Depreciation P11-1 Methods The Winsey Company purchased equipment on January 2, 2010, for $700,000. The equipment has the following characteristics: Estimated service life 20 years 100,000 hours 950,000 units of output Estimated residual value $50,000
During 2010 and 2011, the company used the machine for 4,500 and 5,500 hours, respectively, and produced 40,000 and 60,000 units, respectively. Required Compute the depreciation for 2010 and 2011 under each of the following methods: 1. Straight-line 2. Hours worked 3. Units of output 4. Sum-of-the-years'-digits 5. Double-declining-balance 6. 150%-declining-balance 7. Compute the company's return on assets (net income divided by average total assets, as discussed in Chapter 6) for each method for 2010 and 2011, assuming that income before depreciation is $100,000. For simplicity, use ending assets, and ignore interest, income taxes, and other assets. (round all percentages to one decimal place)
P11-1 Depreciation Methods An asterisk (*) will appear next to an incorrect amount(s) in the outlined cell(s). If you are still getting a red asterisk, and think the answer is correct, but used a formula in the cell try manually typing in the answer according to the rounding instructions. Required Compute the depreciation for 2010 and 2011 under each of the following methods: 1. Straight-line 2. Hours worked 3. Units of output 4. Sum-of-the-years'-digits 5. Double-declining-balance 6. 150%-declining-balance
Name:
Krishna Panday
Method 1. Straight-line:
Method Calculation $650,000 20
Rate of Depreciation $32,500 per year
2010 32,500
2011 32,500
(round to the nearest dollar)
=
2. Hours worked $650,000 100,000 3. Units of output $650,000 950,000 4. Sum-of-the-years'-digits: 20 210 5. Double Declining Balance
(Multiply the numerator by 2)
=
$6.50 per hour
29,250
35,750
=
$0.68 per unit 0.095238 2010 Rate
27,200
40,800
=
61,905
58,810
2 20 1.5 20
=
10.0% per year
70,000
63,000
6. 150% declining balance
(Multiply the numerator by 1.5)
=
7.5% per year
52,500
48,563
7. Compute the company's return on assets (net income divided by average total assets, as discussed in Chapter 6) for each method for 2010 and 2011, assuming that income before depreciation is $100,000. For simplicity, use ending assets, and ignore interest, income taxes, and other assets. (round all percentages to one decimal place)
2010 Formula for Return on Total Assets+(see below) Straight Line $100,000 - CY Depr $700,000 - CY Depr $67,500 667,500 $70,750 670,750 $72,800 672,800 $38,095 638,095 $30,000 630,000 $47,500 647,500
2011 $100,000 - CY Depr $700,000 - (CY Depr + PY Depr) $67,500 635,000 $64,250 635,000 $59,200 632,000 $41,190 579,285 $37,000 567,000 $51,437 598,937
2010
2011
(round to one decimal place)
10.1%
10.6%
Hours worked
10.5%
10.1%
Units of output
10.8%
9.4%
Sum-of-the-years' -digits
6.0%
7.1%
Double-declining balance
4.8%
6.5%
150%-declining balance
7.3%
8.6%
+
Legend: CY = Current Year Depr = Depreciation PY = Prior Year
P11-1 Depreciation Methods An asterisk (*) will appear next to an incorrect amount(s) in the outlined cell(s). If you are still getting a red asterisk, and think the answer is correct, but used a formula in the cell try manually typing in the answer according to the rounding instructions. Required Compute the depreciation for 2010 and 2011 under each of the following methods: 1. Straight-line 2. Hours worked 3. Units of output 4. Sum-of-the-years'-digits 5. Double-declining-balance 6. 150%-declining-balance
Name:
Solutions
Method 1. Straight-line:
Method Calculation $650,000 20
Rate of Depreciation $32,500 per year
2010 32,500
2011 32,500
(round to the nearest dollar)
=
2. Hours worked $650,000 100,000 3. Units of output $650,000 950,000 4. Sum-of-the-years'-digits: 20 210 5. Double Declining Balance
(Multiply the numerator by 2)
=
$6.50 per hour
29,250
35,750
=
$0.68 per unit 0.095238 2010 Rate
27,200
40,800
=
61,905
58,810
2 20 1.5 20
=
10.0% per year
70,000
63,000
6. 150% declining balance
(Multiply the numerator by 1.5)
=
7.5% per year
52,500
48,563
7. Compute the company's return on assets (net income divided by average total assets, as discussed in Chapter 6) for each method for 2010 and 2011, assuming that income before depreciation is $100,000. For simplicity, use ending assets, and ignore interest, income taxes, and other assets. (round all percentages to one decimal place)
2010 Formula for Return on Total Assets+(see below) Straight Line $100,000 - CY Depr $700,000 - CY Depr $67,500 667,500 $70,750 670,750 $72,800 672,800 $38,095 638,095 $30,000 630,000 $47,500 647,500
2011 $100,000 - CY Depr $700,000 - (CY Depr + PY Depr) $67,500 635,000 $64,250 635,000 $59,200 632,000 $41,190 579,285 $37,000 567,000 $51,437 598,937
2010
2011
(round to one decimal place)
10.1%
10.6%
Hours worked
10.5%
10.1%
Units of output
10.8%
9.4%
Sum-of-the-years' -digits
6.0%
7.1%
Double-declining balance
4.8%
6.5%
150%-declining balance
7.3%
8.6%
+
Legend: CY = Current Year Depr = Depreciation PY = Prior Year
P11-11 Depreciation for Financial Statements and Income Tax Purposes
Name:
Krishna Panday
An asterisk (*) will appear next to an incorrect amount(s) in the outlined cell(s). If you are still getting a red asterisk, and think the answer is correct, but used a formula in the cell try manually typing in the answer according to the rounding instructions. Required 1. Prepare an income statement for financial reporting through pretax accounting income for each of the five years, 2010 through 2014. 1. Pretax Income Statement Sales Cost of goods sold Gross profit Operating expenses Depreciation expense Loss on disposal Pretax accounting income
a
2010 $100,000 (60,000) $40,000 (15,000) (3,000) $22,000
2011 $100,000 (60,000) $40,000 (15,000) (3,000) $22,000
2012 $100,000 (60,000) $40,000 (15,000) (3,000) $22,000
2013 $100,000 (60,000) $40,000 (15,000) (3,000) $22,000
2014 $100,000 (60,000) $40,000 (15,000) (3,000) (1,000) $21,000
Calculation of Depreciation Expense (Book): Cost - Residual value Life = 18,000 5 3,000 = $3,000
b
Loss on disposal calculation: Cost 18,000 Accum Depr 15,000 Disposal 2,000 = Loss on Disposal $1,000
Hint: Accum Depr means Accumulated Depreciation (add up depreciation expense for each year on the asset and remember the current year as well).
2. Prepare, instead, an income statement for income tax purposes through taxable income for each of the five years, 2010 through 2014. 2010 $100,000 (60,000) $40,000 (15,000) (5,999) $19,001 2011 $100,000 (60,000) $40,000 (15,000) (8,001) $16,999 2012 $100,000 (60,000) $40,000 (15,000) (2,666) $22,334 2013 $100,000 (60,000) $40,000 (15,000) (1,334) $23,666 2014 $100,000 (60,000) $40,000 (15,000) (3,000) * 2,000 $27,000
Sales Cost of goods sold Gross profit Operating expenses Depreciation expense Gain on disposal Taxable income
a-d
Tax Depreciation (MACRS Table): Year 1: 2010 Year 2: 2011 Year 3: 2012 Year 4: 2013 x Cost $18,000 18,000 18,000 18,000 = Tax Depreciation MACRS % 33.33% $5,999 44.45% 8,001 14.81% 2,666 7.41% 1,334
a b c d
3. Compare the total income for all five years under Requirement 1 and Requirement 2. Pretax Income $22,000 22,000 22,000 22,000 21,000 $109,000 Taxable Income $19,001 16,999 22,334 23,666 27,000 $109,000
Year 1: 2010 Year 2: 2011 Year 3: 2012 Year 4: 2013 Year 5: 2014
P11-11 Depreciation for Financial Statements and Income Tax Purposes
Name:
Solution
An asterisk (*) will appear next to an incorrect amount(s) in the outlined cell(s). If you are still getting a red asterisk, and think the answer is correct, but used a formula in the cell try manually typing in the answer according to the rounding instructions. Required 1. Prepare an income statement for financial reporting through pretax accounting income for each of the five years, 2010 through 2014. 1. Pretax Income Statement Sales Cost of goods sold Gross profit Operating expenses Depreciation expense Loss on disposal Pretax accounting income
a
2010 $100,000 (60,000) $40,000 (15,000) (3,000) $22,000
2011 $100,000 (60,000) $40,000 (15,000) (3,000) $22,000
2012 $100,000 (60,000) $40,000 (15,000) (3,000) $22,000
2013 $100,000 (60,000) $40,000 (15,000) (3,000) $22,000
2014 $100,000 (60,000) $40,000 (15,000) (3,000) (1,000) $21,000
Calculation of Depreciation Expense Cost (Book): - Residual value Life = 18,000 5 3,000 = $3,000
b
Loss on disposal calculation: Cost 18,000 Accum Depr 15,000 Disposal 2,000 = Loss on Disposal $1,000
Hint: Accum Depr means Accumulated Depreciation (add up depreciation expense for each year on the asset and remember the current year as well).
2. Prepare, instead, an income statement for income tax purposes through taxable income for each of the five years, 2010 through 2014. 2010 $100,000 (60,000) $40,000 (15,000) (5,999) $19,001 2011 $100,000 (60,000) $40,000 (15,000) (8,001) $16,999 2012 $100,000 (60,000) $40,000 (15,000) (2,666) $22,334 2013 $100,000 (60,000) $40,000 (15,000) (1,334) $23,666 2014 $100,000 (60,000) $40,000 (15,000) 2,000 $27,000
Sales Cost of goods sold Gross profit Operating expenses Depreciation expense Gain on disposal Taxable income
a-d
Tax Depreciation (MACRS Table): Year 1: 2010 Year 2: 2011 Year 3: 2012 Year 4: 2013 x Cost $18,000 18,000 18,000 18,000 = Tax Depreciation MACRS % 33.33% $5,999 44.45% 8,001 14.81% 2,666 7.41% 1,334
a b c d
3. Compare the total income for all five years under Requirement 1 and Requirement 2. Pretax Income $22,000 22,000 22,000 22,000 21,000 $109,000 Taxable Income $19,001 16,999 22,334 23,666 27,000 $109,000
Year 1: 2010 Year 2: 2011 Year 3: 2012 Year 4: 2013 Year 5: 2014
P11-14 Changes and Corrections of Depreciation
Name:
Krishna Panday
An asterisk (*) will appear next to an incorrect amount(s) in the outlined cell(s). If you are still getting a red asterisk, and think the answer is correct, but used a formula in the cell try manually typing in the answer according to the rounding instructions. Required Prepare any necessary correcting journal entries for each situation. Also prepare the journal entry necessary for each situation to record the depreciation for 2010. (Assume that the debit is to Depreciation Expense.) 1. Machine A was purchased for $50,000 on January 1, 2005. Straight-line depreciation has been recorded for five years, and the Accumulated Depreciation account has a balance of $25,000. The estimated residual value remains at $5,000, but the service life is now estimated to be one year longer than estimated originally.
Original life: Depreciation Base Annual Depreciation+
+
45,000 5,000
=
9 years
Annual Depreciation: Cost - Accum. Depr. Remaining life
$25,000 5 $20,000 5
=
5,000 per year 4,000 per year
Revised Depreciation: Book Value - Residual Value Remaining life Journal Entry to record 2010 depreciation: Depreciation Expense Accumulated Depr: Machine A
=
4,000 4,000
2. Machine B was purchased for $40,000 on January 1, 2008. It had an estimated residual value of $5,000 and an estimated service life of 10 years. It has been depreciated under the double-declining-balance method for two years. Now, at the beginning of the third year, Ryel has decided to change to the straight-line method.
Original life: 1 year x 2 (Double-Declining-Bal) Total useful life Calculate the previous Depreciation taken: Beginning Book Value x Year 1 40,000 Year 2 32,000 Book Value at the end of Year 2: Original Cost 40,000 2 10 = 20% per year depreciation
Rate Per Year = Previous Depreciation Taken 20% 8,000 = 20% 6,400 = Total Depr. In prior years $14,400 Year 1 and 2 Depr. 14,400 25,600 Year 3 Beg. Book Value 2,575 per year
=
Revised Depreciation (under straight-line method) for Year 3: Beg. Book Value - Residual Value Remaining life Journal Entry to record 2010 depreciation: Depreciation Expense Accumulated Depr: Machine B
$20,600 8
=
2,575 2,575
3. Machine C was purchased for $20,000 on January 1, 2009. Double-declining-balance depreciation has been recorded for one year. The estimated residual value of the machine is $2,000 and the estimated service life is five years. The computation of the depreciation erroneously included the estimated residual value. Original Calculation: 1 year x 2 (Double-Declining-Bal) Total useful life
2 5
=
40% per year Previous Depreciation Taken 7,200 40% per year Previous Depreciation Taken 8,000
Calculate the previous Depreciation taken erroneously: Beg Book Value - Residual Rate Per Year x Year 1 18,000 40% Correct depreciation (without Residual Value): 1 year x 2 (Double-Declining-Bal) Total useful life Beg Book Value Year 1 20,000 x 2 5 Rate Per Year 40%
= =
= = =
Adjustment needed between Error and Correct depreciation: Corrected Depr. Original Depr. 8,000 7,200 Current Year (2010) depreciation: 1 year x 2 (Double-Declining-Bal) Total useful life Beginning Book Value Year 1 Year 2 20,000 12,000 x
=
Adjustment needed 800
2 5 Rate Per Year 40% 40%
= = = = 800
40% per year Previous Depreciation Taken 8,000 4,800
Journal Entry to record error correction and 2010 depreciation: Retained Earnings Accumulated Depr: Machine C Depreciation Expense Accumulated Depr: Machine C
800 4,800 4,800
P11-14 Changes and Corrections of Depreciation
Name:
Solution
An asterisk (*) will appear next to an incorrect amount(s) in the outlined cell(s). If you are still getting a red asterisk, and think the answer is correct, but used a formula in the cell try manually typing in the answer according to the rounding instructions. Required Prepare any necessary correcting journal entries for each situation. Also prepare the journal entry necessary for each situation to record the depreciation for 2010. (Assume that the debit is to Depreciation Expense.) 1. Machine A was purchased for $50,000 on January 1, 2005. Straight-line depreciation has been recorded for five years, and the Accumulated Depreciation account has a balance of $25,000. The estimated residual value remains at $5,000, but the service life is now estimated to be one year longer than estimated originally.
Original life: Depreciation Base Annual Depreciation+
+
45,000 5,000
=
9 years
Annual Depreciation: Cost - Accum. Depr. Remaining life
$25,000 5 $20,000 5
=
5,000 per year 4,000 per year
Revised Depreciation: Book Value - Residual Value Remaining life Journal Entry to record 2010 depreciation: Depreciation Expense Accumulated Depr: Machine A
=
4,000 4,000
2. Machine B was purchased for $40,000 on January 1, 2008. It had an estimated residual value of $5,000 and an estimated service life of 10 years. It has been depreciated under the double-declining-balance method for two years. Now, at the beginning of the third year, Ryel has decided to change to the straight-line method.
Original life: 1 year x 2 (Double-Declining-Bal) Total useful life Calculate the previous Depreciation taken: Beginning Book Value x Year 1 40,000 Year 2 32,000 Book Value at the end of Year 2: Original Cost 40,000 2 10 = 20% per year depreciation
Rate Per Year = Previous Depreciation Taken 20% 8,000 = 20% 6,400 = Total Depr. In prior years $14,400 Year 1 and 2 Depr. 14,400 25,600 Year 3 Beg. Book Value 2,575 per year
=
Revised Depreciation (under straight-line method) for Year 3: Beg. Book Value - Residual Value Remaining life Journal Entry to record 2010 depreciation: Depreciation Expense Accumulated Depr: Machine B
$20,600 8
=
2,575 2,575
3. Machine C was purchased for $20,000 on January 1, 2009. Double-declining-balance depreciation has been recorded for one year. The estimated residual value of the machine is $2,000 and the estimated service life is five years. The computation of the depreciation erroneously included the estimated residual value. Original Calculation: 1 year x 2 (Double-Declining-Bal) Total useful life
2 5
=
40% per year Previous Depreciation Taken 7,200 40% per year Previous Depreciation Taken 8,000
Calculate the previous Depreciation taken erroneously: Beg Book Value - Residual Rate Per Year x Year 1 18,000 40% Correct depreciation (without Residual Value): 1 year x 2 (Double-Declining-Bal) Total useful life Beg Book Value Year 1 20,000 x 2 5 Rate Per Year 40%
= =
= = =
Adjustment needed between Error and Correct depreciation: Corrected Depr. Original Depr. 8,000 7,200 Current Year (2010) depreciation: 1 year x 2 (Double-Declining-Bal) Total useful life Beginning Book Value Year 1 Year 2 20,000 12,000 x
=
Adjustment needed 800
2 5 Rate Per Year 40% 40%
= = = = 800
40% per year Previous Depreciation Taken 8,000 4,800
Journal Entry to record error correction and 2010 depreciation: Retained Earnings Accumulated Depr: Machine C Depreciation Expense Accumulated Depr: Machine C
800 4,800 4,800