Seminar 02 Week 03 - 0902

Seminar 02 Week 03 - S OLUTIONS TO SELF STUDY QUESTIONS 3 The effects of the three methods on annual depreciation expense are(a Straight-line –

Info iconThis preview shows page 1. Sign up to view the full content.

View Full Document Right Arrow Icon
This is the end of the preview. Sign up to access the rest of the document.

Unformatted text preview: S OLUTIONS TO SELF STUDY QUESTIONS 3. The effects of the three methods on annual depreciation expense are: (a) Straight-line – constant amount (b) Diminishing-balance – decreasing amount (c) Units-of-production – varying amount. 4. Capital expenditures are additions and improvements incurred to increase the operating efficiency, productive capacity or the expected useful life of the asset. These expenditures are usually material in amount, incur infrequently and are recorded as debits to the PPE asset affected, whereas expenses are expenditures for the ordinary repairs made to maintain the operating efficiency and expected productive life of the asset. These expenditures usually occur frequently and are recorded as a debit to the Repairs and Maintenance Expense account as incurred and are an expense in the income statement. 5. In a sale of PPE assets, the carrying (book) value of the asset is compared to the proceeds received from the sale. If the proceeds of the sale exceed the carrying value of the PPE asset, a gain on disposal occurs. If the proceeds of the sale are less than the carrying value of the PPE asset sold, a loss on disposal occurs. 10. By selecting a higher estimated useful life, Betty Ltd is spreading the PPE asset’s cost over a longer period of time. The depreciation expense reported in each period is lower and profit is higher. Barney’s choice of a shorter estimated useful life will result in higher depreciation expense reported in each period and lower profit. Therefore, Betty Ltd may appear to be a better performer. Page 9 of 16 B rief Exercise 8.6 Sharkey Ltd (a) (b) (c) E xercise 8.1 Zhang Ltd (a) The following points explain the application of the historical cost principle in determining the acquisition of PPE assets. 1. Under the historical cost principle, the acquisition cost for a PPE asset includes all expenditures necessary to acquire the asset and make it ready for its intended use. 2. For example, the cost of factory machinery includes the purchase price, freight costs paid by the purchaser, insurance costs during transit, and installation costs. 3. Cost is the fair value at acquisition date of all assets given up or liabilities undertaken, plus any incidental costs. 4. Fair value is the amount for which an asset could be exchanged between knowledgeable willing parties in an arm’s-length transaction. (b) 1. 2. 3. 4. 5. 6. 7. 8. Land Factory Machinery. Delivery Truck Land Improvements Delivery truck Factory Machinery Prepaid Insurance Motor Vehicle Expense Page 10 of 16 E xercise 8.2 Troy Ltd Cost of new machine Balance date Estimated residual Depreciable amount (a) $114,000 purchased 1 October 2010 31 December $18,000 = Cost less Residual = $114,000 - $18,000 = $96,000 Straight line depreciation rate: 100% ÷ 5 years = 20% 2010 Depreciation Depreciable amount x dep’n rate x 3 months $96,000 x 20% x 3/12 $4,800 2011 Depreciation (b) = = = = = = Depreciable amount x dep’n rate $96,000 x 20% $19,200 Diminishing-balance method: Straight line rate doubled (given in question) 20% x 2 = 40% 2010 Depreciation = = = Depreciable amount x dep’n rate x 3 months $114,000 x 40% x 3/12 $11,400 Remember the Diminishing-balance method applies the rate to the carrying value not the depreciable amount. 2011 Depreciation (c) Units-of-production method: Depreciation cost per unit 2010 depreciation = = = Depreciable amount x dep’n rate $102,600 x 40% $41,040 = = = Depreciable amount ÷ Total units of production $96,000 ÷ 20,000 hours $4.80 per hour = = 900 hours x $4.80 $4,320 Page 11 of 16 E xercise 8.8 Chen Ltd 1 Jan 30 June Accumulated Depreciation – Machinery Machinery (Machine scrapped fully depreciated) 62,000 62,000 Depreciation Expense Accum Dep’n – Computer (Dep’n to date of sale) 2,500 2,500 Calculation: 35,000 x 1/7 x 6/12 30 June Cash Accumulated Depreciation – Computer Gain on Sale Computer (Sale of Computer Equipment) 2,500 25,000 17,500 7,500 35,000 Calculation: Cost Accum Dep’n (5,000 x 3 years + 2,500) (17,500) Carrying amount of equipment sold 17,500 Proceeds from sale 25,000 Gain on sale 31 Dec 35,000 7,500 Depreciation Expense Accum Dep’n – Truck (Update depreciation) 3,000 3,000 Calculation: (27,000 - 3,000) x 1/8 31 Dec Loss on Disposal Accumulated Depreciation – Truck Delivery Truck (Removal of asset from books) 12,000 15,000 27,000 Calculation: (27,000 - 3,000) x 5/8 Page 12 of 16 3,000 15,000 P roblem Set A 8.7 Erin Ltd a) Accumulated Depreciation on balance date 31 December 2011 1. Straight-line: (Cost-Residual value) / Useful life = Depreciation expense Year 2008 2009 2010 2011 2. Accum Dep’n 12,800 25,600 38,400 51,200 Diminishing balance: Carrying amount at beginning of year x Diminishing balance rate = Depreciation expense Diminishing balance depreciation rate = 1.5 x straight-line rate = 1.5 x 10% = 15% Year 2009 2010 2011 3. Calculation MACHINE 1 (135,000-7,000) / 10 = 12,800 (135,000-7,000) / 10 = 12,800 (135,000-7,000) / 10 = 12,800 (135,000-7,000) / 10 = 12,800 Calculation MACHINE 2 96,000 x 15% = 14,400 (96,000-14,400) x 15% = 12,240 (96,000-26,640) x 15% = 10,404 Accum Dep’n 14,400 26,640 37,044 Unit of Production: Depreciation cost per unit = Depreciable cost / Total unit of production = $60,000 / 30,000 hours = $2.00 per machine hour Depreciation cost per unit * Units of production during the year = Depreciation expense Year 2009 2010 2011 Calculation MACHINE 3 500 x 2.00 = 1,000 3,500 x 2.00 = 7,000 4,500 x 2.00 = 9,000 Accum Dep’n 1,000 8,000 17,000 (b) If machine 2 were purchased on 1 April, the depreciation expense for this machine in year 2009 should only be 9 months. Year 2009 2010 Calculation MACHINE 2 96,000 x 15% x 9/12 (96,000-10,800) x 15% Page 13 of 16 Dep’n Expense 10,800 12,780 ...
View Full Document

This note was uploaded on 04/14/2010 for the course ACCT 1002 taught by Professor Angela during the Three '10 term at University of Sydney.

Ask a homework question - tutors are online