160000 160000 the annual service cost of 1000 and the

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Unformatted text preview: epreciation Per Books 2009 2010 Correct Depreciation $48,000 0 Difference $ 0 $48,000 32,000* 32,000 *$32,000 = $48,000 2/3 Therefore, in 2009 expenses were overstated by $48,000, so net income was understated by $48,000. In 2010 expenses were understated by $32,000, so net income was overstated by $32,000. 25 P9–5 a. b. Dryer (+A) Cash (–A) Purchased a dryer. 100,000 100,000 In deciding how to account for service and repair costs, one must consider the effect of the cost on (1) the useful life of the asset, (2) the quality of units produced by the asset, (3) the quantity of units produced by the asset, or (4) the cost of operating the asset. If the costs increase one of the first three items or reduce the last item, they provide a future benefit to the company. Consequently, the costs should be capitalized and amortized over the asset's useful life. If the costs do not increase one of the above items, they do not provide a future benefit, and they should be expensed immediately. In this particular case, the $160,000 overhaul increased both the dryer's efficiency and useful life. Consequently, the $160,000 should be capitalized as follows: Dryer (+A) Cash (–A) Overhauled dryer. 160,000 160,000 The annual service cost of $1,000 and the major repair cost of $5,000 are incurred simply to maintain the dryer's existing service potential and, therefore, do not provide expected future benefits. Consequently, these costs should be expensed as incurred. c. 2008 through 2011: Depreciation Expense 2012 through 2015: Depreciation Expense = = (Cost – Salvage Value) ÷ Useful Life ($100,000 – $10,000) ÷ 5 Years = $18,000 per Year = {[(Cost – Accumulated Depreciation) + Betterments] – Salvage Value} ÷ Remaining Useful Life. {[($100,000 – $72,000) + $160,000] – $10,000} ÷ 4 Years $44,500 per Year = = P9–6 a. Building (+A) Cash (–A) 1,500,000 Purchased a building. 1,500,000 b. Building (+A) Cash (–A) Installed a new roof on building. 200,000 c. Depreciation Expense (E, –SE) 50,500* Accumulated Depreciation (–A) Depreciated building. *$50,500 26 = 200,000 50,500 {[($1,500,000 – $540,000 Accumulated Depreciation) + $200,000] – $150,000 Salvage Value} ÷ Remaining Life of 20 Years. 27 P9–6 d. Concluded Cash (+A) 1,200,000 Accumulated Depreciation (+A) 843,000* Building (–A) 1,700,000 Gain on Sale of Building (Ga, +SE) Sold building. *$843,000 Note: = 343,000 ($54,000 10 years for 2007 through 2016) + ($50,500 6 years for 2017 through 2022) The above entry assumes that the adjusting entry to record depreciation expense for 2022 had already been recorded. If this entry had not yet been made, the appropriate entry to record the sale would have been as follows: Cash (+A) 1,200,000 Accumulated Depreciation (+A) Depreciation Expense (E, –SE) Building (–A) 1,700,000 Gain on Sale of Building (Ga, +SE) Sold building. 792,500 50,500 343,000 P9–7 a. Depreciation Expense per Year 1/1/11 Accumulated Depreciation 1/1/11 Book Value b. = = $15,000 Depreciation Expense per Year 5 Years = $75,000 = Cost – 1/1/11 Accumulated Depreciation = $180,000 – $75,000 = $105,000 Depreciation Expense (E, –SE) Accumulated Depreciation (–A) Depreciated fixed assets. *$9,375 = ($180,000 – $30,000) ÷ 10 Years = $15,000 per Year 9,375 9,375 (Book Value of $105,000 – Salvage Value of $30,000) ÷ Remaining Useful Life of 8 Years P9–8 When the hand­held instruments were capitalized as a prepaid expense, they were carried as Current Assets and converted to an expense as used. After the accounting change, the asset was carried as a long­lived asset and converted to an expense through a depreciation charge that spread the cost over a five­year period, lowering the amount charged against earnings when compared to the previous 28 method. The asset will remain on the books for a longer period of time (assets and equity are higher) and income will also be higher due to the lower expense. The current ratio is lowered, because the assets are moved to the noncurrent section of the balance sheet. Finally, the fixed asset turnover ratio, which measures sales to fixed assets, will be lower as the dollar amount assigned to fixed assets is now greater. P9–9 a. Every depreciation method depreciates the same amount over the useful life of a fixed asset. Depreciation methods only vary the timing of depreciation charges. Therefore, both the straight­line method and the double­declining­balance method will give rise to the same total amount of depreciation over the four­year useful life of this equipment. The following table shows that the total depreciation under the two methods is the same. Method Year 1 Year 2 Year 3 Year 4 Total Accumulated Depreciation Book Value Straight­linea $15,000 $15,000 $15,000 $15,000 $60,000 Double­declining­balanceb 40,000 20,000 0 0 60,000 a $15,000 = ($80,000 – $20,000) ÷ 4 years b Depreciation Depreciation D a te Factor Expense Historical Cost 1/1/11 $80,000 $ 0 12/31/11 12/31/12 12/31/...
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This homework help was uploaded on 03/03/2014 for the course ACCT 5053 taught by Professor Staff during the Fall '08 term at Oklahoma State.

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