INTERMEDIATE ACCOUNTING
INTERMEDIATE ACCOUNTING
8th Edition
ISBN: 9780078025839
Author: J. David Spiceland
Publisher: McGraw-Hill Education
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Chapter 11, Problem 11.5P
To determine

Depreciation:

It refers to the reduction in the monetary value of fixed tangible assets over its useful life due to its wear and tear or, obsolescence. In other words, it is the method of distributing the cost of tangible fixed assets over its estimated useful life.

Straight-line Depreciation:

Under the straight-line method of depreciation, the same amount of depreciation is allocated every year over the estimated useful life of an asset. The formula to calculate the depreciation cost of the asset using the residual value is shown as below:

Depreciation = (Cost of the assetResidual value)Estimated useful life of the asset

Sum-of- the-years’ digits method:

Sum-of-the years’ digits method determines the depreciation by multiplying the depreciable base and declining fraction.

Double-declining-balance method:

It is an accelerated method of depreciation under which the depreciation declines in each successive year until the value of asset becomes zero. Under this method, the book value (original cost less accumulated depreciation) of the long-term asset is decreased by a fixed rate. It is double the rate of the straight-line depreciation. Use the following formula to determine the annual depreciation:

Depreciation = Purchase price × 2Usefullife

Amortization:

It is the process of allocating the value of an intangible asset over its definite useful life.

To determine: The missing amounts in fixed assets and depreciation schedule of Corporation T.

Expert Solution & Answer
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Explanation of Solution

1. Cost of Land A:

Asset Fair value ($)

Percent of

 total fair value (%)

Initial valuation ($)
Land A 72,000 8% 65,000
Building  A 828,000 92% 747,500
Total 900,000 100.0% 812,500

Table (1)

Thus, the cost of land A is $65,000.

Note:

Percent of total fair value = Fair value of land / buildingTotalfairvalue

Initital valuation = Percent of total fair value × Cash paid for the property

2. Cost of Building A:

Refer 1 for calculation of cost of building. Hence, the cost of land is $747,500.

3. Estimated useful life of Building:

Depreciation = Cost of the Asset  Residual valueEstimated Useful Life of the Asset$14,000=$747,500 – $47,500Estimated Useful Life of the AssetEstimated Useful Life of the Asset}=$747,500 – $47,500$14,000=50years

Thus, the estimated useful life is 50 years.

4. The amount of depreciation (Building A) for the year 2016:

Corporation T used the straight line method for cost allocation. So, depreciation is same as prior year. Thus, the depreciation on building is $14,000.

5. Cost of land B:

Cost of land B =((Number of shares × Price per share)+Demolition of old building)=(3,000shares×$25pershare)+$10,400=$85,400

Thus, the cost of land B is $85,400.

6. The amount of depreciation (Building B) for the year 2016:

Building B is under construction, hence there is no depreciation value before the use of building.

7. Cost of donated equipment:

The fair value of donated equipment is equal to the cost of donated equipment. Therefore, the cost of donated equipment is $16,000.

8. The amount of depreciation (Equipment) for the year 2015:

The company uses 150% declining balance method. Therefore, depreciation is determined as follows:

Depreciation = Cost of equipment × Depreciation rate (1)=  $16,000×15%=$2,400

Thus, the depreciation is $2,400.

Working note:

Calculate the depreciation rate

150%declining balance method = 1.5 × Straight-line rate (10%)=1.5×10%=15% (1)

9. The amount of depreciation (Equipment) for the year 2016:

The company uses 150% declining balance method. Therefore, depreciation is determined as follows:

Depreciation = (Cost of equipment–Depreciation for 2017) × Depreciation rate (1)= ($16,000$2,400)×15%=$2,040

Thus, the depreciation is $2,040.

10. Cost of Machine A:

Cost of Mahcine A = Total cost – Normal repairs = $110,000 – $11,000=$99,000

Thus, the cost of Machine A is $99,000.

11. The amount of depreciation (Machine A) for the year 2015:

The company uses declining balance method. Therefore, depreciation is determined as follows:

Depreciation = Depreciable base (3) × Estimated useful life Sum-of-years'digits (2)=$94,000×1055=$17,000

Thus, the depreciation is $17,000.

Working note:

1. Calculate the sum-of-the-digits

Sum-of-the-digits = n×(n+1)2=10×(10+1)2=10×112=55 (2)

2. Calculate the amount of depreciation base

Depreciable base = Purchase price –Residual value = $99,000$5,500=$94,000 (3)

12. The amount of depreciation (Machine B) for the year ended 2016:

The company uses declining balance method. Therefore, depreciation is determined as follows:

Depreciation = [(Depreciable base (4) –Depreciation for 2017) × Estimated remaining life Sum-of-years'digits (5) ×412]=$94,000×955×412=$5,100

Hence, the amount of depreciation (Machine B) for the year ended 2016 is $5,100.

Working note:

1. Calculate the sum-of-the-digits

Sum-of-the-digits = n×(n+1)2=10×(10+1)2=10×112=55 (4)

2. Calculate the amount of depreciation base

Depreciable base = Purchase price –Residual value = $99,000–$5,500=$94,000 (5)

13. Cost of Machine B:

Present value annuity due = Annuity amount ×Present value of  an annuity due of $1 =$4,000 × 7.71008=$30,840

Note: PV factor (Present value of an annuity due of $1: n = 11, i =8%) is taken from the table value (Table 6 in Appendix from textbook).

Hence, the cost of Machine B is $30,840.

14. The amount of depreciation for Machine B –Straight line method:

Depreciation = Cost of the Asset  Residual valueEstimated Useful Life of the Asset=$30,840 – $015 years=$2,056

Thus, the depreciation is $2,056.

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Chapter 11 Solutions

INTERMEDIATE ACCOUNTING

Ch. 11 - Prob. 11.11QCh. 11 - Prob. 11.12QCh. 11 - What are some of the simplifying conventions a...Ch. 11 - Explain the accounting treatment required when a...Ch. 11 - Explain the accounting treatment and disclosures...Ch. 11 - Explain the steps required to correct an error in...Ch. 11 - Prob. 11.17QCh. 11 - Prob. 11.18QCh. 11 - Prob. 11.19QCh. 11 - Prob. 11.20QCh. 11 - Briefly explain the differences between U.S. GAAP...Ch. 11 - Under U.S. GAAP, litigation costs to successfully...Ch. 11 - Cost allocation At the beginning of its fiscal...Ch. 11 - Prob. 11.2BECh. 11 - Prob. 11.3BECh. 11 - Prob. 11.4BECh. 11 - Prob. 11.5BECh. 11 - Prob. 11.6BECh. 11 - Prob. 11.7BECh. 11 - Prob. 11.8BECh. 11 - Prob. 11.9BECh. 11 - Impairment; property, plant, and equipment LO118...Ch. 11 - Prob. 11.11BECh. 11 - IFRS; impairment; property, plant, and equipment ...Ch. 11 - Prob. 11.13BECh. 11 - Prob. 11.14BECh. 11 - IFRS; impairment; goodwill LO1110 IFRS Refer to...Ch. 11 - Subsequent expenditures LO119 Demmert...Ch. 11 - Prob. 11.1ECh. 11 - Prob. 11.2ECh. 11 - Prob. 11.3ECh. 11 - Prob. 11.4ECh. 11 - Depreciation methods; solving for unknowns LO112...Ch. 11 - Prob. 11.6ECh. 11 - Prob. 11.7ECh. 11 - Prob. 11.8ECh. 11 - Prob. 11.9ECh. 11 - Prob. 11.10ECh. 11 - Prob. 11.11ECh. 11 - Prob. 11.12ECh. 11 - Prob. 11.13ECh. 11 - E 11–14 Cost of a natural resource; depletion and...Ch. 11 - Prob. 11.15ECh. 11 - Prob. 11.16ECh. 11 - Prob. 11.17ECh. 11 - Prob. 11.18ECh. 11 - Prob. 11.19ECh. 11 - Prob. 11.20ECh. 11 - Prob. 11.21ECh. 11 - Prob. 11.22ECh. 11 - Impairment; property, plant, and equipment LO118...Ch. 11 - IFRS; impairment; property, plant, and equipment ...Ch. 11 - E 11–25 IFRS; Impairment; property, plant, and...Ch. 11 - Impairment; property, plant, and equipment LO118...Ch. 11 - Prob. 11.27ECh. 11 - Prob. 11.28ECh. 11 - Prob. 11.29ECh. 11 - FASB codification research LO118 The FASB...Ch. 11 - Prob. 11.31ECh. 11 - Subsequent expenditures LO119 Belltone Company...Ch. 11 - E11–33 IFRS; amortization; cost to defend a patent...Ch. 11 - Prob. 11.34ECh. 11 - Concept s; terminology LO111 through LO116, LO118...Ch. 11 - E11–36 Retirement and replacement...Ch. 11 - Prob. 1CPACh. 11 - LO11–2 2. Calculate depreciation for year 2 based...Ch. 11 - Prob. 3CPACh. 11 - Prob. 4CPACh. 11 - Prob. 5CPACh. 11 - Prob. 6CPACh. 11 - Prob. 7CPACh. 11 - Prob. 8CPACh. 11 - Prob. 9CPACh. 11 - Prob. 10CPACh. 11 - Prob. 11CPACh. 11 - Prob. 12CPACh. 11 - Prob. 13CPACh. 11 - Prob. 14CPACh. 11 - Prob. 1CMACh. 11 - Prob. 2CMACh. 11 - Prob. 3CMACh. 11 - P 11–1 Depreciation methods; change in...Ch. 11 - Prob. 11.2PCh. 11 - Prob. 11.3PCh. 11 - Prob. 11.4PCh. 11 - Prob. 11.5PCh. 11 - Prob. 11.6PCh. 11 - Prob. 11.7PCh. 11 - Prob. 11.8PCh. 11 - Prob. 11.9PCh. 11 - Prob. 11.10PCh. 11 - Prob. 11.11PCh. 11 - Prob. 11.12PCh. 11 - Prob. 11.13PCh. 11 - Analysis Case 111 Depreciation, depletion, and...Ch. 11 - Communication Case 112 Depreciation LO111 At a...Ch. 11 - Judgment Case 113 Straight-line method; composite...Ch. 11 - Prob. 11.4BYPCh. 11 - Prob. 11.5BYPCh. 11 - Prob. 11.7BYPCh. 11 - Prob. 11.8BYPCh. 11 - Research Case 119 FASB codification; locate and...Ch. 11 - Prob. 11.10BYPCh. 11 - Prob. 11.11BYPCh. 11 - Prob. 11.13BYPCh. 11 - Prob. 11.14BYPCh. 11 - Real World Case 1115 Depreciation and depletion...Ch. 11 - Prob. 11.16BYPCh. 11 - Prob. 11.17BYP
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