Windsor Company is in the process of preparing its financial statements for 2020. Assume that no entries for depreciation have been recorded in 2020. The following information related to depreciation of fixed assets is provided to you. 1. Windsor purchased equipment on January 2, 2017, for $86,600. At that time, the equipment had an estimated useful life of 10 years with a $4,600 salvage value. The equipment is depreciated on a straight-line basis. On January 2, 2020, as a result of additional information, the company determined that the equipment has a remaining useful life of 4 years with a $3,200 salvage value. 2. During 2020, Windsor changed from the double-declining-balance method for its building to the straight-line method. The building originally cost $280,000. It had a useful life of 10 years and a salvage value of $28,000. The following computations present depreciation on both bases for 2018 and 2019. 2019 2018 Straight-line $25,200 $25,200 Declining-balance 44,800 56,000 3. Windsor purchased a machine on July 1, 2018, at a cost of $130,000. The machine has a salvage value of $18,000 and a useful life of 8 years. Windsor’s bookkeeper recorded straight-line depreciation in 2018 and 2019 but failed to consider the salvage value. Show comparative net income for 2019 and 2020. Income before depreciation expense was $280,000 in 2020, and was $290,000 in 2019. (Ignore taxes.)
Depreciation Methods
The word "depreciation" is defined as an accounting method wherein the cost of tangible assets is spread over its useful life and it usually denotes how much of the assets value has been used up. The depreciation is usually considered as an operating expense. The main reason behind depreciation includes wear and tear of the assets, obsolescence etc.
Depreciation Accounting
In terms of accounting, with the passage of time the value of a fixed asset (like machinery, plants, furniture etc.) goes down over a specific period of time is known as depreciation. Now, the question comes in your mind, why the value of the fixed asset reduces over time.
Windsor Company is in the process of preparing its financial statements for 2020. Assume that no entries for depreciation have been recorded in 2020. The following information related to depreciation of fixed assets is provided to you.
1. | Windsor purchased equipment on January 2, 2017, for $86,600. At that time, the equipment had an estimated useful life of 10 years with a $4,600 salvage value. The equipment is |
|
2. | During 2020, Windsor changed from the double-declining-balance method for its building to the straight-line method. The building originally cost $280,000. It had a useful life of 10 years and a salvage value of $28,000. The following computations present depreciation on both bases for 2018 and 2019. |
2019
|
2018
|
|||
Straight-line | $25,200 | $25,200 | ||
Declining-balance | 44,800 | 56,000 |
3. | Windsor purchased a machine on July 1, 2018, at a cost of $130,000. The machine has a salvage value of $18,000 and a useful life of 8 years. Windsor’s bookkeeper recorded straight-line depreciation in 2018 and 2019 but failed to consider the salvage value. |
Show comparative net income for 2019 and 2020. Income before depreciation expense was $280,000 in 2020, and was $290,000 in 2019. (Ignore taxes.)
Trending now
This is a popular solution!
Step by step
Solved in 3 steps with 6 images