MASTERING DEPRECIATION
SOLUTIONS TO 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.
1. CompilationThe CPA only organizes company data based solely on
information provided by the company.
2. ReviewThe CPA performs a limited inspection of information provided by the
company and reports whether material differences were found.
3. AuditThe CPA examines the financial statements and gives an opinion on
whether the statements materially conform to GAAP.
2. What is the purpose of depreciation?
To match a fixed asset’s cost against the revenue it produces over its estimated
useful life.
3. What is the adjusting entry to record $10,000 of depreciation expense?
Depreciation Expense
Accumulated Depreciation
10,000
10,000
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?
If the difference between tax and GAAP depreciation were material.
5. What four factors must you know to calculate an asset’s depreciation expense?
1.
2.
3.
4.
Cost
Estimated useful life
Residual value
Depreciation method used
6. APEX Incorporated purchases a machine using 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.
Fixed Assets - Machine
Notes Payable
110,300
110,300
Basis, or original cost, includes any expenditure incurred to acquire an asset. For
the machine that APEX purchased, this includes:
$100,000 machine + $2,500 freight + $4,500 sales tax + $3,300 installation =
$110,300.
© American Institute of Professional Bookkeepers, 2010
Homework Solutions
1
Mastering Depreciation
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.
1. An accelerated method of depreciation.
2. When a company can use tax depreciation on
audited financial statements.
3. A CPA organizes financial information
provided by the company but does not express
an opinion as to whether the information
materially conforms to GAAP.
4. Depreciation method that yields the same
amount of depreciation each year.
5. Undepreciated cost on the balance sheet.
1. j
2. f
3. c
4. i
a. audit
b. book value
c. compilation
d. fair market value
e. historical cost
f. materiality
g. residual value
h. salvage value
i. straight-line
j. sum-of-the-years’ digits
5. b
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?
($250,000 FMV land ÷ $600,000 total FMV)  $500,000 total acquisition cost =
$208,333 acquisition cost for the land
b. What is the acquisition cost of the building?
($350,000 FMV building ÷ $600,000 total FMV)  $500,000 total acquisition
cost = $291,667 acquisition cost for 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?
($4,000 FMV computer ÷ $6,000 total FMV)  $5,000 total acquisition cost =
$3,333 acquisition cost for the computer
b. What is the acquisition cost of the printer?
($2,000 FMV printer ÷ $6,000 total FMV)  $5,000 total acquisition cost =
$1,667 acquisition cost for the printer
Homework Solutions
2
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
$101,700
69,300
36,900
Depreciation
expense
$32,400
32,400
32,400
Accumulated
depreciation
$32,400
64,800
97,200
Year-end
book value
$69,300
36,900
4,500
Annual depreciation expense:
($101,700  $4,500) = $97,200 depreciable base; $97,200/3 years = $32,400
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 straightline depreciation. Complete the table below.
Year
20X1
20X2
20X3
Year-beginning
book value
$151,500
102,500
53,500
Depreciation
expense
Accumulated
depreciation
$49,000
49,000
49,000
$ 49,000
98,000
147,000
Year-end
book value
$102,500
53,500
4,500
Annual depreciation expense:
($151,500  $4,500) = $147,000 depreciable base; $147,000/3 years = $49,000
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
$101,700
82,800
50,400
18,000
Depreciation
expense
$18,900
32,400
32,400
13,500
Accumulated
depreciation
Year-end
book value
$18,900
51,300
83,700
97,200
$82,800
50,400
18,000
4,500
$101,700 original cost  $4,500 residual value = $97,200 depreciable base
Depreciation expense:
20X1: $97,200 ÷ 3 years = $32,400  7/12 = $18,900
20X2: $97,200 ÷ 3 years = $32,400
20X3: $97,200 ÷ 3 years = $32,400
20X4: $32,400  5/12 = $13,500 (the 5 months’ depreciation not taken in 20X1)
Homework Solutions
3
Mastering Depreciation
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
20X1
20X2
20X3
20X4
20X5
Year-beginning
book value
Depreciation
expense
$125,000
113,000
68,000
35,000
14,000
Accumulated
depreciation
Year-end
book value
$ 7,500
37,500
67,500
97,500
120,000
$117,500
87,500
57,500
27,500
5,000
$ 7,500
30,000
30,000
30,000
22,500
$125,000 cost  $5,000 residual value = $120,000 depreciable base;
$120,000/4 years = $30,000 annual depreciation
Partial-year depreciation:
20X1: $30,000  3/12 = $7,500
20X5: $30,000  9/12 = $22,500
b. Prepare the adjusting journal entry to record 20X3 depreciation expense.
Depreciation Expense
Accumulated Depreciation
30,000
30,000
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
$600,000
502,000
385,500
268,500
151,500
34,500
Depreciation
expense
$ 97,500
117,000
117,000
117,000
117,000
19,500
Accumulated
depreciation
Year-end
book value
$ 97,500
214,500
331,500
448,500
565,500
585,000
$502,500
385,500
268,500
151,500
34,500
15,000
$600,000 cost  $15,000 residual value = $585,000 depreciable base;
$585,000/5 years = $117,000 annual depreciation
Partial-year depreciation:
20X1: $117,000  10/12 = $97,500
20X6: $117,000  2/12 = $19,500
b. Prepare the adjusting journal entry to record 20X1 depreciation expense.
Depreciation Expense
Accumulated Depreciation
Homework Solutions
97,500
97,500
4
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
20X1
20X2
20X3
Year-beginning
book value
$101,700
60,390
26,370
Depreciation
expense
$41,310
34,020
21,870
Accumulated
depreciation
Year-end
book value
$41,310
75,330
97,200
$60,390
26,370
4,500
$101,700 cost  $4,500 residual value = $97,200 depreciable base;
$97,200/12,000 total hours = $8.10 hourly depreciation rate
20X1 depreciation expense:
5,100 hours  $8.10 =
$41,310
20X2 depreciation expense:
4,200 hours  $8.10 =
34,020
20X3 depreciation expense:
2,700 hours  $8.10 =
21,870
12,000 total hours
$97,200
Note: Year 3 depreciation is limited to 2,700 hours (12,000  5,100  4,200)
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
20X1
20X2
20X3
Year-beginning
book value
$151,500
84,615
39,045
Depreciation
expense
$66,885
45,570
34,545
Accumulated
depreciation
Year-end
book value
$ 66,885
112,455
147,000
$84,615
39,045
4,500
$151,500 cost  $4,500 residual value = $147,000 depreciable base;
$147,000/20,000 total hours = $7.35 hourly depreciation rate
20X1 depreciation expense:
9,100 hours  $7.35 =
$ 66,885
20X2 depreciation expense:
6,200 hours  $7.35 =
45,570
20X3 depreciation expense:
4,700 hours  $7.35 =
34,545
20,000 total hours
$147,000
Note: Year 3 depreciation is limited to 4,700 hours (20,000  9,100  6,200)
Homework Solutions
5
Mastering Depreciation
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
20X1
20X2
20X3
Year-beginning
book value
Depreciation
expense
$101,700
76,590
31,230
$25,110
45,360
26,730
Accumulated
depreciation
Year-end
book value
$25,110
70,470
97,200
$76,590
31,230
4,500
$101,700 cost  $4,500 residual value = $97,200 depreciable base;
$97,200 ÷ 12,000 total hours = $8.10 hourly depreciation rate
20X1 depreciation expense:
3,100 hours  $8.10 =
$25,110
20X2 depreciation expense:
5,600 hours  $8.10 =
45,360
20X3 depreciation expense:
3,300 hours  $8.10 =
26,730
12,000 total hours
$97,200
Note: Year 3 usage is limited to 3,300 hours (12,000  3,100  5,600)
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
$125,000
110,600
61,400
16,400
$14,400
49,200
45,000
11,400
Accumulated
depreciation
$ 14,400
63,600
108,600
120,000
Year-end
book value
$110,600
61,400
16,400
5,000
$125,000 cost  $5,000 residual value = $120,000 depreciable base;
$120,000 ÷ 20,000 total hours = $6 hourly depreciation rate
Depreciation expense:
20X1: 2,400  $6 = $14,400
20X2: 8,200  $6 = $49,200
20X3: 7,500  $6 = $45,000
20X4: 1,900  $6 = $11,400
Note: Year 4 depreciation is limited to 1,900 hours (20,000  2,400  8,200  7,500)
b. Prepare the adjusting journal entry to record 20X3 depreciation expense.
Depreciation Expense
Accumulated Depreciation
Homework Solutions
45,000
45,000
6
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
$600,000
470,130
369,510
263,040
122,640
$129,870
100,620
106,470
140,400
107,640
Accumulated
depreciation
$129,870
230,490
336,960
477,360
585,000
Year-end
book value
$470,130
369,510
263,040
122,640
15,000
$600,000 cost  $15,000 residual value = $585,000 depreciable base;
$585,000/50,000 total hours = $11.70 hourly depreciation rate
Depreciation expense:
20X1: 11,100  $11.70 = $129,870
20X2: 8,600  $11.70 = $100,620
20X3: 9,100  $11.70 = $106,470
20X4: 12,000  $11.70 = $140,400
20X5: 9,200  $11.70 = $107,640
Note: Year 5 depreciation is limited to 9,200 hours (50,000  11,100  8,600 
9,100  12,000)
b. Prepare the adjusting journal entry to record 20X1 depreciation expense.
Depreciation Expense
Accumulated Depreciation
Homework Solutions
129,870
129,870
7
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
$101,700
33,900
11,300
Depreciation
expense
$67,800
22,600
6,800
Accumulated
depreciation
Year-end
book value
$67,800
90,400
97,200
$33,900
11,300
4,500
1/3 years = 33.3333% straight-line rate  2 = 66.6666% DDB rate
Depreciation expense:
20X1:
$101,700 beginning book value  66.6666% = $67,800
20X2:
$33,900 beginning book value 66.6666% = $22,600
20X3:
$11,300 beginning book value  $4,500 residual value = $6,800
Note that for 20X3, depreciation using the formula would have been $11,300 
66.6666% = $7,533. This would have caused book value to be less than residual
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
$151,500
75,750
37,875
Depreciation
expense
Accumulated
depreciation
Year-end
book value
$75,750
37,875
33,375
$ 75,750
113,625
147,000
$75,750
37,875
4,500
1/3 years = 33.3333% straight-line rate  1.5 = 50% rate
Depreciation expense:
20X1:
$151,500 beginning book value  50% = $75,750
20X2:
$75,750 beginning book value  50% = $37,875
20X3:
$37,875 beginning book value  $4,500 residual value = $33,375
Note that for 20X3, depreciation using the formula would have been $37,875 
50% = $18,938. This would result in a book value greater than residual value.
Homework Solutions
8
Mastering Depreciation
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
$101,700
72,037
36,018
18,009
9,004
Depreciation
expense
Accumulated
depreciation
Year-end
book value
$29,663
36,019
18,009
9,005
4,504
$29,663
65,682
83,691
92,696
97,200
$72,037
36,018
18,009
9,004
4,500
1/4 years = 25% straight-line rate  2 = 50% DDB rate
Depreciation expense:
20X1:
$101,700 beginning book value  50% DDB rate  7/12 = $29,663
20X2:
$72,037 beginning book value  50% DDB rate = $36,019
20X3:
$36,018 beginning book value  50% DDB rate = $18,009
20X4:
$18,009 beginning book value  50% DDB rate = $9,005
20X5:
$9,004 beginning book value  $4,500 residual value = $4,504
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
$125,000
115,625
80,937
56,656
39,659
27,761
Depreciation
expense
Accumulated
depreciation
Year-end
book value
$ 9,375
34,688
24,281
16,997
11,898
12,761
$ 9,375
44,063
68,344
85,341
97,239
110,000
$115,625
80,937
56,656
39,659
27,761
15,000
1/5 years = 20% straight-line rate  1.5 = 30% depreciation rate
Depreciation expense:
20X1: $125,000 beginning book value  30%  3/12 = $9,375
20X2: $115,625 beginning book value  30% = $34,688
20X3: $80,937 beginning book value  30% = $24,281
20X4: $56,656 beginning book value  30% = $16,997
20X5: $39,659 beginning book value  30% = $11,898
20X6: $27,761 beginning book value  $15,000 residual value = $12,761
b. Prepare the adjusting journal entry to record 20X3 depreciation expense.
Depreciation Expense
Accumulated Depreciation
Homework Solutions
24,281
24,281
9
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
$600,000
400,000
240,000
144,000
86,400
51,840
Depreciation
expense
$200,000
160,000
96,000
57,600
34,560
36,840
Accumulated
depreciation
$200,000
360,000
456,000
513,600
548,160
585,000
Year-end
book value
$400,000
240,000
144,000
86,400
51,840
15,000
1/5 years = 20% straight-line rate  2 = 40% DDB rate
Depreciation expense:
20X1: $600,000 beginning book value  40% DDB rate  10/12 = $200,000
20X2: $400,000 beginning book value  40% DDB rate = $160,000
20X3: $240,000 beginning book value  40% DDB rate = $96,000
20X4: $144,000 beginning book value  40% DDB rate = $57,600
20X5: $86,400 beginning book value  40% DDB rate = $34,560
20X6: $51,840 beginning book value  $15,000 residual value = $36,840
b. Prepare the adjusting journal entry to record 20X1 depreciation expense.
Depreciation Expense
Accumulated Depreciation
Homework Solutions
200,000
200,000
10
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
$101,700
53,100
20,700
Depreciation
expense
$48,600
32,400
16,200
Accumulated
depreciation
$48,600
81,000
97,200
Year-end
book value
$53,100
20,700
4,500
Sum-of-the-years’ denominator [(n  (n + 1))/2]: (3  4)/2 = 6
Depreciation expense:
20X1: $101,700  $4,500 = $97,200 depreciable base; $97,200  3/6 = $48,600
20X2: $97,200  2/6 = $32,400
20X3: $97,200  1/6 = $16,200
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
$151,500
92,700
48,600
19,200
Depreciation
expense
$58,800
44,100
29,400
14,700
Accumulated
depreciation
$ 58,800
102,900
132,300
147,000
Year-end
book value
$92,700
48,600
19,200
4,500
$151,500  $4,500 = $147,000 depreciable base;
Sum-of-the-years’ denominator [(n  (n + 1))/2]: (4  5)/2 = 10
Depreciation expense:
20X1: $147,000  4/10 = $58,800
20X2: $147,000  3/10 = $44,100
20X3: $147,000  2/10 = $29,400
20X4 $147,000  1/10 = $14,700
Homework Solutions
11
Mastering Depreciation
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
$101,700
73,350
34,200
11,250
Depreciation
expense
$28,350
39,150
22,950
6,750
Accumulated
depreciation
Year-end
book value
$28,350
67,500
90,450
97,200
$73,350
34,200
11,250
4,500
$101,700 cost  $4,500 residual value = $97,200 depreciable base;
Sum-of-the-years’ denominator [(n  (n + 1))/2]: (3  4)/2 = 6
1st
12 mo
2nd
12 mo
3rd
12 mo
Total
$97,200  3/6 = $48,600
20X1
20X2
(7/12)
(5/12)
20X3
20X4
$28,350 $20,250
(7/12)
$97,200  2/6 = $32,400
(5/12)
18,900 $13,500
(7/12)
$97,200  1/6 = $16,200
(5/12)
9,450 $6,750
$28,350 $39,150 $22,950 $6,750
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
$125,000
113,000
68,000
35,000
14,000
Depreciation
expense
Accumulated
depreciation
Year-end
book value
$12,000
45,000
33,000
21,000
9,000
$ 12,000
57,000
90,000
111,000
120,000
$113,000
68,000
35,000
14,000
5,000
$125,000 cost  $5,000 residual value = $120,000 depreciable base;
Sum-of-the-years’ denominator [(n  (n + 1))/2] = (4  5)/2 = 10
1st
12 mo
2nd
12 mo
3rd
12 mo
4th
12 mo
Total
$120,000  4/10
= $48,000
$120,000  3/10
= $36,000
$120,000  2/10
= $24,000
$120,000  1/10
= $12,000
Homework Solutions
20X1
20X2
(3/12)
(9/12)
20X3
20X4
20X5
$12,000 $36,000
(3/12)
(9/12)
9,000 $27,000
(3/12)
(9/12)
6,000 $18,000
(3/12)
(9/12)
3,000 $9,000
$12,000 $45,000 $33,000 $21,000 $9,000
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Mastering Depreciation
b. Prepare the adjusting journal entry to record 20X3 depreciation expense.
Depreciation Expense
Accumulated Depreciation
33,000
33,000
5. On March 1, 20X1, Efay Co. 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.
a. Efay uses SYD depreciation. Complete the table below.
Year
20X1
20X2
20X3
20X4
20X5
20X6
Year-beginning
book value
$600,000
437,500
275,000
151,500
67,000
21,500
Depreciation
expense
Accumulated
depreciation
Year-end
book value
$162,500
162,500
123,500
84,500
45,500
6,500
$162,500
325,000
448,500
533,000
578,500
585,000
$437,500
275,000
151,500
67,000
21,500
15,000
$600,000 cost  $15,000 residual value = $585,000 depreciable base;
Sum-of-the-years’ denominator [(n  (n + 1))/2] = (5  6)/2 = 15
$585,000  5/15 = $195,000 first 12 months’ depreciation
$585,000  4/15 = $156,000 second 12 months’ depreciation
$585,000  3/15 = $117,000 third 12 months’ depreciation
$585,000  2/15 = $78,000 fourth 12 months’ depreciation
$585,000  1/15 = $39,000 last 12 months’ depreciation
Depreciation expense:
20X1: $195,000  10/12 = $162,500
20X2: ($195,000  2/12) + ($156,000  10/12) = $162,500
20X3: ($156,000  2/12) + ($117,000  10/12) = $123,500
20X4: ($117,000  2/12) + ($78,000  10/12) = $84,500
20X5: ($78,000  2/12) + ($39,000  10/12) = $45,500
20X6: $39,000  2/12 = $6,500
b. Prepare the adjusting journal entry to record 20X1 depreciation expense.
Depreciation Expense
Accumulated Depreciation
Homework Solutions
162,500
162,500
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Mastering Depreciation
Section 7 DEPRECIATION UNDER FEDERAL INCOME TAX DEPRECIATION RULES
1. During 2009, Axel Corporation purchases new machinery (5-year property) for
$200,000 and decides not to take a Section 179 deduction.
a. Compute tax depreciation for the machinery for 20092014.
Year
2009
2009
2010
2011
2012
2013
2014
Depreciation calculation
$200,000  50% bonus depreciation*
$100,000  20%
$100,000  32%
$100,000  19.2%
$100,000  11.52%
$100,000  11.52%
$100,000  5.76%
Dep. Exp.
$100,000
20,000
32,000
19,200
11,520
11,520
5,760
$200,000
* 50% bonus depreciation applies to new property placed in service in 2009.
b. Compute tax depreciation for 20092014 if Axel had purchased used machinery.
Year
2009
2010
2011
2012
2013
2014
Depreciation calculation
$200,000  20%
$200,000  32%
$200,000  19.2%
$200,000  11.52%
$200,000  11.52%
$200,000  5.76%
Dep. Exp.
$ 40,000
64,000
38,400
23,040
23,040
11,520
$200,000
Note: Bonus depreciation does not apply to used property.
2. During 2009, Basil Company purchases new equipment (7-year property) for
$100,000 and decides not to take a Section 179 deduction.
a. Compute tax depreciation for the equipment for 20092014.
Year
2009
2009
2010
2011
2012
2013
2014
2015
2016
Dep. Exp.
$ 50,000
7,145
12,245
8,745
6,245
4,465
4,460
4,465
2,230
$100,000
* 50% bonus depreciation applies to new property placed in service in 2009.
Homework Solutions
Depreciation calculation
$100,000  50% bonus depreciation*
$50,000  14.29%
$50,000  24.49%
$50,000  17.49%
$50,000  12.49%
$50,000  8.93%
$50,000  8.92%
$50,000  8.93%
$50,000  4.46%
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Mastering Depreciation
b. Compute tax depreciation for 20092014 if Basil had purchased used equipment.
Year
2009
2010
2011
2012
2013
2014
2015
2016
Depreciation calculation
$100,000  14.29%
$100,000  24.49%
$100,000  17.49%
$100,000  12.49%
$100,000  8.93%
$100,000  8.92%
$100,000  8.93%
$100,000  4.46%
Dep. Exp.
$ 14,290
24,490
17,490
12,490
8,930
8,920
8,930
4,460
$100,000
Note: Bonus depreciation does not apply to used property.
3. During 2009, Diamonds Inc. purchases only one asset: new equipment (7-year
property) for $350,000. Diamonds takes the maximum Section 179 deduction.
a. Compute tax depreciation for 20092016.
Year
2009
2009
2009
2010
2011
2012
2013
2014
2015
2016
Depreciation calculation
Section 179 maximum
($350,000  $250,000)  50%*
$50,000  14.29%
$50,000  24.49%
$50,000  17.49%
$50,000  12.49%
$50,000  8.93%
$50,000  8.92%
$50,000  8.93%
$50,000  4.46%
Dep. Exp.
$250,000
50,000
7,145
12,245
8,745
6,245
4,465
4,460
4,465
2,230
$350,000
* 50% bonus depreciation applies to new property placed in service in 2009.
b. Compute tax depreciation if Diamonds Inc. had purchased used equipment.
Year
2009
2009
2010
2011
2012
2013
2014
2015
2016
Dep. Exp.
$250,000
14,290
24,490
17,490
12,490
8,930
8,920
8,930
4,460
$350,000
Note: Bonus depreciation does not apply to used property.
Homework Solutions
Depreciation calculation
Section 179 maximum
$100,000  14.29%
$100,000  24.49%
$100,000  17.49%
$100,000  12.49%
$100,000  8.93%
$100,000  8.92%
$100,000  8.93%
$100,000  4.46%
15
Mastering Depreciation
4. In 2009, Fast Money, Inc. purchases only one asset: new machinery (5-year
property) for $600,000. Fast Money takes the maximum Section 179 deduction.
a. Compute tax depreciation for 20092016.
Year
2009
2009
2009
2010
2011
2012
2013
2014
Depreciation calculation
Section 179 maximum
($600,000  $250,000)  50% *
$175,000  20%
$175,000  32%
$175,000  19.2%
$175,000  11.52%
$175,000  11.52%
$175,000  5.76%
Dep. Exp.
$250,000
175,000
35,000
56,000
33,600
20,160
20,160
10,080
$600,000
* 50% bonus depreciation applies to new property placed in service in 2009.
b. Compute tax depreciation if Fast Money had purchased used equipment.
Year
2009
2009
2010
2011
2012
2013
2014
Depreciation calculation
Section 179 maximum
($600,000  $250,000)  20%
$350,000  32%
$350,000  19.2%
$350,000  11.52%
$350,000  11.52%
$350,000  5.76%
Dep. Exp.
$250,000
70,000
112,000
67,200
40,320
40,320
20,160
$600,000
Note: Bonus depreciation does not apply to used property.
5. In April 2009, RentCo purchases a building for $120,000. Compute tax
depreciation for this property for 20092011 if:
a. The building is commercial.
2009: $120,000  1.819% = $2,182.80
2010 and 2011: $120,000  2.564% = $3,076.80
b. The building is residential.
2009: $120,000  2.576% = $3,091.20
2010 and 2011: $120,000  3.636% = $4,363.20
6. In December 2009, CityCo purchases a building for $150,000. Compute tax
depreciation for this property for 20092011 if:
a. The building is commercial.
2009: $150,000  .107% = $160.50
2010 and 2011: $150,000  2.564% = $3,846
b. The building is residential.
2009: $150,000  .152% = $228
2010 and 2011: $150,000  3.636% = $5,454
Homework Solutions
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Mastering Depreciation
7. In February 2009, StratCo purchases a building for $340,000. Compute tax
depreciation for this property for 20092011 if:
a. The building is commercial.
2009: $340,000  2.2247% = $7,639.80
2010 and 2011: $340,000  2.564% = $8,717.60
b. The building is residential.
2009: $340,000  3.182% = $10,818.80
2010 and 2011: $340,000  3.636% = $12,362.40
Homework Solutions
17
Mastering Depreciation
Section 8 TAX DEPRECIATION OF VEHICLES
1. On June 5, 2009, Royce Company purchases a passenger auto for $25,000.
a. Compute tax depreciation for 20092017 if the car is new.
2009: $10,960 (lesser of ($25,000  50%) + ($12,500  20%) = $15,000 or
$10,960 first year limit)
2010: $4,000 (lesser of $12,500  32% = $4,000 or $4,800 second year limit)
2011: $2,400 (lesser of $12,500  19.2% = $2,400 or $2,850 third year limit)
2012: $1,440 (lesser of $12,500  11.52% = $1,440 or $1,775 fourth year limit)
2013: $1,440 (lesser of $12,500  11.52% = $1,440 or $1,775 fifth year limit)
2014: $720 (lesser of $12,500  5.76% = $720 or $1,775 sixth year limit)
2015: $1,775 (lesser of $4,040 remaining cost basis or $1,775)
2016: $1,775 (lesser of $2,265 remaining cost basis or $1,775)
2017: $490 (lesser of $490 remaining cost basis or $1,775)
b. Compute tax depreciation for 20092017 if the car is used.
2009:
2010:
2011:
2012:
2013:
2014:
2015:
2016:
2017:
$2,960 (lesser of $25,000  20% = $5,000 or $2,960 first year limit)
$4,800 (lesser of $25,000  32% = $8,000 or $4,800 second year limit)
$2,850 (lesser of $25,000  19.2% = $4,800 or $2,850 third year limit)
$1,775 (lesser of $25,000  11.52% = $2,880 or $1,775 fourth year limit)
$1,775 (lesser of $25,000  11.52% = $2,880 or $1,775 fifth year limit)
$1,440 (lesser of $25,000  5.76% = $1,440 or $1,775 sixth year limit)
$1,775 (lesser of $9,400 remaining cost basis or $1,775)
$1,775 (lesser of $7,625 remaining cost basis or $1,775)
$1,775 (lesser of $5,850 remaining cost basis or $1,775)
2. Describe the differences between IRS definitions of a passenger auto and heavy
SUV and what kind of depreciation can be taken on each.
A passenger automobile is any four-wheel vehicle made primarily for use on a
public street, road, or highway and rated at 6,000 pounds or less of unloaded gross
vehicle weight. Annual IRS limits combining Section 179 expensing, bonus
depreciation and MACRS apply to passenger automobiles.
Heavy SUVs have an unloaded gross vehicle weight over 6,000 pounds and under
than 14,000 pounds. Although the annual IRS depreciation limits do not apply to
heavy SUVs, Section 179 expensing is limited to $25,000 on these vehicles.
3. A company car is used 60% for business and 40% for personal use. Annual tax
depreciation is $4,800. Compute allowable depreciation if:
a. The car is owned by a corporation and driven by an employee.
The corporation can deduct the $4,800 on its tax return provided that it
includes $1,920 ($4,800  40%) in the employee’s taxable income.
b. The car is owned by a sole proprietorship and driven by an employee.
The owner can deduct the $4,800 on his or her tax return provided that the
owner includes $1,920 ($4,800  40%) in the employee’s taxable income.
c. The car is owned by a sole proprietorship and driven by the owner.
The owner can only deduct $2,880 ($4,800  60%) for depreciation on the car.
Homework Solutions
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