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Intermediate Accounting: Reporting...

3rd Edition
James M. Wahlen + 2 others
ISBN: 9781337788281

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Intermediate Accounting: Reporting...

3rd Edition
James M. Wahlen + 2 others
ISBN: 9781337788281
Textbook Problem
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Depreciation Methods Sayers Company purchased a building for $250,000 on January 2, 2019. The building has an expected residual value of $20,000 at the end of its expected life of 20 years.

Required:

  1. 1. Prepare a schedule showing depreciation expense for 2019 and 2020 and the book value on December 31, 2019, and December 31, 2020, for each of the following methods:
  2. a. straight-line
  3. b. sum-of-the-years’-digits
  4. c. double-declining-balance
  5. d. 150%-declining-balance
  6. 2. Next Level Holding all other things equal, what is the effect of depreciation on the rate of return?

1.

To determine

Prepare a schedule that screens the depreciation expense for 2019 and 2020, and the book value on December 31, 2019 and 2020 for each of the given depreciation method.

Explanation

Depreciation expense: Depreciation expense is a non-cash expense, which is recorded on the income statement reflecting the consumption of economic benefits of long-term asset on account of its wear and tear or obsolesces.

Straight-line depreciation method: The depreciation method which assumes that the consumption of economic benefits of long-term asset could be distributed equally throughout the useful life of the asset is referred to as straight-line method.

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: The depreciation method which assumes that the consumption of economic benefits of long-term asset is high in the early years but gradually declines towards the end of its useful life is referred to as double-declining-balance method

Prepare a schedule that screens the depreciation expense for 2019 and 2020, and the book value on December 31, 2019 and 2020 for each of the given depreciation method as follows:

Year

Book Value

(A)

Depreciation

(B)

Ending Book Value

(AB)

a. Straight-line Method:
2019$250,000 $11,500 (1)$238,500
2020$238,500 $11,500 (1) $227,000
b. Sum-of-the-years’-digits:
2019$250,000 $21,905 (4)$228,095
2020$228,095 $20,810 (4)$207,285
c. Double-declining-balance:
2019$250,000 $25,000 (6) $225,000
2020$225,000 $22,500 (6) $202,500
d. 150%-declining balance method:
2019$250,000 $18,750 (8) $231,250
2020$231,250$17,344 (8) $213,906

Table (1)

Working note (1):

Calculate the depreciation expense under straight line method:

2019:

Depreciation expenses=Acquisition cost – Residual valueUseful life =$250,000$20,00020 years=$11,500 

2020:

Depreciation expenses=Acquisition cost – Residual valueUseful life =$250,000$20,00020 years=$11,500 

Working note (2):

Calculate the denominator of the fraction for sum-of-the-year’s digit.

Sum-of-the-digits = n×(n+1)2=20×(20+1)2=20×212=210

Working note (3):

Calculate the depreciable base of asset

2.

To determine

State the effect of the depreciation expense on the rate of return.

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