Financial Mathematics

FINANCIAL MATHEMATICS QUESTIONS ON DEPRECIATION 1

A firm bought a machine for $20,000 which is expected to be used for 5 years and then sold for $2,000. What is the annual amount of depreciation if the straight line method is used?

2

A machine costing $10,000 has an expected life of 4 year and estimated residual value of $500. Calculate the depreciation charge per year A machine cost $25,650 depreciates to a scrap value of $500 in 10 years. Calculate:

3

(a) the annual rate of depreciation if the reducing balance method of depreciation is to be used (b) the book value at the end of the sixth year A firm estimates that office equipment depreciates in value by 40% in its first year of use, by 25% of its value at the beginning of that year during its second year of use, and thereafter each year 10% of its value at the beginning of that year

4

5

Calculate: (a)

the value after eight years’ of equipment costing $550 new

(b)

the value when new of equipment valued at $100 after five years’ of use.

The total cost of a fleet of lorries is $180,00 and the residual value after five years is $20,00. Using the diminishing balance method find the rate of annual depreciation. Five word processors are brought for an office, the total cost of the equipment being $12,000. The residual value of the machine after five years is estimated to be $3,000. Find the annual percentage depreciation to be charged if

6 (a) the fixed installment method is used (b) the diminishing balance method is used ( answer to 2 decimal plac FINANCIAL MATHEMATICS ANSWERS ON DEPRECIATION 1.

$3,600

2. $2,375 3. (a) 32.55% (b) $2,415.34 4. (a) $131.53 (b) $304.83 5. 35.56% 6. (a) 15% (b) 24.21%

Problem # On April 1, 2005, a company disposed of equipment for $14,200 cash that had cost $35,000 on January 1, 2001. The equipment had a salvage value of $5,000 and a useful life of 10 years. The double-declining-balance depreciation method was used. On December 31, 2004, accumulated depreciation was $20,664. Prepare a journal entry to record depreciation for 2005 up to the date of disposal of the equipment. Prepare a journal entry to record the disposal of the equipment.

Solution
716.80

Accumulated Depreciation - Equipment

716.80

($35,000 - $20,664) x .2 x (3/12) = $716.80 Entry to record disposal of equipment Accumulated Depreciation - Equipment

21,380.80

Cash

14,200.00 Equipment

35,000.00

Gain on Sale of Equipment*

580.80

Calculation of Gain on Sale of Equipment Cost of equipment Accumulated Depreciation ($20,664 + $716.80) Book Value of equipment

$35,000.00 21,380.80 $13,619.20

Cash received Gain on sale

14,200.00 $580.80

Short Problem #1 Match each of the following terms a through j with the appropriate definitions 1 through 10. a. Extraordinary repairs b. Obsolescence c. Amortization d. Depletion e. Salvage Value f. Book Value g. Land Improvements h. Copyright i. Inadequacy j. Patent _____

1.

Estimate of amount to be recovered at the end of a plant asset's useful life.

_____

2. Major repairs that extend the useful life of a plant asset beyond prior expectations.

_____

3. A process of allocating the cost of an intangible asset to expense over its estimated useful life.

_____

4. A right granted that gives its owner the exclusive privilege to publish and sell musical, literary, or artistic work during the life of the creator plus 50 years.

_____

5. A condition which, because of new inventions and improvements, a plant asset can no longer be used to produce goods or services with a competitive advantage.

_____

6. The total cost of a plant asset less its accumulated depreciation.

_____

7. The process of allocating the cost of natural resources to the periods when they are consumed.

_____

8. An exclusive right granted to its owner to manufacture

and sell an item, or to use a process, for 17 years. _____ 9. A condition where the capacity of plant assets is too small to meet the company's productive demands. _____ 10. Assets that increase the benefits of land, have a limited useful life, and are subject to depreciation.

1. Once the estimated depreciation expense for an asset is calculated: a. It can't be changed due to the historical cost principle. b. It may be revised based on new information. c. Any changes are accumulated and recognized when the asset is sold. d. The estimate cannot be changed but the new information should be disclosed. e. It cannot be changed due to the consistency principle.