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Intermediate Accounting: Reporting...

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

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BuyFindarrow_forward

Intermediate Accounting: Reporting...

3rd Edition
James M. Wahlen + 2 others
ISBN: 9781337788281
Textbook Problem
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Lightning Delivery Company purchased a new delivery truck for $45,000 on April 1, 2019. The truck is expected to have a service life of 10 years or 120,000 miles and a residual value of $3,000. The truck was driven 10,000 miles in 2019 and 13,000 miles in 2020. Lightning computes depreciation expense to the nearest whole month.

Required:

  1. 1. Compute depreciation expense for 2019 and 2020 (round answers to the nearest dollar) using the:
    1. a. straight-line method
    2. b. sum-of-the-years’-digits method
    3. c. double-declining-balance method
    4. d. activity method
  2. 2. For each method, what is the book value of the machine at the end of 2019? At the end of 2020?
  3. 3. Next Level Describe the pattern of depreciation expense and book value observed in the above calculations. Under what situations would each method be appropriate?

1.

To determine

Compute the depreciation expense of Company G for 2019 and 2020 under the following depreciation method:

  1. a. Straight line method.
  2. b. Sum-of the year’s digits method.
  3. c. Double declining balance method.
  4. d. Activity-method.
Explanation

Depreciation: Depreciation is a method of reducing the capitalized cost of long-lived operating assets or plant assets for the period the asset is used.

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.

Activity method:  In this method of depreciation, the amount of depreciation is charged based on the units of production or hours worked each year. When the usefulness of an asset is related to the production cost of a unit, this method is more appropriate to use.

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.

a. Straight line method:

2019:

Depreciation expenses=[Acquisition cost – Residual valueUseful life×Depreciation expense incurredMonths in a year ]=$45,000$3,00010 years×9 (April to December)12=$3,150

2020:

Depreciation expenses=Acquisition cost – Residual valueUseful life =$45,000$3,0005 years=$4,200

b. Sum-of- the-years’ digits method:

Year

Depreciable

Base

 ($) (1)

 

Depreciation

rate per year

 

Period of depreciation incurred

Depreciation expense incurredMonths in a year

 

Depreciation expense

($)

201942,000×1055×912=5,727
202042,000×955×1212=7,064

Table (1)

Working note (1):

Calculate the depreciable base of asset.

Depreciable base = Purchase price –Residual value = $45,000–$3,000=$42,000

Working note (2):

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

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

c

2.

To determine

Calculate the book value of the machine at the end of 2019 and 2020 under each depreciation method.

3.

To determine

Explain the situation under which each depreciation method is more appropriate.

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