REVIEW EXERCISES
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CHAPTER 17—SECTION I
1. $45,000
2. $88,600
3. $158,200
4. $750,000
Cost
$150
$625
$0
$0
Freight
Charges
$500
$2,500
$1,800
$10,300
Setup
Charges
Salvage
Value
$3,500
$9,000
$20,000
$70,000
Total
Cost
$45,650.00
91,725.00
160,000.00
760,300.00
10
7
5
15
Estimated
Useful Life
(years)
$42,150.00
82,725.00
140,000.00
690,300.00
Total
Depreciation
$4,215.00
11,817.86
28,000.00
46,020.00
Annual
Depreciation
Calculate the total cost, total depreciation, and annual depreciation for the following
assets by using the straight-line method:
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REVIEW EXERCISES | CHAPTER 17—SECTION I
5. The Fluffy Laundry purchased new washing machines and dryers for $57,000. Freight
charges were $470, and installation amounted to $500. The machines are expected to
last 5 years and have a residual value of $2,000. If Fluffy elects to use the straight-line
method of depreciation, prepare a depreciation schedule for these machines.
Fluffy Laundry Depreciation Schedule
Straight-line Method
End of
Year
Annual
Depreciation
Accumulated
Depreciation
Book
Value
(new)
1
2
3
4
5
$11,194.00
11,194.00
11,194.00
11,194.00
11,194.00
$11,194.00
22,388.00
33,582.00
44,776.00
55,970.00
$57,970.00
46,776.00
35,582.00
24,388.00
13,194.00
2,000.00
To
To
An
Total cost 5 57,000.00 1 470.00 1 500.00
5 $57,970.00
Total depreciation 5 57,970.00 2 2,000.00
5 55,970.00
55,970.00
5 11,194.00
Annual depreciation 5
5
6. Canmore Supply Company purchases warehouse shelving for $18,600. Freight charges
were $370, and assembly and setup amounted to $575. The shelves are expected to last
for 7 years and have a scrap value of $900. Using the straight-line method of depreciation,
a.
What is the annual depreciation expense of the shelving?
Total cost 5 18,600.00 1 370.00 1 575.00 5 $19,545.00
Total depreciation 5 19,545.00 2 900.00 5 $18,645.00
Annual depreciation 5
b.
18,645.00
5 $2,663.57
7
What is the accumulated depreciation after the third year?
Accumulated depreciation after 3rd year 5 $2,663.57 3 3 5 $7,990.71
c.
What is the book value of the shelving after the fifth year?
Book value after 5th year 5 19,545 2 (2,663.57 3 5)
5 $6,227.15
REVIEW EXERCISES
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CHAPTER 17—SECTION I
7.
8.
9.
Year 1
5/15
7/28
10/55
Sum-of-theYears’ Digits
15
28
55
Useful
Life (years)
5
7
10
3/15
5/28
8/55
Year 3
1/15
3/28
6/55
Year 5
Depreciation Rate Fraction
Complete Exercises 7–9 as they relate to the sum-of-the-years’ digits method of
depreciation:
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REVIEW EXERCISES
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CHAPTER 17—SECTION I
80,000
60,000
40,000
20,000
4
21
3
21
2
21
1
21
420,000
420,000
420,000
420,000
3
4
5
6
$445,000
2 25,000
$420,000
100,000
5
21
420,000
2
Original cost
Trade-in value
Total depreciation
$120,000
Annual
Depreciation
6
21
Depreciation
Rate Fraction
$420,000
Total
Depreciation
1
End of
Year
420,000
400,000
360,000
300,000
220,000
$120,000
(new)
Accumulated
Depreciation
New Age Manufacturing, Inc.
Machinery—SYD Depreciation Schedule
25,000
45,000
85,000
145,000
225,000
325,000
$445,000
Book
Value
10. New Age Manufacturing, Inc., purchased production-line machinery for $445,000. It
is expected to last for 6 years and have a trade-in value of $25,000. Using the sum-ofthe-years’ digits method, prepare a depreciation schedule for New Age.
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REVIEW EXERCISES | CHAPTER 17—SECTION I
Complete Exercises 11–13 as they relate to the declining-balance method of depreciation:
11.
12.
13.
Years
Straight-Line
Rate (%)
Multiple (%)
Declining-Balance
Rate (%)
4
6
10
25
16.67
10
125
200
150
31.25
33.34
15
14. A U-Haul franchise bought a fleet of new trucks for $180,000. The fleet is expected
to have an 8-year useful life and a trade-in value of $35,000. Prepare a depreciation
schedule by using the 150% declining-balance method for the trucks.
U-Haul
Depreciation Schedule—Truck Fleet
8-year, 150% declining-balance
End of Beginning
Year
Book Value
1
2
3
4
5
6
7
8
$180,000.00
146,250.00
118,828.12
96,547.85
78,445.13
63,736.67
51,786.04
42,076.16
Depreciation
Rate
.1875
.1875
.1875
.1875
.1875
.1875
.1875
.1875
*Maximum allowed to reach salvage value
Total depreciation 5 $180,000 2 35,000
5 $145,000
Depreciation
for the Year
$33,750.00
27,421.88
22,280.27
18,102.72
14,708.46
11,950.63
9,709.88
7,076.16*
Accumulated
Depreciation
Ending
Book Value
(new) $180,000.00
$33,750.00
146,250.00
61,171.88
118,828.12
83,452.15
96,547.85
101,554.87
78,445.13
116,263.33
63,736.67
128,213.96
51,786.04
137,923.84
42,076.16
145,000.00
35,000.00
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REVIEW EXERCISES | CHAPTER 17—SECTION I
Complete the following as they relate to the units-of-production method of depreciation (round to the nearest tenth of a cent when necessary):
Asset
15. Pump
16. Automobile
17. Assembly robot
Cost
Salvage
Value
Units of
Useful Life
$15,000
$27,400
$775,000
$2,800
$3,400
$25,000
100,000 hours
60,000 miles
3,000,000 units
Depreciation
per Unit
$.122
.4
.25
18. Millennium Manufacturing purchased a new stamping machine for $45,000 with a salvage value of $5,000. For depreciation purposes, the machine is expected to have a
useful life of 250,000 units of production. Complete the following depreciation schedule by using the units-of-production method:
Millennium Manufacturing, Inc.
Depreciation Schedule, Units-of-Production
Stamping Machine—250,000 Units
End of
Year
Depreciation
per Unit
Units
Produced
Annual
Depreciation
Accumulated
Depreciation
(new)
Book
Value
$45,000.00
1
$0.16
50,000
$8,000.00
$8,000.00
37,000.00
2
0.16
70,000
11,200.00
19,200.00
25,800.00
3
0.16
45,000
7,200.00
26,400.00
18,600.00
4
0.16
66,000
10,560.00
36,960.00
8,040.00
5
0.16
30,000
$3,040.00*
40,000.00
5,000.00
*Maximum allowed to reach salvage value
Total cost 45,000.00 2 5,000.00 5 40,000.00
40,000.00
Depreciation per unit 5
5 $.16
250,000
BUSINESS DECISION
|
CHAPTER 17—SECTION I
c.
b.
a.
Accumulated depreciation 5 85,000 3 20 5 $1,700,000
Book value 5 3,800,000 2 1,700,000 5 $2,100,000
If at the start of the twenty-first year you revise your estimate so that the remaining useful life is 15 years and the residual value is $120,000, what should be
the depreciation expense for each of the remaining 15 years?
Total depreciation
2,100,000 2 120,000
Annual depreciation 5
5
5 $132,000
Estimated useful life
15
What is the amount of the annual depreciation?
Total depreciation
3,800,000 2 400,000
Annual depreciation 5
5
5 $85,000
Estimated useful life
40
What is the book value of the property at the end of the twentieth year of use?
19. You are the accountant for Simplex Industries, a manufacturer of plastic gears for
electric motors. The company’s production facility in Pittsburgh has a cost of
$3,800,000, an estimated residual value of $400,000, and an estimated useful life of
40 years. You are using the straight-line method of depreciation for this asset.
THE REVISED ESTIMATE
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REVIEW EXERCISES | CHAPTER 17—SECTION I I
1. Cudjoe Key Developers purchased a computer system for $75,000 on October 4, 2001.
The computer system will be used for business 100% of the time. The accountant for
the company has elected to take a $10,000 section 179 deduction and the asset qualifies for a special depreciation allowance (see Table 17-4).
a.
What is the basis for depreciation for the computer system?
Tentative basis 5 $75,000 2 $10,000 5 $65,000
The asset qualifies for a 30% special depreciation allowance
Basis for depreciation 5 $65,000(100% 2 30%) 5 $45,500
b.
What is the amount of the first year’s depreciation using MACRS?
Computers are in the 5-year property class
First year depreciation 5 20%
$45,500 3 0.2 5 $9,100
2. Atlantis Fantasy Company constructed roads and a bridge at AtlantisWorld in Orlando,
Florida, at a cost of $15,000,000. Atlantis uses MACRS for tax purposes. No section
179 or special depreciation allowances were taken.
a.
What is the second year’s depreciation deduction?
Roads and bridges are in the 15-year property class.
Second year cost recovery percent 5 9.50%
MACRS, year 2 5 15,000,000 3 9.50%
5 $1,425,000.00
b.
What is the ninth year’s depreciation deduction?
Ninth year cost recovery percent 5 5.91%
MACRS, year 9 5 15,000,000 3 5.91%
5 $886,500.00
REVIEW EXERCISES
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CHAPTER 17—SECTION II
d.
c.
b.
a.
Final year (11th year) depreciation 5 150,000.00 3 3.28% 5 $4,920.00
What is the amount of the depreciation expense in the final year of write-off?
Sixth-year cost recovery percent 5 7.37%
What is the percentage for the sixth year of depreciation for this property?
10-year property
What is the property class for this asset under MACRS?
Basis for depreciation 5 $300,000(100% 2 50%) 5 $150,000
Tentative basis 5 $375,000 - $75,000 5 $300,000
The asset qualifies for a 50% special depreciation allowance
What is the basis for depreciation for the fruit trees?
3. Minute Maid Orange Groves planted fruit trees valued at $375,000 on February 12,
2004. The accountant for the company took a $75,000 section 179 deduction and the
asset is entitled to a special depreciation allowance.
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4.
REVIEW EXERCISES | CHAPTER 17—SECTION I I
Island Hoppers Airways of Hawaii purchased a new commercial airplane for $2,400,000.
The airplane is used for business 100% of the time. No section 179 or special allowances
are available for this asset. As the accountant for the company, prepare a depreciation
schedule for the asset by using MACRS.
Commercial airplanes are in the 7-year property class.
See Appendix B following the index for schedule.
5.
Lake Tahoe Timber Company purchased land containing an estimated 6,500,000 board
feet of lumber for $3,700,000. The company invested another $300,000 to construct access roads and a company depot. The residual value of the property and equipment
is estimated to be $880,000.
a.
What is the average depletion cost per board foot of lumber?
Total cost of asset 5 3,700,000 1 300,000 2 880,000 5 $3,120,000
3,120,000
5 $.48
Average depletion cost 5
6,500,000
b.
If 782,000 board feet were cut in the second year of operation, what is the amount
of the depletion cost for that year?
Second year depletion 5 782,000 3 .48 5 $375,360
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BUSINESS DECISION | CHAPTER 17—SECTION I I
INTANGIBLE WRITE-OFFS
6. As you have seen in this chapter, companies depreciate or write off the expense of tangible assets, such as trucks and equipment, over a period of their useful lives. Many companies also have intangible assets that must be accounted for as an expense over a period
of time.
Intangible assets are resources that benefit the company, but do not have any
physical substance. Some examples are copyrights, franchises, patents, trademarks, and
leases. In accounting, intangible assets are written off in a procedure known as asset
amortization. This is much like straight-line depreciation, but there is no salvage value.
You are the accountant for Bayview Pharmaceuticals, Inc. In January 2000, the
company purchased the patent rights for a new medication from Novae, Inc., for
$9,000,000. The patent had 15 years remaining as its useful life. In January 2005,
Bayview Pharmaceuticals successfully defended its right to the patent in a lawsuit at
a cost of $550,000 in legal fees.
a.
Using the straight-line method, calculate the patent’s annual amortization expense
for the years before the lawsuit.
9,000,000
Asset value
5
5 $600,000
Estimated useful life
15
Calculate the amortization expense per year for the remaining years after the lawsuit.
Annual amortization expense 5
b.
Accumulated expense 5 600,000 3 5 years 5 $3,000,000
Asset value 5 9,000,000 2 3,000,000 5 $6,000,000
6,000,000 1 550,000
Revised asset value
5
5 $655,000
Revised annual expense 5
Estimated useful life
10