Week Three Homework Acct305
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SOLUTIONS – WEEK THREE – ACCT 305
Exercise 111 1. Straight-line: $33,000 - 3,000 = $6,000 per year 5 years 2. Sum-of-the-years’ digits:
Year
Depreciabl e Base
2006 2007 2008 2009 2010 Total
$30,000 30,000 30,000 30,000 30,000
X
Depreciati on Rate per Year
= Depreciati on $10,000 8,000 6,000 4,000 2,000 $30,000
Exercise 111 (concluded) 3. Double-declining balance: Straight-line rate of 20% (1
Book Value Beginning Year
2006 2007 2008 2009 2010
÷
5 years) x 2 = 40% DDB rate.
Depreciati on
of Year
Rate per
X
$33,000 19,800 11,880 7,128 4,277
Total
Year 40% 40% 40% 40% *
Depreciati = on $ 13,200 7,920 4,752 2,851 1,277 * $30,000
Book Value End of Year $19,800 11,880 7,128 4,277 3,000
* Amount necessary to reduce book value to residual value
4. Units-of-production:
$33,000 - 3,000 = $.30 per mile depreciation rate 100,000 miles
Actual
Depreciati on
Miles Year
Driven
Rate per
X
2006 2007 2008 2009 2010 Totals *
Mile = $.30 .30 .30 .30 *
22,000 24,000 15,000 20,000 21,000 102,000
Book Value Depreciati on $6,600 7,200 4,500 6,000 5,700 * $30,000
End of Year $26,400 19,200 14,700 8,700 3,000
Amount necessary to reduce book value to residual value
Exercise 118 Requirement 1 Cost of the equipment: Purchase price
$154,000
Freight charges
2,000
Installation charges
4,000 $160,000
Straight-line rate of 12.5% (1
Year
Book Value Beginni ng of Year
2006 $160,000 2007 120,000
X
÷
Depreciati on Rate per Year 25% 25%
8 years) x 2 = 25% DDB rate.
= Depreciati on $ 40,000 30,000
Book Value End of Year $120,000 90,000
2008 2009 2010 2011 2012 2013 Total
90,000 67,500 50,625 45,625 40,625 35,625
25% 25% * * * *
22,500 16,875 5,000 5,000 5,000 5,000 $129,375
67,500 50,625 45,625 40,625 35,625 30,625
* Switch to straight-line in 2010:
Straight-line depreciation:
$50,625 - 30,625 = $5,000 per year 4 years Requirement 2 For plant and equipment used in the manufacture of a product, depreciation is a product cost and is included in the cost of inventory. Eventually, when the product is sold, depreciation will be included in cost of goods sold.
Brief Exercise 1114 Annual maintenance on machinery, $5,400 This is an example of normal repairs and maintenance. Future benefits are not increased; therefore the expenditure should be expensed in the period incurred. Remodeling of offices, $22,000 This is an example of an improvement. The cost of the remodeling should be capitalized and depreciated, either by (1) substitution, (2) direct capitalization of the cost, or (3) a reduction of accumulated depreciation. Rearrangement of the shipping and receiving area, $35,000 This is an example of a rearrangement. Because the rearrangement increased productivity, the cost should be capitalized and depreciated. Addition of a security system, $25,000 This is an example of an addition. The cost of the security system should be capitalized and depreciated.
Real World Case 11-14 Requirement 1 ($ in millions)
Plant, rental machines and other property Balance, beginning of 2004 Add: Acquisitions during 2004
(Cost):
$36,153 5,368
Less: Balance end of 2004
(36,385)
Dispositions during 2004
$ 5,136
Plant, rental machines and other property
(Accumulated depreciation):
Balance, beginning of 2004
$21,464
Add: Depreciation for 2004
3,959
Less: Balance end of 2004
(21,210)
Accumulated depreciation of 2004 dispositions $ 4,213
Gain (loss) on 2004 dispositions: Cost of dispositions
$ 5,136
Less: Accumulated depreciation of dispositions (4,213) Book value of dispositions
Proceeds from dispositions Less: Book value of dispositions Gain on 2004 dispositions
$ 923
$1,311 (923) $ 388
Requirement 2 2004 depreciable assets:
Plant, rental machines and other property Less: Land and land improvements Cost of depreciable assets
$36,385 (840) $35,545
The disclosure note indicates that IBM uses the straight-line depreciation method. $35,545 ÷ $3,959 (2004 depreciation) = 8.98 years. The approximate average service life of IBM's depreciable assets is 9 years.
Exercise 111 1. Straight-line: $33,000 - 3,000 = $6,000 per year 5 years 2. Sum-of-the-years’ digits:
Year
Depreciabl e Base
2006 2007 2008 2009 2010 Total
$30,000 30,000 30,000 30,000 30,000
X
Depreciati on Rate per Year
= Depreciati on $10,000 8,000 6,000 4,000 2,000 $30,000
Exercise 111 (concluded) 3. Double-declining balance: Straight-line rate of 20% (1
Book Value Beginning Year
2006 2007 2008 2009 2010
÷
5 years) x 2 = 40% DDB rate.
Depreciati on
of Year
Rate per
X
$33,000 19,800 11,880 7,128 4,277
Total
Year 40% 40% 40% 40% *
Depreciati = on $ 13,200 7,920 4,752 2,851 1,277 * $30,000
Book Value End of Year $19,800 11,880 7,128 4,277 3,000
* Amount necessary to reduce book value to residual value
4. Units-of-production:
$33,000 - 3,000 = $.30 per mile depreciation rate 100,000 miles
Actual
Depreciati on
Miles Year
Driven
Rate per
X
2006 2007 2008 2009 2010 Totals *
Mile = $.30 .30 .30 .30 *
22,000 24,000 15,000 20,000 21,000 102,000
Book Value Depreciati on $6,600 7,200 4,500 6,000 5,700 * $30,000
End of Year $26,400 19,200 14,700 8,700 3,000
Amount necessary to reduce book value to residual value
Exercise 118 Requirement 1 Cost of the equipment: Purchase price
$154,000
Freight charges
2,000
Installation charges
4,000 $160,000
Straight-line rate of 12.5% (1
Year
Book Value Beginni ng of Year
2006 $160,000 2007 120,000
X
÷
Depreciati on Rate per Year 25% 25%
8 years) x 2 = 25% DDB rate.
= Depreciati on $ 40,000 30,000
Book Value End of Year $120,000 90,000
2008 2009 2010 2011 2012 2013 Total
90,000 67,500 50,625 45,625 40,625 35,625
25% 25% * * * *
22,500 16,875 5,000 5,000 5,000 5,000 $129,375
67,500 50,625 45,625 40,625 35,625 30,625
* Switch to straight-line in 2010:
Straight-line depreciation:
$50,625 - 30,625 = $5,000 per year 4 years Requirement 2 For plant and equipment used in the manufacture of a product, depreciation is a product cost and is included in the cost of inventory. Eventually, when the product is sold, depreciation will be included in cost of goods sold.
Brief Exercise 1114 Annual maintenance on machinery, $5,400 This is an example of normal repairs and maintenance. Future benefits are not increased; therefore the expenditure should be expensed in the period incurred. Remodeling of offices, $22,000 This is an example of an improvement. The cost of the remodeling should be capitalized and depreciated, either by (1) substitution, (2) direct capitalization of the cost, or (3) a reduction of accumulated depreciation. Rearrangement of the shipping and receiving area, $35,000 This is an example of a rearrangement. Because the rearrangement increased productivity, the cost should be capitalized and depreciated. Addition of a security system, $25,000 This is an example of an addition. The cost of the security system should be capitalized and depreciated.
Real World Case 11-14 Requirement 1 ($ in millions)
Plant, rental machines and other property Balance, beginning of 2004 Add: Acquisitions during 2004
(Cost):
$36,153 5,368
Less: Balance end of 2004
(36,385)
Dispositions during 2004
$ 5,136
Plant, rental machines and other property
(Accumulated depreciation):
Balance, beginning of 2004
$21,464
Add: Depreciation for 2004
3,959
Less: Balance end of 2004
(21,210)
Accumulated depreciation of 2004 dispositions $ 4,213
Gain (loss) on 2004 dispositions: Cost of dispositions
$ 5,136
Less: Accumulated depreciation of dispositions (4,213) Book value of dispositions
Proceeds from dispositions Less: Book value of dispositions Gain on 2004 dispositions
$ 923
$1,311 (923) $ 388
Requirement 2 2004 depreciable assets:
Plant, rental machines and other property Less: Land and land improvements Cost of depreciable assets
$36,385 (840) $35,545
The disclosure note indicates that IBM uses the straight-line depreciation method. $35,545 ÷ $3,959 (2004 depreciation) = 8.98 years. The approximate average service life of IBM's depreciable assets is 9 years.
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