8 Challenging Issues Under
Accrual Accounting:
Long-Lived Depreciable Assets –
A Closer Look
Discussion Questions
8-1. Some factors determining the estimated useful life of assets
might include:
a. prior experience the company
b. industry norms
c. anticipated technological advancements
d. the way the asset will be used
e. anticipated company growth
An important point that needs to be made during the
discussion of this question is that companies are considering
the useful life of the asset and not the life of the asset.
Companies rarely, if ever, intend to use any asset until it is
literally worthless. Usually, the estimated useful life is
somewhat shorter than the actual life.
8-2. The definition of residual value or Awhat is left over@ implies
that the asset will be scrapped or traded-in for a newer asset
once its estimated life is over. In trying to estimate an
asset=s residual value, a company actually tries to look into
the future and determine what the company will receive for
an asset when it is disposed of or traded in on a new
purchase. If the company believes there will be a market for
the used asset, the company might find out what used
assets, like the one being depreciated, are selling for today.
Chapter 8 – Challenging Issues under Accrual Accounting: Long-Lived Depreciable Assets – F8- 1
A Closer Look
That amount could be used as a starting point in the
development of the estimate of its asset=s residual value.
If a large piece of machinery is expected to be totally
obsolete when the company is finished using it, the
estimated residual value may be based on how much the
company could expect to get from the scrap metal in the
asset. Expected technological advances may lead
management to anticipate that machinery may become
nothing more than scrap metal well before the asset actually
wears out. In this case, the residual value may be estimated
as a dollar amount per ton that the company can expect to
get when the machinery is replaced.
8-3. The first alternative starts with a depreciable base of
$24,000 to allocate over the estimated useful life of 6 years.
The cost is allocated to expense at the rate of $4,000 per
year. The second case starts with a depreciable base of
$25,000 allocated over 4 years. This scenario allocates the
depreciable amount at a rate of $6,250 per year. Because
the expense is higher, the net income is lower.
However, the second scenario calls for depreciation expense
to be recorded for only 4 years. After that, net income is not
impacted by depreciation related to this asset. The second
scenario would record more depreciation expense per year,
but only 4 years of net income will be affected.
F8-2
Chapter 8: Challenging Issues Under Accrual Accounting: Long-Lived Depreciable
Assets—A Closer Look
8-4. Units-of-production may be established for each item in the
following manner:
a. Long-distance truck - based on mileage or based on
number of hours of engine time
b. Commercial airliner - based on number of hours of
engine running time or based on number of air miles
flown
c. Milling machine - based on number of parts produced
or based on number of machine hours used
d. Cruise ship - based on number of engine hours
Students may come up with some other useful measurements.
8-5. Answers may vary but some suggestions might include:
a. Furniture and fixtures
b. Buildings
c. Office machinery
d. Computers
e. Automotive equipment
8-6. The book value is computed by subtracting the accumulated
depreciation from the original cost. The book value at the
end of three years for each scenario is as follows:
Decision 1:Book Value = [$40,000 B ($9,000 x 3)] = $13,000
Decision 2:Book Value = [$40,000 B ($7,200 x 3)] = $18,400
Decision 3:Book Value = [$40,000 B ($9,500 x 3)] = $11,500
Decision 4:Book Value = [$40,000 B ($7,600 x 3)] = $17,200
8-7. This question is designed as a review for your students
about the meaning of retained earnings and how yearly net
income (or loss) will affect it. Beavers had a $23,000 loss in
2007, which lowered retained earnings by that amount.
Since the company had a $27,000 retained earnings balance
Chapter 8 – Challenging Issues under Accrual Accounting: Long-Lived Depreciable Assets – F8- 3
A Closer Look
at the end of 2007 (after taking into account the $23,000
loss), the retained earnings balance at the beginning of the
year must have been $50,000. This can be demonstrated by
constructing a statement of retained earnings for 2007:
Retained Earnings at January 1, 2007
LESS: Net Loss
LESS: Dividends
Retained Earnings at December 31, 2007
$50,000
(23,000)
-0$27,000
8-8. This question demonstrates the effect depreciation expense
has on periodic earnings (and, therefore, retained earnings).
To get the full benefit of this question, your students need to
have worked their way through Discussion Question 8-7.
From that work, they would know retained earnings at
January 1, 2007 was $50,000. The statement of retained
earnings for 2007 if Beavers had not recorded any
depreciation is:
Retained Earnings at January 1, 2007
ADD: Net Income
LESS: Dividends
Retained Earnings at December 31, 2007
$ 50,000
97,000*
-0$147,000
*This is most easily calculated by reconstructing the 2007
income statement and simply omitting the depreciation
expense:
Sales
$755,000
Cost of Goods Sold
422,000
Gross Margin
$333,000
Operating Expenses
Other than Depreciation
(236,000)
Net Income
$ 97,000
F8-4
Chapter 8: Challenging Issues Under Accrual Accounting: Long-Lived Depreciable
Assets—A Closer Look
8-9. The key concept for students to grasp is that over time (at
the end of the life of the asset) any method of calculating
depreciation will yield the same final result. This is because
depreciation is a cost allocation method and since the cost is
a fixed amount, the net result of depreciation expense must
be the same regardless of the way the amount is calculated
during the life of the asset. The differences are in the
reported depreciation expense (and net income) for
individual years over the life of the asset, not the total
depreciation expense.
Each of the five income statements tell the story of an
individual year, and are affected by the differences. The
balance sheets reflect the accumulated impact of the
differences. Only four of five are different.
The reason the 2011 balance sheet is the same under either
depreciation method is that once all the depreciation has
been taken on Beaver=s machine (over its life), the
accumulated depreciation is the same regardless of the
method used in calculating depreciation. Additionally, since
total net income over the life of the asset is the same
regardless of the depreciation method, retained earnings will
be the same. These are the two items on the balance sheet
that were different in the previous years.
Chapter 8 – Challenging Issues under Accrual Accounting: Long-Lived Depreciable Assets – F8- 5
A Closer Look
8-10. Cash is not part of the depreciation process, so the cash
balances are the same under both methods. The cash paid
for the machine is recorded whenever payment is made. The
depreciation process has no influence on when that is.
NOTE TO INSTRUCTOR: Students may raise the issue of
net income differences impacting taxes and, therefore, cash.
Be prepared to explain that our focus is on financial
reporting, which is separate and distinct from tax law.
Differences in methods used for financial reporting do not
directly affect a company=s taxes because MACRS is used
for tax purposes regardless of the financial method used.
8-11. The short answer is that the 2007 figures in Exhibit 8-8 are
not enough. It is, however, important for students to see
what we can and cannot learn from the limited information.
The company using straight-line depreciation appears to
have been more profitable. In fact, the company using
double-declining-balance reported a $23,000 loss. If you
were making an investment decision based on this
information, the natural tendency would be to select the
company that uses straight-line. The difference, however,
between the two companies= figures is a result of the way
depreciation was calculated.
Even if only the 2007 figures from Exhibit 8-8 were available,
we could determine the difference in the amount of
depreciation expanse recorded by the two companies.
($120,000 - $55,000 = $65,000). This difference fully
explains the differences between the net incomes and the
book values reported by the two companies.
If the company using straight-line had recorded $120,000 of
depreciation expense, it, too, would have shown a $23,000
F8-6
Chapter 8: Challenging Issues Under Accrual Accounting: Long-Lived Depreciable
Assets—A Closer Look
loss. In this case, the entire difference in the companies= net
incomes is a result of differences in depreciation expense.
Since this expense is a cost allocation, its impact on net
income should not affect a decision maker=s evaluation of
company performance.
Does one company have more assets than the other? We
can=t tell for sure from the limited information, but the
difference in the book value of their assets is a result of the
depreciation expense difference. If the company using
straight-line had recorded $120,000 of depreciation expense,
its book value would be $65,000 lower ($180,000--just like
the other company).
8-12. This question asks students to apply knowledge presented
earlier about the income statement to help them realize that
they are building an integrated set of skills which can enable
them to read and use accounting information. The specific
items appearing on Beaver=s multi-step income statement
that would not appear on a single-step statement are Gross
Margin and Operating Income.
NOTE TO INSTRUCTOR: Discussion Questions 8-13
through 8-19 are actually more like traditional homework
exercises than most of the Discussion Questions found in
this text. We have chosen to include them here because an
understanding of the items covered in them is critical to your
students= grasp of the effects of different depreciation
methods and what gains and losses really mean. If you
choose not to use them in your class work with the material,
they make good homework problems.
Chapter 8 – Challenging Issues under Accrual Accounting: Long-Lived Depreciable Assets – F8- 7
A Closer Look
8-13. Two items would be different on the income statement. The
first is the loss on the sale of the machine (reported as
$6,000), which would become a loss on the abandonment of
the machine equal to the book value of the machine
($25,000). The difference is caused by the fact that Beavers
did not receive the $19,000 cash as reported in the financial
statements in Exhibit 8-12. The other item affected on the
income statement is net income, which would be $72,000
instead of $91,000 reported in the exhibit. This difference is
caused by the loss being $19,000 higher.
Two specific items would be different on the balance sheet.
The first is cash (reported as $212,000), which would now be
$193,000. The difference is caused by the fact that Beavers
did not receive the $19,000 cash as reported in the financial
statement in Exhibit 8-11. This difference in cash would, of
course, cause a difference in total assets, as well. The other
item affected on the balance sheet is retained earnings,
which would be $332,000 instead of $351,000. This
difference is caused by net income (this period=s addition to
retained earnings) being $19,000 lower. The difference in
retained earnings would, of course, cause a difference in
total liabilities and stockholders= equity.
8-14. Straight Arrow Automotive:
$228,000 - $92,000 /4 years = $34,000 per year.
Accelerated Movers:
1. Figure the straight-line rate in percentages.
100% / 4 = 25% (per year)
2. Double the straight-line percentage.
25% x 2 = 50% (per year)
3. Apply that percentage to the book value of the asset.
50% x $228,000 = $114,000 (depreciation expense for
the first year)
F8-8
Chapter 8: Challenging Issues Under Accrual Accounting: Long-Lived Depreciable
Assets—A Closer Look
8-15. This question helps your students understand how the one
difference in depreciation flows through other related items
on the two financial statements.
Income Statement Items:
Depreciation Expense: Higher for Accelerated Automotive
because the company is using double-decliningbalance depreciation.
Total Operating expenses: Higher for Accelerated
Automotive because Depreciation Expense is higher.
Operating Income: Lower for Accelerated Automotive due to
higher Total Operating Expenses.
Net Income: Lower for Accelerated Automotive due to higher
Total Operating Expenses.
Balance Sheet Items:
Accumulated Depreciation: Higher for Accelerated
Automotive due to higher Depreciation Expense.
Trucks, Net. Lower for Accelerated Automotive due to
higher Accumulated Depreciation.
Total Assets: Lower for Accelerated Automotive due to
lower book value of trucks.
Retained Earnings: Lower for Accelerated Automotive due
to lower Net Income.
Total Shareholders= Equity: Lower for Accelerated
Automotive due to lower Retained Earnings.
Total Liabilities and Owner=s Equity: Lower for Accelerated
Automotive due to lower Total Shareholders= Equity.
Chapter 8 – Challenging Issues under Accrual Accounting: Long-Lived Depreciable Assets – F8- 9
A Closer Look
8-16. Straight-Line Automotive and Accelerated Automotive both
had beginning retained earnings balances of $143,000. This
can best be determined by creating a 2007 statement of
retained earnings for each company from the information
provided in the income statements and balance sheets and
then filling in the unknown beginning balances of retained
earnings:
Straight-Line Automotive:
Retained Earnings, January 1, 2007
ADD: Net Income for 2007
LESS: Dividends
Retained Earnings, December 31, 2007
$143,000 (determined)
221,000 (given)
-0- (given)
$364,000 (given)
Accelerated Automotive:
Retained Earnings, January 1, 2007
ADD: Net Income for2007
LESS: Dividends
Retained Earnings, December 31, 2007
$143,000 (determined)
141,000 (given)
-0(given)
$284,000
8-17. Depreciation expense on the income statement of StraightLine Automotive was $34,000 in 2008 and accumulated
depreciation on its balance sheet at the end of 2008 is also
$34,000. Depreciation expense for Accelerated Automotive
was $114,000 and accumulated depreciation is also
$114,000. In both cases the reason the depreciation
expense are the same is because 2008 is the first year the
assets are being depreciated. Accumulated depreciation is
the sum of all the prior years= depreciation expense plus the
depreciation expense for the current year. Since each
company purchased its fleet of trucks in 2008, there was no
prior depreciation. Therefore, the Accumulated Depreciation
shown on the 2008 balance sheet and the Depreciation
Expense reported on the 2008 income statement are the
same. In all years subsequent to 2008, Accumulated
F8-10
Chapter 8: Challenging Issues Under Accrual Accounting: Long-Lived Depreciable
Assets—A Closer Look
Depreciation and Depreciation Expense related to this asset
will be different amounts.
8-18. Accelerated Automotive shows accumulated depreciation of
$114,000 and book value of $114,000. To understand these
two amounts are the same, you must remember.
1. Double-declining balance depreciation is calculated
using twice the straight-line rate.
2. The estimated useful life of the trucks is four years,
which is 25% each year using straight-line depreciation.
This means that double-declining balance depreciation
use 50% (twice the straight-line rate).
3. The 50% rate is applied to the book value each year,
and in the first year (before any depreciation has been
recorded) the book value equals the cost.
(The
estimated residual value of $92,000 is ignored in the
initial calculation of depreciation using the double
declining-balance method.)
Given the facts of this case for Accelerated Automotive, the
depreciation calculation for the first year (2008) is:
Year
Book Value
At The
Beginning
Of The Year
2008
$228,000
2008
Depreciation
Expense
Depreciation
Percentage
X
50%
=
$114,000
The amount of depreciation expense for the first year is
exactly half of the original cost of the trucks. Book value is
defined as the original cost of an asset less the accumulated
depreciation. Since accumulated depreciation is equal to
50% of the cost of the trucks ($114,000), the book value of
the trucks is also 50% of the original cost of the trucks
($114,000).
Chapter 8 – Challenging Issues under Accrual Accounting: Long-Lived Depreciable Assets – F8- 11
A Closer Look
Straight-Line Automotive shows accumulated depreciation of
$34,000 and book value of $194,000. The amounts are
different because only $34,000 of depreciation expense was
recognized. The book value is calculated by subtracting the
accumulated depreciation from the cost of the trucks
($228,000 - $34,000 = $194,000).
8-19. Depreciation expense under the double-declining-balance
method is based on the book value at the beginning of any
given year during an asset=s estimated useful life. The fleet
of trucks had a book value at the beginning of 2009 of
$114,000 ($228,000 cost - $114,000 accumulated
depreciation). Therefore, it would seem reasonable to
calculate depreciation expense of $57,000 ($114,000 X
50%).
Companies, however, are not allowed to depreciate assets
beyond the point at which the book value of the assets is
equal to the assets= estimated residual value. The maximum
amount of depreciation expense recorded over the life of the
asset is the asset=s depreciable base (cost - residual value).
In this case, accumulated depreciation cannot exceed
$136,000, the depreciable base. At this point, the book value
will equal the residual value ($228,000 - $136,000 =
$92,000). With this limit in mind, and $114,000 in
accumulated depreciation already, the amount of
depreciation expense for 2009 is limited to $22,000.
F8-12
Chapter 8: Challenging Issues Under Accrual Accounting: Long-Lived Depreciable
Assets—A Closer Look
8-20. There is no way to tell from the information provided in the
text whether the companies were wise to sell their trucks or
whether they got a Agood deal@. The purpose of this
question is to drive home to the students that an informed
user of accounting information needs more than just
numbers to successfully evaluate a decision.
Also, this question Asets up@ the examination of Exhibit 815. Both companies sell their trucks for $150,000. The
evaluation of whether or not the move is wise should be the
same for both companies at this point because what limited
information we have is the same for both. Students will soon
see that one company will show a gain and one will incur a
loss, but those results are not evidence of whether or not
selling these assets is a smart move.
Before we could evaluate whether selling the trucks at this
time for $150,000 was a smart move, we would need to
know more, including information about:
-why the companies sold the trucks.
-whether the companies planned or needed to replace
the trucks.
-what the cost of replacement trucks would be.
-how the sale of the trucks will affect each company=s
operations.
-the market for used trucks (could the companies get
more for them in a different season?)
-what the companies planned to so with the $150,000.
Chapter 8 – Challenging Issues under Accrual Accounting: Long-Lived Depreciable Assets – F8- 13
A Closer Look
Review the Facts
A.
Examples of long-lived assets would include furniture, office
equipment, automobiles, trucks and real estate.
B.
The depreciation process is the systematic allocation of the
historical cost of long-lived assets.
C.
The computation of depreciation requires management to
estimate the useful life of the equipment and the expected
salvage value at the end of the life of the equipment.
D.
The depreciable base of an asset is the cost of the asset
minus the residual or salvage value. The depreciable base of
the asset is the maximum amount of the asset that may be
depreciated.
E.
The two methods are the straight-line depreciation method
and the production depreciation method. The production
method is used when the life of the asset is better measured
using the units it can produce over its life.
F.
An accelerated depreciation method is one that calls for
larger amounts of depreciation in the early years of life of a
fixed asset. The depreciation expense declines in the later
years. The accelerated methods are most applicable when
the asset is being used more heavily in the early years
thereby justifying more depreciation in the early years of life.
G.
The formula for straight-line depreciation is as follows:
Cost – Residual Value / Useful Life
F8-14
Chapter 8: Challenging Issues Under Accrual Accounting: Long-Lived Depreciable
Assets—A Closer Look
H.
The book value of an asset is defined as the cost –
accumulated depreciation.
I.
Accumulated depreciation represents the total of all the
depreciation expense that has been recognized for the asset
over its life to date.
J.
The double-declining-balance method of depreciation is
calculated by the following steps:
Step 1: Calculate the straight-line rate of depreciation
100% / Number of Year’s of the Asset’s Life
Step 2: Double the percentage found in step 1
Step 3: Multiply the book value of the asset times the rate
found in step 2 to get depreciation expense
K.
Total depreciation expense and total net income are the
same over the life of the asset under all methods of
depreciation. In the early years of life the accelerated
method of depreciation will reduce net income more than
straight line but it will even out in the long run as the straight
line method will lead to more income in the later years of life.
L.
A fixed asset is considered fully depreciated when its book
value and its residual value are the same at the end of the
asset’s estimated useful life.
M.
Gains and losses appear on the income statement and are
ultimately closed to capital or retained earnings.
N.
A gain is an inflow from a peripheral activity whereas a
revenue is an inflow from a principal business activity. A loss
is an outflow from a peripheral activity whereas an expense
is an outflow arising from a principal business activity.
Chapter 8 – Challenging Issues under Accrual Accounting: Long-Lived Depreciable Assets – F8- 15
A Closer Look
O.
A gain on the sale of an asset arises when the asset is sold
for more than its book value. A loss on the sale of an asset
occurs when the asset is sold for less than its book value.
P.
The sale of an asset for no gain or loss has no impact on the
income statement and the balance sheet sustains no net
change from such a transaction.
Apply What You Have Learned
8-21.
1. e
2. j
3.
a
4.
i
5.
c
6.
f
7.
8.
g
b
9.
h
10.
d
F8-16
One of the factors determining how much of an asset’s
cost will be allocated to the periods supposed
benefited.
A depreciation method that uses activity instead of time
as the basis of allocation..
More of the cost of a long-lived asset is converted to
expense in the early years of its life than in later years
The cost of a long-lived asset less the estimated
residual value.
Results when a depreciable asset is sold for more than
its book value.
An equal amount of a long-lived asset’s cost is
converted to expense in each year of its useful life.
Net inflows resulting from peripheral activities.
The cost of a long-lived depreciable asset less its
accumulated depreciation.
Results when a depreciable asset is sold for less than
its book value.
Net outflows resulting from peripheral activities.
Chapter 8: Challenging Issues Under Accrual Accounting: Long-Lived Depreciable
Assets—A Closer Look
8-22.
The statement presented is an improper view of the
depreciation process in accounting. Depreciation of long-lived
assets is an attempt to allocate the cost of the asset to the period
that it helps to produce revenues to achieve a proper matching of
revenues and expenses. Depreciation does not attempt to value
the asset on the balance sheet.
8-23.
a.
1.
2.
3.
(Cost – Residual Value) / Life =
($150,000 – $10,000) / 5 =
($150,000 – $20,000) / 5 =
($150,000 – $30,000) / 5 =
Depreciation
$28,000 per year
$26,000 per year
$24,000 per year
b.
Alternative #3 will result in the highest reported yearly net
income because it yields the lowest depreciation expense.
However, over the time period of ownership, there will be no
difference in total net income among the three alternatives.
c.
The lathe will be economically useful to Garcia and
Company for as long as it is productive. The actual useful life
of the lathe is in no way affected by management’s estimate
of its useful life or residual value.
Chapter 8 – Challenging Issues under Accrual Accounting: Long-Lived Depreciable Assets – F8- 17
A Closer Look
8-24.
a
1.
2.
3.
(Cost – Residual Value) / Life =
($75,000 – $7,500) / 4
=
($75,000 – $12,500) / 4
=
($75,000 – $17,500) / 4
=
Depreciation
$16,875 per year
$15,625 per year
$14,375 per year
b.
Alternative #3 will result in the highest reported yearly net
income because it yields the lowest depreciation expense.
Alternative #1 will result in the lowest net income. However,
over the time period of ownership, there will be no difference
in total net income among the three alternatives.
c.
The minicomputer will be useful to Lottinvilles Inc. for as long
as it is productive. The actual useful life of the minicomputer
is in no way affected by management’s estimate of its useful
life or residual value.
8-25.
a.
1.
2.
3.
F8-18
(Cost – Residual Value) / Life =
($700,000 – $40,000) / 6 =
($700,000 – $100,000) / 5 =
($700,000 – $140,000) / 4 =
Depreciation
$110,000 per year
$120,000 per year
$140,000 per year
Chapter 8: Challenging Issues Under Accrual Accounting: Long-Lived Depreciable
Assets—A Closer Look
b.
Alternative #3 will result in the lowest reported yearly net
income because it yields the highest depreciation expense.
Alternative #1 will result in the highest net income. However,
over the time period of ownership, there will be no difference
in total net income among the three alternatives.
c.
The deciding factor should be which of the three alternatives
represents management’s best estimate of the press’ useful
life and residual value. The decision should not be based on
the effect of depreciation on net income.
8-26.
a.
(Cost – Residual Value) / Life = Depreciation
1. ($250,000 – $10,000) / 5 = $48,000 per year
2. ($250,000 – $25,000) / 4 = $56,250 per year
3. ($250,000 – $50,000) / 3 = $66,667 per year
b.
Alternative #3 will result in the lowest reported yearly net
income because it yields the highest depreciation expense.
Alternative #1 will result in the highest net income. However,
over the time period of ownership, there will be no difference
in total net income among the three alternatives.
c.
The deciding factor should be which of the three alternatives
represents management’s best estimate of the freezer’s
useful life and residual value. The decision should not be
based on the effect of depreciation on net income.
8-27.
a.
Book Value
Beginning
Year of the Year
Depreciation
Percentage
Yearly
Depreciation
Expense
Chapter 8 – Challenging Issues under Accrual Accounting: Long-Lived Depreciable Assets –
A Closer Look
F8- 19
2008 $600,000 x
40% =
$240,000
2009 360,000 x
40% =
144,000
2010 216,000 x
40% =
86,400
2011 129,600 x
40% =
51,840
2012 77,760 x
40% =
37,760*
Total Depreciation Expense recognized $560,000
*The calculated amount is $31,104. To fully depreciate this asset during its useful
life, the amount is raised to $37,760.
b.
$600,000 – $560,000 = $40,000
8-27. (Continued)
c. The book value is the cost of a long-lived asset minus
accumulated depreciation. Book value represents the asset cost
that has not yet been converted from asset to expense and does
not relate to the “value” or “worth” of the asset.
F8-20
Chapter 8: Challenging Issues Under Accrual Accounting: Long-Lived Depreciable
Assets—A Closer Look
8-28.
a.
Year
Book Value
Beginning
of the Year
Depreciation
Percentage
1
$900,000
x
50% =
2
450,000
x
50% =
3
225,000
x
50% =
4
112,500
x
50%
Total Depreciation Expense recognized
Yearly
Depreciation
Expense
$450,000
225,000
112,500
32,500 *
$820,000
* We cannot depreciate the asset below its stated salvage value.
b.
$900,000 – $820,000 = $80,000
c.
The book value is the cost of a long-lived asset minus
accumulated depreciation. Book value represents the asset
cost that has not yet been converted from asset to expense
and does not relate to the “value” or “worth” of the asset.
8-29.
a. (Cost – Residual Value) / Life = Depreciation
($480,000 – $40,000) / 6 = $73,333 per year
Chapter 8 – Challenging Issues under Accrual Accounting: Long-Lived Depreciable Assets –
A Closer Look
F8- 21
b.
Year
Book Value
Beginning
of the Year
Yearly
Depreciation
Expense
Depreciation
Percentage
1
$480,000 x
33.333%
2
320,002 x
33.333%
3
213,335 x
33.333%
4
142,224 x
33.333%
5
94,816 x
33.333%
6
63,211 x
33.333%
Total Depreciation Expense recognized
=
=
=
=
=
=
$159,998
106,667
71,111
47,408
31,605
23,211 *
$440,000
* The calculated amount is $21,070. To fully depreciate this asset during
its useful life, the amount is raised to $23,211.
8-30.
a. (Cost – Residual Value) / Life = Depreciation
($375,000 – $45,000) / 4 = $82,500 per year
b.
Year
Book Value
Beginning
of the Year
Depreciation
Percentage
1
$375,000 x
2
187,500 x
3
93,750 x
4
46,875 x
Total Depreciation Expense
50% =
50% =
50% =
50% =
Yearly
Depreciation
Expense
$187,500
93,750
46,875
1,875*
$330,000
* We cannot depreciate the asset below its stated salvage value.
8-31.
a. (Cost – Residual Value) / Production = Depreciation
($70,000 – $10,000) /1,000,000 miles = $.06 per mile
F8-22
Chapter 8: Challenging Issues Under Accrual Accounting: Long-Lived Depreciable
Assets—A Closer Look
Year Cost Production
Yearly Depreciation
2007 $.06 x 200,000 miles =
$12,000
2008 .06 x 225,000 miles =
13,500
2009 .06 x 300,000 miles =
18,000
2010 .06 x 275,000 miles =
16,500
Total Depreciation Expense recognized
$60,000
Book Value = Cost – Accumulated Depreciation
$10,000 = $70,000 – $60,000
b.
c.
d.
Sales Price
$15,000
Sales Price
$5,000
Sales Price
$1,000
– Book Value
– $10,000
– Book Value
– $10,000
– Book Value
– $10,000
=
=
=
=
=
=
Gain or Loss
$5,000 Gain
Gain or Loss
$5,000 Loss
Gain or Loss
$9,000 Loss
8-32.
a. (Cost – Residual Value) / Production = Depreciation
($95,000 – $5,000) / 2,000,000 pages = $.045 per page
Chapter 8 – Challenging Issues under Accrual Accounting: Long-Lived Depreciable Assets –
A Closer Look
F8- 23
Year Cost
Production
Yearly Depreciation
2007 $.045 x 500,000 pages =
$22,500
2008 .045 x 400,000 pages =
18,000
2009 .045 x 430,000 pages =
19,350
2010 .045 x 600,000 pages =
27,000
2011 .045 x 350,000 pages =
3,150*
Total Depreciation Expense recognized $90,000
* We cannot depreciate the asset below its stated salvage value.
Book Value = Cost – Accumulated Depreciation
$5,000 = $95,000 – $90,000
b.
c.
d.
F8-24
Sales Price – Book Value =
$15,000 – $5,000
=
Sales Price – Book Value =
$5,000 – $5,000
=
Sales Price – Book Value =
$2,000 – $5,000
=
Gain or Loss
$10,000 Gain
Gain or Loss
No Gain or Loss
Gain or Loss
$3,000 Loss
Chapter 8: Challenging Issues Under Accrual Accounting: Long-Lived Depreciable
Assets—A Closer Look
8-33.
a. (Cost – Residual Value) / Production = Depreciation
($200,000 – $4,000) /1,600,000 hours = $.1225 per hour
Year Cost
Production
Yearly Depreciation
2008 $.1225 x 500,000 hours =
$ 61,250
2009 .1225 x 430,000 hours =
52,675
2010 .1225 x 300,000 hours =
36,750
2011 .1225 x 300,000 hours =
36,750
Total Depreciation Expense recognized $187,425
Book Value = Cost – Accumulated Depreciation
$12,575 = $200,000 – $187,425
b.
c.
d.
Sales Price
$12,000
Sales Price
$3,000
Sales Price
$10,000
– Book Value =
– $12,575
=
– Book Value =
– $12,575
=
– Book Value =
– $12,575
=
Gain or Loss
$575 Loss
Gain or Loss
$9,575 Loss
Gain or Loss
$2,575 Loss
Chapter 8 – Challenging Issues under Accrual Accounting: Long-Lived Depreciable Assets –
A Closer Look
F8- 25
8-34.
a. (Cost – Residual Value) / Life = Depreciation
($700,000 – $50,000) / 4 = $162,500 per year
b.
Book Value
Beginning
Year of the Year
Depreciation
Percentage
Yearly
Depreciation
Expense
2007 $700,000 x
50% =
$350,000
2008 350,000 x
50% =
175,000
2009 175,000 x
50% =
87,500
2010 87,500 x
50% =
37,500*
Total Depreciation Expense recognized $650,000
*We cannot depreciate the asset below its stated salvage value.
c.
(1)
(2)
F8-26
Depreciation expense for 2007 using straight-line
depreciation is $162,500. Twice that would be
$335,000. Depreciation expense for 2007 using doubledeclining balance depreciation is $350,000. It is not
twice the amount of straight-line depreciation because
the $50,000 residual value is ignored in calculating
double-declining balance depreciation.
Over the four-year estimated useful life of the fleet,
depreciation expense will total $650,000 regardless of
which method is used. The effect of the choice between
Chapter 8: Challenging Issues Under Accrual Accounting: Long-Lived Depreciable
Assets—A Closer Look
(3)
these two methods is not depreciation expense in total,
but the amount charged against income in any given
year of the estimated useful life.
In the first two years of life using the straight-line
method, depreciation reduces net income by $335,000
while the declining balance method reduces net income
by $525,000. Depreciation is an operating expense
subtracted from revenue to compute net income.
8-35.
a. (Cost – Residual Value) / Life = Depreciation
($600,000 – $50,000) / 3 = $183,333 per year
b.
Book Value
Beginning
Year of the Year
Depreciation
Percentage
2007 $600,000 x
66.6667% =
2008 200,000 x
66.6667% =
2009 66,667 x
66.6667% =
Total Depreciation Expense recognized
Yearly
Depreciation
Expense
$400,000
133,333
16,667*
$550,000
* We cannot depreciate the asset below its stated salvage value.
c.
(1)
(2)
Depreciation expense for 2007 using straight-line
depreciation is $183,333. Twice that would be
$366,666. Depreciation expense for 2007 using doubledeclining balance depreciation is $400,000. It is not
twice the amount of straight-line depreciation because
the $50,000 residual value is ignored in calculating
double-declining balance depreciation.
Over the three-year estimated useful life of the fleet,
depreciation expense will total $550,000 regardless of
which method is used. The effect of the choice between
Chapter 8 – Challenging Issues under Accrual Accounting: Long-Lived Depreciable Assets –
A Closer Look
F8- 27
(3)
F8-28
these two methods is not depreciation expense in total,
but the amount charged against income in any given
year of the estimated useful life.
In the first two years of life using the straight-line
method, depreciation reduces net income by $366,666
while the declining balance method reduces net income
by $533,333. Depreciation is an operating expense
subtracted from revenue to compute net income.
Chapter 8: Challenging Issues Under Accrual Accounting: Long-Lived Depreciable
Assets—A Closer Look
8-36.
a. (Cost – Residual Value) / Life =
($200,000 – $25,000) / 5 =
Year
2008
2009
2010
2011 (6/12 x $35,000)
Total Accumulated Depreciation
Depreciation
$35,000 per year
Depreciation
$ 35,000
35,000
35,000
17,500
$122,500
Book Value = Cost – Accumulated Depreciation
$77,500 = $200,000 – $122,500
b.
Sales Price – Book Value = Gain or Loss
$102,000 – $77,500 = $24,500 Gain
c.
Sales Price – Book Value = Gain or Loss
$25,000 – $77,500 = $52,500 Loss
Chapter 8 – Challenging Issues under Accrual Accounting: Long-Lived Depreciable Assets –
A Closer Look
F8- 29
8-37.
a. (Cost – Residual Value) / Life = Depreciation
($150,000 – $10,000) /
= $35,000 per year
Year
2007
2008
2009 (9/12 x $35,000)
Total Accumulated Depreciation
Depreciation
$35,000
35,000
26,250
$96,250
Book Value = Cost – Accumulated Depreciation
$53,750 = $150,000 – $96,250
b.
Sales Price – Book Value = Gain or Loss
$172,000 – $53,750 = $118,250 Gain
c.
Sales Price – Book Value = Gain or Loss
$25,000 – $53,750 = $28,750 Loss
F8-30
Chapter 8: Challenging Issues Under Accrual Accounting: Long-Lived Depreciable
Assets—A Closer Look
8-38.
a. (Cost – Residual Value) / Life = Depreciation
($450,000 – $50,000) / 10 = $40,000 per year
Year
2001
2002
2003
2004
2005
2006
2007
Total Accumulated Depreciation
Depreciation
$ 40,000
40,000
40,000
40,000
40,000
40,000
40,000
$280,000
Book Value = Cost – Accumulated Depreciation
$170,000 = $450,000 – $280,000
b.
Sales Price – Book Value = Gain or Loss
$130,000 – $170,000 = $40,000 Loss
c.
Sales Price – Book Value = Gain or Loss
$30,000 – $170,000 = $140,000 Loss
Chapter 8 – Challenging Issues under Accrual Accounting: Long-Lived Depreciable Assets –
A Closer Look
F8- 31
8-39.
There is nothing improper about the gain or loss resulting
from the sale of these two copiers. The explanation can be found
in the way the two women chose to compute depreciation on their
copiers. Maude chose an accelerated depreciation method,
whereas Millie chose straight-line. This means that in the early
years of service, Maude was recognizing more depreciation
expense on her copier than Millie was on hers. For this reason,
the book value of Maude’s copier was lower when the asset was
sold. This situation resulted in a gain on the sale for Maude and a
loss on the sale for Millie. Note that across the total time, both
women had exactly the same amount of change in net income
due to owning and selling the copiers.
F8-32
Chapter 8: Challenging Issues Under Accrual Accounting: Long-Lived Depreciable
Assets—A Closer Look
8-40.
a. Redd:
(Cost – Residual Value) / Life = Depreciation
($10,000 – $ -0-)
/ 5 = $2,000 per year
$2,000 x 3 years = $6,000 Accumulated Depreciation
Fred:
Year
Book Value
Beginning
of the Year
Depreciation
Percentage
1
$10,000 x
40% =
2
6,000 x
40% =
3
3,600 x
40% =
Total Depreciation Expense
b.
Yearly
Depreciation
Expense
$4,000
2,400
1,440
$7,840
Redd:
Book Value = Cost – Accumulated Depreciation
$4,000 = $10,000 – $6,000
Sales Price – Book Value = Gain or Loss
$5,500 – $4,000 = $1,500 Gain
Fred:
Book Value = Cost – Accumulated Depreciation
$2,160 = $10,000 – $7,840
Sales Price – Book Value = Gain or Loss
$5,500 – $2,160 = $3,340 Gain
c.
The difference is in the way the two men depreciated their
equipment. Fred chose an accelerated depreciation method,
whereas Redd chose straight-line so that in the early years
of service, Fred recognized more depreciation expense on
his copier than Redd did on his. For this reason, the book
value of Fred’s machine was lower after three years,
Chapter 8 – Challenging Issues under Accrual Accounting: Long-Lived Depreciable Assets –
A Closer Look
F8- 33
resulting in a larger gain on the sale for Fred than for Redd.
8-41.
F8-34
Chapter 8: Challenging Issues Under Accrual Accounting: Long-Lived Depreciable
Assets—A Closer Look
a.
Ethel:
(Cost – Residual Value) / Life = Depreciation
($20,000 – $ -0-)
/5
= $4,000 per year
$4,000 x 3 years = $12,000 Accumulated Depreciation
Lucy:
Year
Book Value
Beginning
of the Year
Depreciation
Percentage
Yearly
Depreciation
Expense
1
$20,000 x
40%
= $ 8,000
2
12,000 x
40%
= 4,800
3
7,200 x
40%
= 2,880
Total Depreciation Expense recognized $15,680
b.
Ethel:
Book Value = Cost – Accumulated Depreciation
$8,000 = $20,000 – $12,000
Sales Price – Book Value = Gain or Loss
$11,000 – $8,000 = $3,000 Gain
Lucy:
Book Value = Cost – Accumulated Depreciation
$4,320 = $20,000 – $15,680
Sales Price – Book Value = Gain or Loss
$11,000 – $4,320 = $6,680 Gain
c.
The difference is in the way the two women depreciated their
equipment. Lucy chose an accelerated depreciation method,
whereas Ethel chose straight-line so that in the early years
of service, Lucy recognized more depreciation expense on
her copier than Ethel did on hers. For this reason, the book
value of Lucy’s machine was lower after three years,
resulting in a larger gain on the sale for Lucy than for Ethel.
8-42.
Chapter 8 – Challenging Issues under Accrual Accounting: Long-Lived Depreciable Assets –
A Closer Look
F8- 35
a.
Ricky:
(Cost – Residual Value) / Life = Depreciation
($40,000 – $ -0-)
/ 5 = $ 8,000 per year
$8,000 x 3 years = $24,000 Accumulated Depreciation
Fred:
Year
Book Value
Beginning
Of The Year
Depreciation
Percentage
1
$40,000
x
2
24,000
x
3
14,400
x
Total Depreciation Expense
b.
40%
40%
40%
Yearly
Depreciation
Expense
= $16,000
= 9,600
= 5,760
$30,760
Ricky:
Book Value = Cost – Accumulated Depreciation
$16,000 = $40,000 – $24,000
Sales Price – Book Value = Gain or Loss
$22,000 – $16,000 = $6,000 Gain
Fred:
Book Value = Cost – Accumulated Depreciation
$8,640 = $40,000 – $31,360
Sales Price – Book Value = Gain or Loss
$22,000 – $8,640 = $13,360 Gain
c.
The difference is in the way the two men depreciated their
equipment. Fred chose an accelerated depreciation method,
whereas Ricky chose straight-line so that in the early years
of service, Fred recognized more depreciation expense on
his equipment than Ricky did on his. For this reason, the
book value of Fred’s machine was lower after three years,
resulting in a larger gain on the sale for Fred than for Ricky.
8-43.
F8-36
Chapter 8: Challenging Issues Under Accrual Accounting: Long-Lived Depreciable
Assets—A Closer Look
In a perfect world, management would know with certainty how
long a piece of equipment would be useful, and the exact amount
of the residual value. Recognizing that we do not live in a perfect
world, management is forced to make the best estimates based
upon information that is available at the time. For this reason, the
estimates are not exact and depreciation estimates may fall short
or they may be excessive. When either of these situations result,
gains or losses may occur when the asset is sold or abandoned.
It is important to recognize that gains and losses from sales
of equipment are nothing more than adjustments to correct for
errors made in the estimation process for the computation of
depreciation expense.
8-44.
a.
Beavers Corporation
Statements of Retained Earnings
For the Years 2007, 2008, 2009, and 2010
2007
2008
2009
2010
Beginning Balance $50,000 $27,000 $ 52,000 $105,800
+ Net Income (Loss) (23,000) 25,000
53,800
71,080
– Dividends
-0-0-0-0= Ending Balance
$27,000 $52,000 $105,800 $176,880
b.
Because the beginning balance of retained earnings for
2007 $50,000 minus the net loss of $23,000 equals the
ending balance of retained earnings, $27,000, it can be
deduced that no dividends were paid in 2007. This is true for
all years presented. Apparently, Beavers adheres to a “no
dividend” policy. Remember, there is no requirement for any
corporation to pay dividends, and a “no dividend” policy is an
acceptable policy.
8-44. (Continued)
Chapter 8 – Challenging Issues under Accrual Accounting: Long-Lived Depreciable Assets –
A Closer Look
F8- 37
c.
Beavers Corporation
Statements of Retained Earnings
For the Years 2007, 2008, 2009, and 2010
2007
2008
2009
2010
Beginning Balance $ 50,000 $147,000 $244,000 $341,000
+ Net Income
97,000
97,000
97,000
97,000
– Dividends
-0-0-0-0= Ending Balance
$147,000 $244,000 $341,000 $438,000
The beginning retained earnings balance for 2007 would be
the ending balance from the company’s 2006 balance sheet. If no
depreciation had been recorded in 2007, net income, and thus,
retained earnings, as of the end of 2007 would have been
$120,000 higher ($97,000 instead of $23,000 net loss). In the
same way, net income for the years 2008, 2009, and 2010 would
be increased by exactly the amount of the depreciation expense
for each year. Net income for each year would be $97,000. The
only difference between the four income statements for Beavers
Corporation is the amount of depreciation expense recorded.
8-45.
F8-38
Chapter 8: Challenging Issues Under Accrual Accounting: Long-Lived Depreciable
Assets—A Closer Look
a.
Expense recognition differs under the cash and accrual
methods. Under cash accounting, expenses are recognized
when the cash associated with the cost is paid. Although
Barker made two merchandise inventory purchases during
the month (January 2 and January 5), only the one on
January 5 ($15,000) was paid for during the month. For this
reason, cost of goods sold under the cash basis totaled
$15,000 for the month.
Under accrual accounting, we attempt to recognize
expenses in the same income statement period as the
revenues they help generate, not when the cash is paid. In
this instance, Barker sold merchandise which cost $12,000
on January 10 and $7,000 on January 20. Those two
amounts total $19,000, which equals the cost of goods sold
on the company’s accrual basis income statement.
b.
Under accrual accounting, the $36,000 of merchandise
inventory purchased during the month but not yet sold would
be shown on Barker’s balance sheet as an asset. Assets are
defined as probable future economic benefits obtained or
controlled by a particular entity as a result of past
transactions or events. The merchandise inventory Barker
still holds at the end of January is appropriately classified as
an asset.
c.
Under the cash basis, business activity is only recognized
when cash is received or disbursed. Therefore, the only
merchandise inventory considered purchased during
January under the cash basis is the $15,000 the company
paid during the month. Merchandise inventory is not
considered an asset under cash basis accounting.
Therefore, the $40,000 of merchandise inventory purchased
8-45. (Continued)
Chapter 8 – Challenging Issues under Accrual Accounting: Long-Lived Depreciable Assets –
A Closer Look
F8- 39
but not paid for during the month is not shown anywhere on
the company’s accounting records or financial statements.
d.Under the cash basis, the entire cost of the truck is shown as
expense because it was paid for during the month. There is
no attempt to match the cost of the truck with the revenues it
will help generate in the future. Barker estimates the truck
will be of use to the company for three years. The amount
recognized as Depreciation Expense under the accrual basis
attempts to match a portion of the cost of the truck with the
period in which the truck will help generate revenue.
e.
f.
g.
1. Book Value of Truck (Cash Basis)
(Cost written off in first year)
2. Book Value of Truck (Accrual Basis)
(Cost - Accumulated Depreciation)
[$10,000 – ($250x12)]
$ -0-
1. Book Value of Truck (Cash Basis)
(Cost written off in first year)
2. Book Value of Truck (Accrual Basis)
(Cost - Accumulated Depreciation)
[$10,000 – ($250x36)]
$ -0-
$7,000
$1,000
The income statement prepared on the cash basis
recognizes the full cost of the truck as expense in 2008. The
statement prepared on the accrual basis only recognizes the
current month’s depreciation on the truck which is a more
realistic approach when attempting to measure income on
the accrual basis.
*8-46.
F8-40
Chapter 8: Challenging Issues Under Accrual Accounting: Long-Lived Depreciable
Assets—A Closer Look
Cunningham Corporation
General Journal
Date
Description
a.
Post
Ref.
Equipment
Cash in Bank
Page
Debit
Credit
60,000
60,000
To record purchase of equipment.
b.
Depreciation Expense
10,000
Accumulated Depreciation
10,000
To record one year’s depreciation
of equipment.
($60,000 – $10,000 ) / 5 = $10,000
*8-47.
Buffington, Inc.
General Journal
Date
Description
a.
Equipment
Cash in Bank
Page
Post
Ref.
Debit
Credit
560,000
125,000
Note Payable – Bank
435,000
To record purchase of equipment.
b.
Depreciation Expense
83,333
Accumulated Depreciation
83,333
To record one year’s depreciation
of equipment.
($560,000 – $60,000 )/6 = $83,333
*8-48.
Chapter 8 – Challenging Issues under Accrual Accounting: Long-Lived Depreciable Assets –
A Closer Look
F8- 41
(Cost – Residual Value) / Life = Depreciation
($560,000 – $60,000) / 6 = $83,333 per year
$83,333 x 4 years = $333,332 Accumulated Depreciation
a.
Book Value = Cost – Accumulated Depreciation
$226,668 = $560,000 – $333,332
Sales Price – Book Value = Gain or Loss
$86,000 – $226,668 = $140,668 Loss
Buffington, Inc.
General Journal
Date
Description
b.
Page
Post
Ref.
Debit
Cash in Bank
Accumulated Depreciation
86,000
333,332
Loss on Sale of Equipment
140,668
Equipment
Credit
560,000
To record purchase of equipment.
*8-49.
F8-42
Chapter 8: Challenging Issues Under Accrual Accounting: Long-Lived Depreciable
Assets—A Closer Look
Malph Corporation
General Journal
Date
Description
a.
Page
Post
Ref.
Equipment
Cash in Bank
Debit
Credit
75,000
75,000
To record purchase of equipment.
b.
Depreciation Expense
10,000
Accumulated Depreciation
10,000
To record one year’s depreciation
of equipment.
($75,000 – $5,000 )/ 7 = $10,000
*8-50.
Dustin Corporation
General Journal
Date
Description
a.
Equipment
Cash in Bank
Page
Post
Ref.
Debit
Credit
75,000
5,000
Note Payable – Bank
70,000
To record purchase of equipment.
b.
Depreciation Expense
9,000
Accumulated Depreciation
9,000
To record one year’s depreciation
of equipment.
($75,000 – $12,000 )/ 7 = $9,000
*8-51.
Chapter 8 – Challenging Issues under Accrual Accounting: Long-Lived Depreciable Assets –
A Closer Look
F8- 43
a.
Year
Book Value
Beginning
of the Year
Yearly
Depreciation
Expense
Depreciation
Percentage
1
$75,000 x
28.57%
2
53,572 x
28.57%
3
38,266 x
28.57%
4
27,333 x
28.57%
Total Depreciation Expense recognized
=
=
=
=
$21,428
15,306
10,933
7,809
$55,476
Book Value = Cost – Accumulated Depreciation
$19,524 = $75,000 – $55,476
Sales Price – Book Value = Gain or Loss
$8,000 – $19,524
= $11,524 Loss
Dustin Corporation
General Journal
Date
Description
b.
Page
Post
Ref.
Debit
Cash in Bank
Accumulated Depreciation
8,000
55,476
Loss on Sale of Equipment
11,524
Credit
Equipment
To record sale of equipment.
*8-52.
F8-44
Chapter 8: Challenging Issues Under Accrual Accounting: Long-Lived Depreciable
Assets—A Closer Look
75,000
(Cost – Residual Value) / Life = Depreciation
($480,000 – $40,000) / 5 = $88,000 per year
a.
b&c
Randall Company
General Journal
Page
Date
2007
Dec
31
Description
Depreciation Expense
Accumulated Depreciation
Post
Ref.
Debit
Credit
88,000
88,000
To record one year’s depreciation
of equipment.
($480,000 – $40,000 )/ 5 = $88,000
2008
Dec
31
Depreciation Expense
88,000
Accumulated Depreciation
88,000
To record one year’s depreciation
of equipment.
2009
Jan
2
Cash in Bank
200,000
Accumulated Depreciation
176,000
Loss on Sale of Equipment
104,000
Equipment
480,000
To record sale of equipment.
Chapter 8 – Challenging Issues under Accrual Accounting: Long-Lived Depreciable Assets –
A Closer Look
F8- 45
*8-53.
a.
Year
Book Value
Beginning
of the Year
Depreciation
Percentage
2007
$375,000
x
2008
225,000
x
2009
135,000
x
2010
81,000
x
2011
48,600
x
Total Depreciation Expense
40% =
40% =
40% =
40% =
40% =
Yearly
Depreciation
Expense
$150,000
90,000
54,000
32,400
8,600*
$335,000
* We cannot depreciate the asset below its stated salvage value.
Wooten Company
General Journal
Date
2007
Dec
31
Description
Depreciation Expense
Accumulated Depreciation
Page
Post
Ref.
Debit
Credit
150,000
150,000
To record depreciation expense.
2008
Dec
31
Depreciation Expense
90,000
Accumulated Depreciation
90,000
To record depreciation expense.
2009
Dec
31
Depreciation Expense
54,000
Accumulated Depreciation
54,000
To record depreciation expense.
2010
Dec
31
Depreciation Expense
32,400
Accumulated Depreciation
To record depreciation expense.
*8-53. (Continued)
F8-46
Chapter 8: Challenging Issues Under Accrual Accounting: Long-Lived Depreciable
Assets—A Closer Look
32,400
Wooten Company
General Journal
Date
2011
Dec
31
Description
Depreciation Expense
Accumulated Depreciation
Page
Post
Ref.
Debit
Credit
8,600
8,600
To record depreciation expense.
b.
2009
Dec
31
Cash in Bank
50,000
Accumulated Depreciation
294,000
Loss on Sale of Equipment
31,000
Equipment
375,000
To record sale of equipment.
c.
2009
Apr
30
Depreciation Expense
18,000
Accumulated Depreciation
18,000
To record depreciation expense
for 4 months. ($54,000 x 4/12)
Apr
30
Cash in Bank
50,000
Accumulated Depreciation
258,000
Loss on Sale of Equipment
67,000
Equipment
375,000
To record sale of equipment
*8-54.
Chapter 8 – Challenging Issues under Accrual Accounting: Long-Lived Depreciable Assets –
A Closer Look
F8- 47
(Cost – Residual Value) / Life = Depreciation
($700,000 – $50,000 ) / 4 = $162,500 per year
a.
Chesley, Inc.
General Journal
Date
2007
Dec
31
Description
Depreciation Expense
Accumulated Depreciation
Page
Post
Ref.
Debit
Credit
162,500
162,500
To record depreciation expense.
b.
2010
Jan
2
Cash in Bank
Accumulated Depreciation
70,000
650,000
Gain on Sale of Fleet
20,000
Fleet
700,000
To record sale of equipment.
c.
2010
Mar
31
Depreciation Expense
40,625
Accumulated Depreciation
40,625
To record depreciation expense
for 3 months. ($162,500 x 3/12)
Mar
31
Cash in Bank
30,000
Accumulated Depreciation
528,125
Loss on Sale of Equipment
141,875
Equipment
700,000
To record sale of equipment
*8-55.
F8-48
Chapter 8: Challenging Issues Under Accrual Accounting: Long-Lived Depreciable
Assets—A Closer Look
a.
Ricky’s Equipment - Straight Line:
(Cost – Residual Value) / Life = Depreciation
( $40,000 – $ -0- ) / 5 = $8,000 per year
Accumulated Depreciation through June 30, 2010
( 3½ years @ $8,000 per year) = $28,000
Fred’s Equipment - Double-Declining Balance:
Book Value
Beginning
Year of the Year
Depreciation
Percentage
Yearly
Depreciation
Expense
2007 $40,000 x
40%
=
$16,000
2008 24,000 x
40%
=
9,600
2009 14,400 x
40%
=
5,760
2010
8,640 x
40% x ½ =
1,728
Accumulated Depreciation after ( 3.5 years) = $33,088
b.
Ricky’s Sale:
Book Value = Cost – Accumulated Depreciation
$12,000 = $40,000 – $28,000
Sales Price – Book Value = Gain or Loss
$ 22,000 – $12,000
= $10,000 Gain
Fred’s Sale:
Book Value = Cost – Accumulated Depreciation
$6,912 = $40,000 – $33,088
Sales Price – Book Value = Gain or Loss
$ 22,000 – $6,912
= $15,088 Gain
*8-55. (Continued)
Chapter 8 – Challenging Issues under Accrual Accounting: Long-Lived Depreciable Assets –
A Closer Look
F8- 49
Ricky’s Construction Company
General Journal
C.
Date
2007
Jan
2
Description
Equipment
Cash in Bank
Post
Ref.
Page
Debit
Credit
40,000
40,000
To record purchase of equipment.
Dec
31
Depreciation Expense
8,000
Accumulated Depreciation
8,000
To record depreciation expense.
2008
Dec
31
Depreciation Expense
8,000
Accumulated Depreciation
8,000
To record depreciation expense.
2009
Dec
31
Depreciation Expense
8,000
Accumulated Depreciation
8,000
To record depreciation expense.
2010
Jun
30
Depreciation Expense
4,000
Accumulated Depreciation
4,000
To record depreciation expense
for six months. ($8,000 x 6/12)
Jun
30
Cash in Bank
22,000
Accumulated Depreciation
28,000
Gain on Sale of Equipment
10,000
Equipment
40,000
To record sale of equipment
*8-55. (Continued)
F8-50
Chapter 8: Challenging Issues Under Accrual Accounting: Long-Lived Depreciable
Assets—A Closer Look
Fred’s Construction Company
General Journal
Date
2007
Jan
2
Description
Equipment
Cash in Bank
Post
Ref.
Page
Debit
Credit
40,000
40,000
To record purchase of equipment.
Dec
31
Depreciation Expense
16,000
Accumulated Depreciation
16,000
To record depreciation expense.
2008
Dec
31
Depreciation Expense
9,600
Accumulated Depreciation
9,600
To record depreciation expense.
2009
Dec
31
Depreciation Expense
5,760
Accumulated Depreciation
5,760
To record depreciation expense.
2010
Jun
ec
30
Depreciation Expense
1,728
Accumulated Depreciation
1,728
To record depreciation expense
for six months. ($3,456 x 6/12)
Jun
30
Cash in Bank
22,000
Accumulated Depreciation
33,088
Gain on Sale of Equipment
15,088
Equipment
40,000
To record sale of equipment
8-56.
Chapter 8 – Challenging Issues under Accrual Accounting: Long-Lived Depreciable Assets –
A Closer Look
F8- 51
a.
The Sonic Corporation uses straight-line depreciation for all
depreciable assets. The company periodically reviews all
assets for impairments to value to ensure that the reported
amount is recoverable. The primary indicator used to
determine impairment losses is operating losses. The
guidelines of SFAS 144 are followed.
b.
Each students’ article may vary.
8-57.
a. The Darden Corporation employs straight-line depreciation
for all assets. The company uses accelerated depreciation
for tax purposes.
b.
It estimates the following useful lives:
Leasehold Improvements: lesser of lease term or useful life
Building Components:
7-40 years
Machinery and equipment:
2-10 years
c.
Depreciation and amortization expense is listed on the
income statement. Depreciation for FYE 2006 was
$221,456,000 and for FYE 2005 was $213,219,000.
d.
Each students’ article may vary.
8-58.
F8-52
Chapter 8: Challenging Issues Under Accrual Accounting: Long-Lived Depreciable
Assets—A Closer Look
a.
AT&T Corp. and Subsidiaries uses the straight-line method
for all assets except digital equipment purchased after 1989,
packet-switched technology, and certain high-technology
computer processing equipment, for which it uses
accelerated methods.
b.
There are three normal places where you can find the
amount of depreciation expense – the income statement, the
statement of cash flows, and the notes to the financial
statements. In the case of AT&T, all three locations indicate
only combined depreciation and amortization. For FYE 2005,
the combined depreciation and amortization expense is
$35,821,000.
c.
Each students’ article may vary.
Chapter 8 – Challenging Issues under Accrual Accounting: Long-Lived Depreciable Assets –
A Closer Look
F8- 53