(1)
Depreciation refers to the reduction in the monetary value of a fixed asset due to its wear and tear or obsolescence. It is a method of distributing the cost of the fixed assets over its estimated useful life. The following is the formula to calculate the depreciation.
To calculate: The depreciation for 2018 and 2019 using
(1)
Explanation of Solution
Corporation A purchased machinery for $115,000. The estimated service life of the machinery is 10 years and the estimated residual value is $5,000.
Calculate depreciation using straight line method
Straight line method:
Under the straight-line method of depreciation, the same amount of depreciation is allocated every year over the estimated useful life of an asset.
Hence, depreciation for 2018 and 2019 is $11,000.
(2)
To calculate: The depreciation for 2018 and 2019 using Sum-of-the-years’-digits method.
(2)
Explanation of Solution
Corporation A purchased machinery for $115,000. The estimated service life of the machinery is 10 years and the estimated residual value is $5,000.
Sum-of- the-years’ digits (SYD) method:
Sum-of-the years’ digits method determines the depreciation expense by multiplying the depreciable base and declining fraction.
Where n is estimated life time of the asset.
Calculate depreciation for 2018 and 2019 using Sum-of-the-years’-digits method.
For 2018:
For 2019:
Hence, a depreciation expense for 2018 is $20,000 and for 2019 is $18,000.
(3)
To calculate: The depreciation expenses for 2018 and 2019 using double declining balance method.
(3)
Explanation of Solution
Corporation A purchased machinery for $115,000. The estimated service life of the machinery is 10 years and the estimated residual value is $5,000.
Double declining balance (DDB) method:
In this method of depreciation, the depreciation is calculated by multiply beginning of year book value, not depreciable base, by an annual rate that is a multiple of the straight line rate.
Calculate depreciation expense for 2018 and 2019
For 2018:
For 2019:
Hence, a depreciation expense for 2018 is $23,000 and for 2019 is $18,400.
(4)
To calculate: The depreciation expense for 2018 and 2019 using One hundred fifty percent declining balance.
(4)
Explanation of Solution
Corporation A purchased machinery for $115,000. The estimated service life of the machinery is 10 years and the estimated residual value is $5,000.
One hundred fifty percent declining balance:
In this method of depreciation, the depreciation is calculated by multiply beginning of year book value, not depreciable base, by an annual rate that is a 150% or 1.5 of the straight line rate.
Calculate depreciation for 2018 and 2019.
For 2018:
For 2019:
Hence, a depreciation expense for 2018 is $17,250 and for 2019 is $14,663.
(5)
To calculate: The depreciation expense for 2018 and 2019 using
(5)
Explanation of Solution
Corporation A purchased machinery for $115,000. The estimated service life of the machinery is 10 years and the estimated residual value is $5,000. The machine is expected to produce 220,000 units during its life. During 2018, units produced were 10,000 and during 2019, units produced were 25,000.
Units of production method:
The units’ of-production method is an activity-based method that calculates a depletion or depreciation or amortization rate per measure of activity and then multiplies this rate by actual activity to determine periodic cost allocation.
Calculate depreciation expense for 2018 and 2019:
For 2018:
For 2019:
Hence, a depreciation expense for 2018 is $5,000 and for 2019 is $12,500.
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Chapter 11 Solutions
INTERMEDIATE ACCOUNTING LL+CONNECT >BI<
- Effect of depreciation on net income Tuttle Construction Co. specializes in building replicas of historic houses. Tim Newman, president of Tuttle Construction, is considering the purchase of various items of equipment on July 1, 2014, for 400,000. The equipment would have a useful life of five years and no residual value. In the past, all equipment has been leased. For tax purposes, Tim is considering depreciating the equipment, by the straight-line method. He discussed the matter with his CPA and learned that, although the straight-line method could be elected, it was to his advantage to use the Modified Accelerated Cost Recovery System (MACKS) for tax purposes, lie asked for your advice as to which method to use for tax purposes. 1. Compute depreciation for each of the years (2014, 2015, 2016, 2017, 2018, and 2019) of useful life by (a) the straight-line method and (b) MACRS. In using the straight-line method, one-half year's depreciation should be computed for 2014 and 2019.Use the MACRS rates presented in Exhibit 9. 2. Assuming that income before depreciation and income tax is estimated to be 750,000 uniformly per year and that the income tax rate is 40%, compute the net income for each of the years 2014, 2015, 2016, 2017, 2018, and 2019 if (a) the straight-line method is used and (b) MACRS is used. 3. What factors would you present for Tim's consideration in the selection of a depreciation method?arrow_forward(Appendix 11.1) Auburn Company purchased an asset on January 1, Year 1, for 150,000. The asset has a MACRS life of 7 years. The residual value of the asset is 35,000. Calculate the depreciation expense for Year 1 and Year 2 using MACRS.arrow_forwardRevision of depreciation Equipment with a cost of 180,000 has an estimated residual value of 14,400, has an estimated useful life of 16 years, and is depreciated by the straight-line method. (A) Determine the amount of the annual depreciation. (B) Determine the book value at the end of the tenth year of use. (C) Assuming that at the start of the eleventh year the remaining life is estimated to be eight years and the residual value is estimated to be 10,500, determine the depreciation expense for each of the remaining eight years.arrow_forward
- P11.2 (LO 1, 2) (Deprec. for partial periods - SL, Act., SYD, and Declining - Balance) The cost of equip. purchased by Charleston, Inc. on June 1, 2020, is $89,000. It is estimated that the machine will have a $5,000 salvage value at the end of it's service life. It's service life is estimated at 7 years, it's total working hours are estimated at 42,000, and it's total production is estimated at 525,000 units. During 2020, the machine was operated 6,000 hours and produced 55,000 units. During 2021, the machine was operated 5,500 hours and produced 48,000 units. Instructions: Compute deprec. expense on the machine for the year ending Dec. 31, 2020, and the year ending Dec. 31, 2021, using the following methods. a. Straight-line. b. Units-of-output. c. Working hours. d. Sum-of-the-years'-digits. e. Declining-balance (twice the straight-line rate).arrow_forwardQ.5 R&R, Inc., purchased a new machine on September 1, 2009, at a cost of $180,000. The machine’s estimated useful life at the time of the purchase was five years, and its residual value was $10,000. Instructions Prepare a complete depreciation schedule, beginning with calendar year 2009, under each of the methods listed below (assume that the half-year convention is used): Straight-line. 200 percent declining-balance. 150 percent declining-balance (not switching to straight-line).arrow_forwardExercise 9.3 (Algo) Depreciation for Partial Years (LO9-3) On August 3, Cinco Construction purchased special-purpose equipment at a cost of $7,600,000. The useful life of the equipment was estimated to be eight years, with an estimated residual value of $20,000. a. Compute the depreciation expense to be recognized each calendar year for financial reporting purposes under the straight-line depreciation method (half-year convention). b. Compute the depreciation expense to be recognized each calendar year for financial reporting purposes under the 200 percent declining-balance method (half-year convention) with a switch to straight-line when it will maximize depreciation expense. c. Which of these two depreciation methods (straight-line or double-declinin.arrow_forward
- 21. Revision of Depreciation On January 1, 2020, Shapiro Inc. purchased a machine for $115,000. Shapiro depreciated the machine with the straight-line depreciation method over a useful life of 10 years, using a residual value of $5,000. At the beginning of 2022, a major overhaul costing $30,000 was made. After the overhaul, the machine's residual value is estimated to be $7,500, and the machine is expected to have a remaining useful life of 11 years. Required: Determine the depreciation expense for 2022.arrow_forwardCHPT#9_5 Depreciation Methods On January 2, 2018, Skyler, Inc. purchased a laser cutting machine to be used in the fabrication of a part for one of its key products. The machine cost $120,000, and its estimated useful life was four years or 920,000 cuttings, after which it could be sold for $5,000. Required a. Calculate each year’s depreciation expense for the machine's useful life under each of the following depreciation methods (round all answers to the nearest dollar):1. Straight-line.2. Double-declining balance.3. Units-of-production. (Assume annual production in cuttings of 200,000; 350,000; 260,000; and 110,000.)arrow_forwardProblem # 1 (30): Given: On Sep 1, 2017 General Assembly (GA) purchased for $980,000 an ANSONIA 7300 wide-corridor stacking modulator with the expectation that its economic life would be exhausted at 2024 12 31 and that the unit’s salvage value would be $320,000. On 2020 11 01 GA exchanged the equipment for a 4-year, zero-coupon note with a face value of $900,000. GA recognized a loss of $16,100 on the transaction. GA uses SLN for depreciation and prorating for partial periods. Required: Book the 12/31/2020 interest accrual for the note.arrow_forward
- Exercise 11-4 (Algo) Other depreciation methods LO11-21 [The following information applies to the questions displaved below.) On January 1, 2021, the Allegheny Corporation purchased equipment for $343,000. The estimated service life of the equipment is 10 years and the estimated residual value is $24,000. The equipment is expected to produce 296.000 units during its life. Required: Calculate depreciation for 2021 and 2022 using each of the following methods. Print Exercise 11-4 (Algo) Part 1 References 1. Sum-of-the-years'-digits (Do not round intermediate calculations. Round final answers to the nearest whole dollar amount.)arrow_forwardQ.4 Swanson & Hiller, Inc., purchased a new machine on September 1, 2008 at a cost of $108,000. The machine’s estimated useful life at the time of the purchase was five years, and its residual value was $8,000. Instructions a. Prepare a complete depreciation schedule, beginning with calendar year 2008, under each of the methods listed below (assume that the half-year convention is used): 1. Straight-line. 2. 200 percent declining-balance. 3. 150 percent declining-balance, switching to straight-line when that maximizes the expense.arrow_forwardQ#04: A company XYZ has purchased a new CNC Machine which has a cost basis of $5,000 and 8-year depreciable life. The estimated salvage value of the machine is zero at the end of 8 years. Use the Declining Balance method to calculate the annual depreciation amounts when R = 1.5/N (150% DB method). Tabulate the annual depreciation amount and Book Value for each year.arrow_forward
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