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Cornerstones of Financial Accounti...

4th Edition
Jay Rich + 1 other
ISBN: 9781337690881

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Cornerstones of Financial Accounti...

4th Edition
Jay Rich + 1 other
ISBN: 9781337690881
Textbook Problem
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Depreciation Methods

Hansen Supermarkets purchased a radio frequency identification (RFID) system for one of its stores at a cost of $190,000. Hansen determined that the system had an expected life of 8 years (or 50,000,000 items scanned) and an expected residual value of $12,000.

Required:

1. Determine the amount of depreciation expense for the first and second years of the system’s life using the (a) straight-line and (b) double-declining-balance depreciation methods.

2. If the number of items scanned the first and second years were 6,100,000 and 5,600,000, respectively, compute the amount of depreciation expense for the first and second years of the system’s life using the units-of-production depreciation method.

3. Compute the book values for all three depreciation methods as of the end of the first and second years of the system’s life.

4. CONCEPTUAL CONNECTION What factors might management consider when selecting among depreciation methods?

1.

To determine

Introduction: Depreciation means a decrease in the value of the asset within its useful life due to wear and tear of the asset or the asset becomes obsolete. Long-term assets are depreciated by the business. Depreciation does not involve cash transaction rather it shows how much the asset value has been used over a period.

To find: The amount of depreciation of radio frequency identification system for the first and second year using the straight-line method and double-declining balance method.

Explanation

Depreciation schedule using straight-line method

  Amount of depreciation= Costresidual valueNo. of years

  = 190,000

2.

To determine

Introduction: The unit-production method is a method to depreciate the value of an asset. This method is more useful in case of assets that have their value more closely related to the number of units produced by them. To Find: The depreciation of the numbers of item scanned during first and second year by units of production depreciation method.

3.

To determine

Introduction: The book value of asset means deducting depreciation from the original cost of the asset.

To Find: The book value of the asset as of the end of the first and second year of the system life by all three methods.

4.

To determine

To Find: The factors that management must consider choosing the appropriate method of depreciation.

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