Solutions Guide: Please reword the answers to essay type parts so as to guarantee
that your answer is an original. Do not submit as is
P10-2A In recent years, Juresic Transportation purchased three used buses. Because of
frequent turnover in the accounting department, a different accountant selected the
depreciation method for each bus, and various methods were selected. Bus Acquired Cost
Salvage Value Useful Life in Years Depreciation Method 1 1/1/06 $96,000 $6,000 5
Straight-line 2 1/1/06 120,000 10,000 4 Declining-balance 3 1/1/07 80,000 8,000 5 Unitsof-activity For the declining-balance method, the company uses the double-declining rate.
For the units-of activity method, total miles are expected to be 120,000. Actual miles of
use in the first 3 years were: 2007, 24,000; 2008, 34,000; and 2009, 30,000. Compute the
amount of accumulated depreciation on each bus at December 31, 2008. Bus 1 $ Bus 2 $
Bus 3 $ If bus no. 2 was purchased on April 1 instead of January 1, what is the
depreciation expense for this bus in (1) 2006 and (2) 2007? 2006 $ 2007 $
(a)
Year
Computation
Cumulative
12/31
2006
2007
2008
BUS 1
$ 90,000 X 20% = $18,000
$ 90,000 X 20% = $18,000
$ 90,000 X 20% = $18,000
$ 18,000
36,000
54,000
2006
2007
2008
BUS 2
$120,000 X 50% = $60,000
$ 60,000 X 50% = $30,000
$ 30,000 X 50% = $15,000
$ 60,000
90,000
105,000
2007
2008
BUS 3
24,000 miles X $.60* = $14,400
34,000 miles X $.60* = $20,400
$ 14,400
34,800
*$72,000 ÷ 120,000 miles = $.60 per mile.
(b)
Year
Computation
BUS 2
Expense
(1)
2006
$120,000 X 50% X 9/12 = $45,000
$45,000
(2)
2007
$75,000 X 50% = $37,500
$37,500
P10-3A On January 1, 2008, Pele Company purchased the following two machines for
use in its production process. Machine A The cash price of this machine was $38,000.
Related expenditures included: sales tax $1,700, shipping costs $150, insurance during
shipping $80, installation and testing costs $70, and $100 of oil and lubricants to be used
with the machinery during its first year of operations. Pele estimates that the useful life of
the machine is 5 years with a $5,000 salvage value remaining at the end of that time
period. Assume that the straight-line method of depreciation is used. Machine B The
recorded cost of this machine was $160,000. Pele estimates that the useful life of the
machine is 4 years with a $10,000 salvage value remaining at the end of that time period.
Prepare the following for Machine A. The journal entry to record its purchase on January
1, 2008. The journal entry to record annual depreciation at December 31, 2008. Account /
Description Debit Credit 1. Depreciation expenseShippingAccumulated
depreciationSalesSales tax expenseAccounts receivableInsurance
expenseMachineryRepairs expenseCashAccounts payable $ Insurance
expenseMachinerySales tax expenseRepairs expenseSalesShippingAccounts
payableAccumulated depreciationCashDepreciation expenseAccounts receivable $ 2.
CashSales tax expenseShippingInsurance expenseRepairs expenseAccounts
receivableAccounts payableDepreciation expenseMachinerySalesAccumulated
depreciation $ Depreciation expenseAccounts payableAccumulated
depreciationInsurance expenseMachineryShippingSalesCashAccounts receivableSales
tax expenseRepairs expense $ Calculate the amount of depreciation expense that should
record for machine B each year of its useful life under the following assumptions. (Round
depreciation cost per unit to 2 decimal places. Round final answers to 0 decimal places,
e.g. 125.) Pele uses the straight-line method of depreciation. Pele uses the decliningbalance method. The rate used is twice the straight-line rate. Pele uses the units-ofactivity method and estimates that the useful life of the machine is 125,000 units. Actual
usage is as follows: 2008, 45,000 units; 2009, 35,000 units; 2010, 25,000 units; 2011,
20,000 units. Year 1 Year 2 Year 3 Year 4 1. Straight-line $ $ $ $ 2. Declining-balance $
$ $ $ 3. Units-of-activity $ $ $ $ Which method used to calculate depreciation on
machine B reports the highest amount of depreciation expense in year 1 (2008)? all
methods are the samedeclining-balance methodunits-of-activity methodstraight-line
method The highest amount in year 4 (2011)? all methods are the samestraight-line
methoddeclining-balance methodunits-of-activity method The highest total amount over
the 4-year period?
(a)
(1)
Purchase price ...............................................................................................
Sales tax..........................................................................................................
Shipping costs ................................................................................................
Insurance during shipping ...........................................................................
Installation and testing .................................................................................
$ 38,000
1,700
150
80
70
Total cost of machine ..........................................................................
Machine .......................................................................................
Cash ...................................................................................
(2)
(1)
(2)
40,000
$ 40,000
5,000
$ 35,000
÷
5
$ 7,000
7,000
7,000
Recorded cost ................................................................................................
Less: Salvage value ......................................................................................
Depreciable cost ............................................................................................
Years of useful life.........................................................................................
Annual depreciation............................................................................
Book Value at
Beginning
of Year
$160,000
80,000
40,000
20,000
(3)
40,000
Recorded cost ................................................................................................
Less: Salvage value ......................................................................................
Depreciable cost ............................................................................................
Years of useful life.........................................................................................
Annual depreciation............................................................................
Depreciation Expense ................................................................
Accumulated Depreciation ..............................................
(b)
$ 40,000
160,000
10,000
$150,000
÷
4
$ 37,500
DDB Rate
Annual Depreciation
Expense
Accumulated
Depreciation
*50%*
*50%*
*50%*
*50%*
$80,000
40,000
20,000
** 10,000
$ 80,000
120,000
140,000
150,000
**100% ÷ 4-year useful life = 25% X 2 = 50%.
Depreciation cost per unit = ($160,000 – $10,000)/125,000 units = $1.20 per
unit.
Annual Depreciation Expense
2010: $1.20 X 45,000 = $54,000
2011: 1.20 X 35,000 = 42,000
2012: 1.20 X 25,000 = 30,000
2013: 1.20 X 20,000 = 24,000
(c)
The declining-balance method reports the highest amount of depreciation expense
the first year while the straight-line method reports the lowest. In the fourth year,
the straight-line method reports the highest amount of depreciation expense
while the declining-balance method reports the lowest.
These facts occur because the declining-balance method is an accelerated
depreciation method in which the largest amount of depreciation is recognized
in the early years of the asset’s life. If the straight-line method is used, the same
amount of depreciation expense is recognized each year. Therefore, in the early
years less depreciation expense will be recognized under this method than under
the declining-balance method while more will be recognized in the later years.
The amount of depreciation expense recognized using the units-of-activity method
is dependent on production, so this method could recognize more or less
depreciation expense than the other two methods in any year depending on
output.
No matter which of the three methods is used, the same total amount of
depreciation expense will be recognized over the four-year period.