MASTERING DEPRECIATION
HOMEWORK EXERCISES
Unless otherwise indicated in the problem, all companies use a calendar year.
Section 1−DEPRECIATION ON THE FINANCIAL STATEMENTS V. TAX RETURN
Section 2−DEPRECIATION UNDER GAAP (FOR BOOK PURPOSES)
1. A company that prepares financial statements under GAAP for a third party,
such as a bank, normally engages a CPA unrelated to the company to go over
them in one of three different ways. Name each way and briefly describe it.
2. What is the purpose of depreciation?
3. What is the adjusting entry to record $10,000 of depreciation expense?
4. If a company used tax depreciation for its books and were audited, what factor
would require the company to recalculate depreciation under one of the GAAP
methods?
5. What four factors are required to calculate an asset’s depreciation expense?
6. APEX Incorporated purchases a machine with a note payable. Expenditures
include the machine ($100,000), freight ($2,500), sales tax ($4,500) and
installation ($3,300). Record the journal entry to book the acquisition.
7. Select the term on the right that best matches the description on the left. Terms
may be used once, more than once, or not at all.
a. audit
1. An accelerated method of depreciation.
b. book value
2. When a company can use tax depreciation on
c. compilation
audited financial statements.
d. fair market value
3. A CPA organizes financial information
e. historical cost
provided by the company but does not express
f. materiality
an opinion as to whether the information
g. residual value
materially conforms to GAAP.
h. salvage value
4. Depreciation method that yields the same
i. straight-line
amount of depreciation each year.
j. sum-of-the-years’ digits
5. Undepreciated cost on the balance sheet.
8. A company purchases a building and land for $500,000. The appraisal attributes
a fair market value (FMV) of 250,000 to the land and $350,000 to the building.
a. What is the acquisition cost of the land?
b. What is the acquisition cost of the building?
9. A firm purchases for $5,000 a computer and printer. The appraisal attributes a
fair market value (FMV) of $4,000 to the computer and $2,000 to the printer.
a. What is the acquisition cost of the computer?
b. What is the acquisition cost of the printer?
© American Institute of Professional Bookkeepers, 2018
Homework Exercises
1
Mastering Depreciation
Section 3−THE STRAIGHT-LINE (SL) METHOD OF DEPRECIATION
1. On January 1, 20X1, Apogee Corp. purchases for $101,700 a machine with an
estimated useful life of 3 years and a residual value of $4,500. Apogee uses
straight-line depreciation. Complete the table below.
Year
20X1
20X2
20X3
Year-beginning
book value
Depreciation
expense
Accumulated
depreciation
Year-end
book value
2. On January 1, 20X1, Cayler Corp. purchases for $151,500 a machine with an
estimated useful life of 3 years and a salvage value of $4,500. Cayler uses
straight-line depreciation. Complete the table below.
Year
20X1
20X2
20X3
Year-beginning
book value
Depreciation
expense
Accumulated
depreciation
Year-end
book value
3. On June 1, 20X1, Apache Corp. purchases for $101,700 a machine with an
estimated useful life of 3 years and a scrap value of $4,500. Apache uses straightline depreciation. Complete the table below.
Year
20X1
20X2
20X3
20X4
Year-beginning
book value
Depreciation
expense
Accumulated
depreciation
Year-end
book value
4. On October 1, 20X1, Dax Corp. purchases for $125,000 a machine with an
estimated useful life of 4 years and a residual value of $5,000.
a. Dax uses straight-line depreciation. Complete the table below.
Year
Year-beginning
book value
Depreciation
expense
Accumulated
depreciation
Year-end
book value
20X1
20X2
20X3
20X4
20X5
b. Prepare the adjusting journal entry to record 20X3 depreciation expense.
(continued)
Homework Exercises
2
Mastering Depreciation
5. On March 1, 20X1, Efay Co. purchases for $600,000 a machine with an estimated
useful life of 5 years and a salvage value of $15,000.
a. Efay uses straight-line depreciation. Complete the table below.
Year
20X1
20X2
20X3
20X4
20X5
20X6
Year-beginning
book value
Depreciation
expense
Accumulated
depreciation
Year-end
book value
b. Prepare the adjusting journal entry to record 20X1 depreciation expense.
Homework Exercises
3
Mastering Depreciation
Section 4−THE UNITS OF PRODUCTION (UOP) METHOD OF DEPRECIATION
1. On January 1, 20X1, Apogee Corp. purchases for $101,700 a machine with an
estimated useful life at 12,000 machine hours and a scrap value of $4,500. In
Year 1, Apogee uses the machine for 5,100 hours; in Year 2, 4,200 hours; and in
Year 3, 4,400 hours. Apogee uses UOP depreciation. Complete the table below.
Year-beginning
Year
book value
20X1
20X2
20X3
Depreciation
expense
Accumulated
depreciation
Year-end
book value
2. On January 1, 20X1, Cayler Corp. purchases $151,500 a machine for which it
estimates a useful life of 20,000 machine hours and a salvage value of $4,500. In
Year 1, Cayler uses the machine for 9,100 hours; in Year 2, 6,200 hours; and in
Year 3, 9,400 hours. Cayler uses UOP depreciation. Complete the table below.
Year-beginning
Year
book value
20X1
20X2
20X3
Depreciation
expense
Accumulated
depreciation
Year-end
book value
3. On June 1, 20X1, Apache Corp. purchases for $101,700 a machine for which it
estimates a useful life of 12,000 machine hours and a residual value of $4,500. In
Year 1, Apache uses the machine for 3,100 hours; in Year 2, 5,600 hours; and in
Year 3, 4,000 hours. Apache uses UOP depreciation. Complete the table below.
Year-beginning
Year
book value
20X1
20X2
20X3
Depreciation
expense
Accumulated
depreciation
Year-end
book value
4. On October 1, 20X1, Dax Corp. purchases for $125,000 a machine that Dax
estimates will have a useful life of 20,000 machine hours and a scrap value of
$5,000. In Year 1, Dax uses the machine for 2,400 hours; in Year 2, 8,200 hours;
in Year 3, 7,500 hours; and in Year 4, 6,600 hours.
a. Dax uses UOP depreciation. Complete the table below.
Year
20X1
20X2
20X3
20X4
Year-beginning
book value
Depreciation
expense
Accumulated
depreciation
Year-end
book value
b. Prepare the adjusting journal entry to record 20X3 depreciation expense.
(continued)
Homework Exercises
4
Mastering Depreciation
5. On March 1, 20X1, Efay Company purchases for $600,000 a machine that Efay
estimates will have a useful life of 50,000 machine hours and a salvage value of for
$15,000. In Year 1, Efay uses the machine for 11,100 hours; in Year 2, 8,600 hours;
in Year 3, 9,100 hours; in Year 4, 12,000 hours; and in Year 5, 13,600.
a. Efay uses UOP depreciation. Complete the table below.
Year
20X1
20X2
20X3
20X4
20X5
Year-beginning
book value
Depreciation
expense
Accumulated
depreciation
Year-end
book value
b. Prepare the adjusting journal entry to record 20X1 depreciation expense.
Homework Exercises
5
Mastering Depreciation
Section 5−THE DECLINING BALANCE (DB) METHOD OF DEPRECIATION
1. On January 1, 20X1, Apogee Corp. purchases for $101,700 a machine that it
estimates will have a useful life of 3 years and a residual value of $4,500. Apogee
uses DDB depreciation. Complete the table below.
Year
20X1
20X2
20X3
Year-beginning
book value
Depreciation
expense
Accumulated
depreciation
Year-end
book value
2. On January 1, 20X1, Cayler Corp. purchases for $151,500 a machine for which it
estimates a useful life of 3 years and a salvage value of $4,500. Cayler uses 150%
DB depreciation. Complete the table below.
Year
20X1
20X2
20X3
Year-beginning
book value
Depreciation
expense
Accumulated
depreciation
Year-end
book value
3. On June 1, 20X1, Apache Corp. purchases for $101,700 a machine for which it
estimates a life of 4 years and a scrap value of $4,500. Apache uses doubledeclining balance depreciation. Complete the table below.
Year
20X1
20X2
20X3
20X4
20X5
Year-beginning
book value
Depreciation
expense
Accumulated
depreciation
Year-end
book value
4. On October 1, 20X1, Dax Corp. purchases for $125,000 a machine that Dax
estimates will have a useful life of 5 years and a residual value of $15,000.
a. Dax uses 150% DB depreciation. Complete the table below.
Year
20X1
20X2
20X3
20X4
20X5
20X6
Year-beginning
book value
Depreciation
expense
Accumulated
depreciation
Year-end
book value
b. Prepare the adjusting journal entry to record 20X3 depreciation expense.
(continued)
Homework Exercises
6
Mastering Depreciation
5. On March 1, 20X1, Efay Co. purchases for $600,000 a machine that Efay
estimates will have a useful life of 5 years and a residual value of $15,000.
a. Efay uses DDB depreciation. Complete the table below.
Year
20X1
20X2
20X3
20X4
20X5
20X6
Year-beginning
book value
Depreciation
expense
Accumulated
depreciation
Year-end
book value
b. Prepare the adjusting journal entry to record 20X1 depreciation expense.
Homework Exercises
7
Mastering Depreciation
Section 6−THE SUM-OF-THE-YEARS’-DIGITS (SYD) METHOD OF DEPRECIATION
1. On January 1, 20X1, Apogee Corp. purchases for $101,700 a machine that
Apogee estimates has a useful life of 3 years and a salvage value of $4,500.
Apogee uses SYD depreciation. Complete the table below.
Year
20X1
20X2
20X3
Year-beginning
book value
Depreciation
expense
Accumulated
depreciation
Year-end
book value
2. On January 1, 20X1, Cayler Corp. purchases for $151,500 a machine for which it
estimates a useful life of 4 years and a scrap value of $4,500. Cayler uses SYD
depreciation. Complete the table below.
Year
20X1
20X2
20X3
20X4
Year-beginning
book value
Depreciation
expense
Accumulated
depreciation
Year-end
book value
3. On June 1, 20X1, Apache Corp. purchases for $101,700 a machine for which it
estimates a useful life of 3 years and a residual value of $4,500. Apache uses
SYD depreciation. Complete the table below.
Year
20X1
20X2
20X3
20X4
Year-beginning
book value
Depreciation
expense
Accumulated
depreciation
Year-end
book value
4. On October 1, 20X1, Dax Corp. purchases for $125,000 a machine that Dax
estimates has a useful life of 4 years and a scrap value of $5,000.
a. Dax uses SYD depreciation. Complete the table below.
Year
20X1
20X2
20X3
20X4
20X5
Year-beginning
book value
Depreciation
expense
Accumulated
depreciation
Year-end
book value
b. Prepare the adjusting journal entry to record 20X3 depreciation expense.
5. On March 1, 20X1, Efay Co. purchases for $600,000 a machine that Efay
estimates has a useful life of 5 years and a residual value of $15,000.
Homework Exercises
8
Mastering Depreciation
a. Efay uses SYD depreciation. Complete the table below.
Year
20X1
20X2
20X3
20X4
20X5
20X6
Year-beginning
book value
Depreciation
expense
Accumulated
depreciation
Year-end
book value
b. Prepare the adjusting journal entry to record 20X1 depreciation expense.
Homework Exercises
9
Mastering Depreciation
Section 7−DEPRECIATION UNDER FEDERAL INCOME TAX DEPRECIATION RULES
1. During 2018, Axel Corporation purchases machinery (5-year property) for
$200,000 and decides not to take a Sec. 179 deduction.
a. Compute maximum tax depreciation for the machinery for 2018−2023.
b. Compute maximum tax depreciation for 2018−2023 if Axel does not take a Sec. 179
deduction and elects out of 100% bonus.
2. During 2018, 2018, Basil Company purchases equipment (7-year property) for
$100,000, takes a Sec. 179 deduction of $50,000 and elects out of 100% bonus.
a. Compute maximum tax depreciation for the equipment for 2018−2025.
3. During 2018, Diamonds Inc. purchases only one asset: equipment (7-year
property) for $1,600,000. Diamonds takes the maximum Sec. 179 deduction and
elects out of 100% bonus.
a. Compute maximum tax depreciation percentage for the machinery for
2018−2025.
4. In 2018, Fast Money, Inc. purchases only one asset: machinery (5-year property)
for $850,000. Fast Money takes a Sec. 179 deduction of $500,000 and elects out
of 100% bonus.
a. Compute maximum tax depreciation for 2018−2023.
5. In April 2018, RentCo purchases a building for $120,000. Compute tax
depreciation for this property for 2018−2020 if:
a. The building is commercial.
b. The building is residential.
6. In December 2018, CityCo purchases a building for $150,000. Compute tax
depreciation for this property for 2018−2020 if:
a. The building is commercial.
b. The building is residential.
7. In February 2018, StratCo purchases a building for $340,000. Compute tax
depreciation for this property for 2018−2020 if:
c. The building is commercial.
d. The building is residential.
Homework Exercises
10
Mastering Depreciation
Section 8−TAX DEPRECIATION OF VEHICLES
1. On June 5, 2018, Roxy Company purchases a passenger auto for $60,000. Roxy
does not take a Sec. 179 deduction and elects out of 100% bonus on all 5-year
property. Compute tax depreciation for 2018−2025.
2. Describe the differences between IRS definitions of a passenger auto and heavy
SUV and what kind of depreciation can be taken on each.
3. A company car is used 60% for business and 40% for personal use. Annual tax
depreciation is $16,000. Compute allowable depreciation if:
a. The car is owned by a corporation and driven by an employee.
b. The car is owned by Joan’s sole proprietorship and driven by employee Jim.
c. The car is owned by a sole proprietorship and driven by the owner.
Homework Exercises
11