 5, 2017. Alladin uses the calendar year as the basis for the preparation of financial statements.
Instructions
(a) Compute the depreciation expense for the years indicated using the following methods. (Round to the nearest dollar.)
(1) Straight-line method for 2017.
(2) Sum-of-the-years’-digits method for 2018.
(3) Double-declining-balance method for 2017.
(b) Suppose Kate Crow, the president of Alladin, tells you that because the company is a new organization, she expects it will be several years before production and sales reach optimum levels. She asks you to recommend a depreciation method that will allocate less of the company’s depreciation expense to the early years and more to later years of the assets’ lives. What method would you recommend?
P11-2 (L01,2) (Depreciation for Partial Periods—SL, Act., SYD, and Declining-Balance) The cost of equipment purchased by Charleston, Inc., on June 1, 2017, is $89,000. It is estimated that the machine will have a $5,000 salvage value at the end of its service life. Its service life is estimated at 7 years, its total working hours are estimated at 42,000, and its total production is estimated at 525,000 units. During 2017, the machine was operated 6,000 hours and produced 55,000 units. During 2018, the machine was operated 5,500 hours and produced 48,000 units.
Instructions
Compute depreciation expense on the machine for the year ending December 31, 2017, and the year ending December 31, 2018, using the following methods.
(a) Straight-line. (d) Sum-of-the-years’-digits.
(b) Units-of-output. (e) Declining-balance (twice the straight-line rate).
(c) Working hours.
P11-3 (L01,2) (Depreciation—SYD, Act., SL, and DDB) The following data relate to the Machinery account of Eshkol, Inc. at December 31, 2017…
The following transactions occurred during 2018.
(a) On May 5, Machine A was sold for $13,000 cash. The company’s bookkeeper recorded this retirement in the following manner in the cash receipts journal.
Cash 13,000
Machinery (Machine A) 13,000
(b) On December 31, it was determined that Machine B had been used 2,100 hours during 2018.
(c) On December 31, before computing depreciation expense on Machine C, the management of Eshkol, Inc. decided the useful life remaining from January 1, 2018, was 10 years.
(d) On December 31, it was discovered that a machine purchased in 2017 had been expensed completely in that year. This machine cost $28,000 and has a useful life of 10 years and no salvage value. Management has decided to use the doubledeclining- balance method for this machine, which can be referred to as “Machine E.”
Instructions
Prepare the necessary correcting entries for the year 2018. Record the appropriate depreciation expense on the above-mentioned machines. No entry is necessary for Machine D.
P11-4 (L01,2) (Depreciation and Error Analysis) A depreciation schedule for semi-trucks of Ichiro Manufacturing Company was requested by your auditor soon after December 31, 2018, showing the additions, retirements, depreciation, and other data affecting the income of the company in the 4-year period 2015 to 2018, inclusive. The following data were ascertained…
The Accumulated Depreciation—Trucks account previously adjusted to January 1, 2015, and entered in the ledger, had a balance on that date of $30,200 (depreciation on the four trucks from the respective dates of purchase, based on a 5-year life, no salvage value). No charges had been made against the account before January 1, 2015.
Transactions between January 1, 2015, and December 31, 2018, which were recorded in the ledger, are as follows…
Instructions
(a) For each of the 4 years, compute separately the increase or decrease in net income arising from the company’s errors in determining or entering depreciation or in recording transactions affecting trucks, ignoring income tax considerations.
(b) Prepare one compound journal entry as of December 31, 2018, for adjustment of the Trucks account to reflect the correct balances as revealed by your schedule, assuming that the books have not been closed for 2018.
P11-5 (L01,4) (Depletion and Depreciation—Mining) Khamsah Mining Company has purchased a tract of mineral land for $900,000. It is estimated that this tract will yield 120,000 tons of ore with sufficient mineral content to make mining and processing profitable. It is further estimated that 6,000 tons of ore will be mined the first and last year and 12,000 tons every year in between. (Assume 11 years of mining operations.) The land will have a salvage value of $30,000…
.Instructions
(a) As chief accountant for the company, you are to prepare a schedule showing estimated depletion and depreciation costs for each year of the expected life of the mine.
(b) Also compute the depreciation and depletion for the first year assuming actual production of 5,000 tons. Nothing occurred during the year to cause the company engineers to change their estimates of either the mineral resources or the life of the structures and equipment.
P11-6 (L04) (Depletion, Timber, and Unusual Loss) Conan O’Brien Logging and Lumber Company owns 3,000 acres of timberland on the north side of Mount Leno, which was purchased in 2005 at a cost of $550 per acre. In 2017, O’Brien began selectively logging this timber tract. In May 2017, Mount Leno erupted, burying the timberland of O’Brien under a foot of ash. All of the timber on the O’Brien tract was downed. In addition, the logging roads, built at a cost of $150,000, were destroyed, as well as the logging equipment, with a net book value of $300,000…
Instructions
(a) Determine the depletion cost per board foot for the timber harvested prior to the eruption of Mount Leno.
(b) Prepare the journal entry to record the depletion prior to the eruption.
(c) If this tract represents approximately half of the timber holdings of O’Brien, determine the amount of the unusual loss due to the eruption of Mount Leno for the year ended December 31, 2017.
P11-7 (L01,4) (Natural Resources—Timber) Bronson Paper Products purchased 10,000 acres of forested timberland in March 2017. The company paid $1,700 per acre for this land, which was above the $800 per acre most farmers were paying for cleared land. During April, May, June, and July 2017, Bronson cut enough timber to build roads using moveable equipment purchased on April 1, 2017. The cost of the roads was $250,000, and the cost of the equipment was $225,000; this equipment was expected to have a $9,000 salvage value and would be used for the next 15 years. Bronson selected the straight-line method of depreciation for the moveable equipment. Bronson began actively harvesting timber in August and by December had harvested and sold 540,000 board feet of timber of the estimated 6,750,000 board feet available for cutting…
Instructions
Compute the amount of depreciation and depletion expense for each of the 3 years (2017, 2018, and 2019). Assume that the roads are usable only for logging and therefore are included in the depletion base.
P11-8 (L01) GROUPWORK (Comprehensive Fixed-Asset Problem) Darby Sporting Goods Inc. has been experiencing growth in the demand for its products over the last several years. The last two Olympic Games greatly increased the popularity of basketball around the world. As a result, a European sports retailing consortium entered into an agreement with Darby’s Roundball Division to purchase basketballs and other accessories on an increasing basis over the next 5 years…
Instructions
(a) Determine the amounts to be recorded on the books of Darby Sporting Goods Inc. as of December 31, 2017, for each of the following properties acquired from Encino Athletic Equipment Company.
(1) Land. (2) Buildings. (3) Machinery.
(b) Calculate Darby Sporting Goods Inc.’s 2018 depreciation expense, for book purposes, for each of the properties acquired from Encino Athletic Equipment Company.
(c) Discuss the arguments for and against the capitalization of interest costs.
(CMA adapted)
P11-9 (L03) (Impairment) Roland Company uses special strapping equipment in its packaging business. The equipment was purchased in January 2016 for $10,000,000 and had an estimated useful life of 8 years with no salvage value. At December 31, 2017, new technology was introduced that would accelerate the obsolescence of Roland’s equipment. Roland’s controller estimates that expected future net cash flows on the equipment will be $6,300,000 and that the fair value of the equipment is $5,600,000. Roland intends to continue using the equipment, but it is estimated that the remaining useful life is 4 years. Roland uses straight-line depreciation.
Instructions
(a) Prepare the journal entry (if any) to record the impairment at December 31, 2017.
(b) Prepare any journal entries for the equipment at December 31, 2018. The fair value of the equipment at December 31, 2018, is estimated to be $5,900,000.
(c) Repeat the requirements for (a) and (b), assuming that Roland intends to dispose of the equipment and that it has not been disposed of as of December 31, 2018.
P11-10 (L01) GROUPWORK (Comprehensive Depreciation Computations) Kohlbeck Corporation, a manufacturer of steel products, began operations on October 1, 2016. The accounting department of Kohlbeck has started the fixed-asset and depreciation schedule presented on page 595. You have been asked to assist in completing this schedule. In addition to ascertaining that the data already on the schedule are correct, you have obtained the following information from the company’s records and personnel.
1. Depreciation is computed from the first of the month of acquisition to the first of the month of disposition.
2. Land A and Building A were acquired from a predecessor corporation. Kohlbeck paid $800,000 for the land and building together. At the time of acquisition, the land had an appraised value of $90,000, and the building had an appraised value of $810,000.
3. Land B was acquired on October 2, 2016, in exchange for 2,500 newly issued shares of Kohlbeck’s common stock. At the date of acquisition, the stock had a par value of $5 per share and a fair value of $30 per share. During October 2016, Kohlbeck paid $16,000 to demolish an existing building on this land so it could construct a new building.
4. Construction of Building B on the newly acquired land began on October 1, 2017. By September 30, 2018, Kohlbeck had paid $320,000 of the estimated total construction costs of $450,000. It is estimated that the building will be completed and occupied by July 2019.
5. Certain equipment was donated to the corporation by a local university. An independent appraisal of the equipment when donated placed the fair value at $40,000 and the salvage value at $3,000.
6. Machinery A’s total cost of $182,900 includes installation expense of $600 and normal repairs and maintenance of $14,900.
Salvage value is estimated at $6,000. Machinery A was sold on February 1, 2018.
7. On October 1, 2017, Machinery B was acquired with a down payment of $5,740 and the remaining payments to be made in 11 annual installments of $6,000 each beginning October 1, 2017. The prevailing interest rate was 8%. The following data were abstracted from present value tables (rounded)…
Instructions
For each numbered item on the schedule above, supply the correct amount. (Round each answer to the nearest dollar.)
P11-11 (L01,2) (Depreciation for Partial Periods—SL, Act., SYD, and DDB) On January 1, 2015, a machine was purchased for $90,000. The machine has an estimated salvage value of $6,000 and an estimated useful life of 5 years. The machine can operate for 100,000 hours before it needs to be replaced. The company closed its books on December 31 and operates the machine as follows:
2015, 20,000 hours; 2016, 25,000 hours; 2017, 15,000 hours; 2018, 30,000 hours; and 2019, 10,000 hours.
Instructions
(a) Compute the annual depreciation charges over the machine’s life assuming a December 31 year-end for each of the following depreciation methods.
(1) Straight-line method. (3) Sum-of-the-years’-digits method.
(2) Activity method. (4) Double-declining-balance method.
(b) Assume a fiscal year-end of September 30. Compute the annual depreciation charges over the asset’s life applying each of the following methods.
(1) Straight-line method. (3) Double-declining-balance method.
(2) Sum-of-the-years’-digits method.
*P11-12 (L01,6) EXCEL (Depreciation—SL, DDB, SYD, Act., and MACRS) On January 1, 2016, Locke Company, a small machine-tool manufacturer, acquired for $1,260,000 a piece of new industrial equipment. The new equipment had a useful life of 5 years, and the salvage value was estimated to be $60,000. Locke estimates that the new equipment can produce 12,000 machine tools in its first year. It estimates that production will decline by 1,000 units per year over the remaining useful life of the equipment.
The following depreciation methods may be used: (1) straight-line, (2) double-declining-balance, (3) sum-of-the-years’-digits, and (4) units-of-output. For tax purposes, the class life is 7 years. Use the MACRS tables for computing depreciation.
Instructions
(a) Which depreciation method would maximize net income for financial statement reporting for the 3-year period ending December 31, 2018? Prepare a schedule showing the amount of accumulated depreciation at December 31, 2018, under the method selected. Ignore present value, income tax, and deferred income tax considerations.
(b) Which depreciation method (MACRS or optional straight-line) would minimize net income for income tax reporting for the 3-year period ending December 31, 2018? Determine the amount of accumulated depreciation at December 31, 2018. Ignore present value considerations. (AICPA adapted)
