A new machine has an initial cost of $300,000, an estimated useful life of 2,000 hours of use over a 3-year period, and an estimated residual value of $70,000. Usage rates are estimated as 500 hours in the first year, 700 hours in the second year, and 800 hours in the third year. Depreciation expense in Year 2 under the units-of-production method of depreciation will be
Answer (C) is correct. Depreciation expense equals cost minus residual value, times the estimated hours of use in Year 2 divided by the total estimated hours of use. Thus, depreciation expense is $80,500 [($300,000 – $70,000) × (700 hours ÷ 2,000 hours)].
A company uses straight-line depre accelerated depreciation for tax purposes. Which of the following account balances would be lower in the financial statements used for tax purposes than it would be in the general purpose financial statements?
Answer (C) is correct. Because the tax basis uses an accelerated method, depreciation expense and accumulated depreciation will be greater. Moreover, taxable income will be lower than financial net income. Consequently, tax-basis retained earnings will be less than that in the general purpose financial statements.
All of the following would be included as part of the cost of a depreciable asset except the
Answer (A) is . Site preparation costs [clearing, draining, filling, leveling the property, and razing existing buildings, minus any proceeds (such as timber sales)] are costs of the land, not of the building to be constructed on the land.
Basic Brick, Inc., purchased manufacturing equipment for $100,000, with an estimated useful life of 10 years and a salvage value of $15,000. The second year’s depreciation for this equipment using the double-declining balance method is
Answer (C) is correct. Under the double-declining balance method, the full cost of the asset, or $100,000, is depreciated, but not below salvage value. Because the straight-line rate for a 10-year asset is 10% (100% ÷ 10), the double-declining balance rate is 20% (10% × 2). The first year’s depreciation is $20,000 ($100,000 × 20%), leaving a carrying amount for the second year of $80,000 ($100,000 – $20,000). The second year’s depreciation is thus $16,000 ($80,000 × 20%).
Equipment bought by Wilson Steam Generating Company 3 years ago was charged to equipment expense in error. The cost of the equipment was $100,000, with no expected salvage value and a 10-year estimated life. Wilson uses the straight-line depreciation method on similar equipment. The error was discovered at the end of Year 3 prior to the issuance of Wilson’s financial statements. After correction of the error, the correct carrying value of the equipment will be
Answer (B) is correct. The straight-line depreciation that should have been charged to the equipment had it been properly capitalized is $30,000 [$100,000 × (3 ÷ 10 years)]. Thus, after correction of the error, the carrying amount of the equipment will be $70,000 ($100,000 – $30,000).
Lakeside Electric purchased a truck for $38,600 to transport equipment to various job sites. For this purpose, storage bins were welded to the truck bed at a cost of $1,700. Doug Lombardi, controller of Lakeside, estimates the useful life of the truck to be 5 years and the residual value to be $1,000. Using the double-declining balance method, the depreciation expense on the truck for its second year of use is
Answer (D) is correct. Under double-declining balance method, the full cost of the asset, or $40,300 ($38,600 + $1,700), is depreciated, but not below salvage value. Because the straight-line rate for a 5-year asset is 20% (100% ÷ 5), the double-declining balance rate is 40% (20% × 2). The first year’s depreciation is $16,120 ($40,300 × 40%), leaving a carrying amount for the second year of $24,180 ($40,300 – $16,120). The second year’s depreciation is thus $9,672 ($24,180 × 40%).
Albright Company uses the sum-of-the-years’-digits (SYD) method of depreciation. On
January 1, the company purchased a machine for $50,000. It had an estimated life of
5 years and no residual value. Depreciation for the first year would be
Answer (C) is correct.
The SYD method multiplies a constant depreciable base (cost minus
residual value) by a declining fraction. The numerator is the number of
years of the useful life minus the years elapsed (5 – 0 = 5). The
denominator is the sum of the digits of the years in the asset’s useful life
(1 + 2 + 3 + 4 + 5). The first year’s depreciation expense is therefore
$16,667 [$50,000 × (5 ÷ 15)].
When a fixed plant asset with a 5-year estimated useful life is sold during the second year,
how would the use of an accelerated depreciation method instead of the straight-line
method affect the gain or loss on the sale of the fixed plant asset?
Answer (B) is correct.
An accelerated method reduces the carrying amount of the asset more
rapidly in the early years of the useful life than does the straight-line
method. Hence, the effect of an early sale is to increase the gain or
decrease the loss that would have been recognized under the straight-line
Which one of the following methods of depreciation will result in the lowest reported net
income in the early life of a depreciable asset?
Answer (D) is correct.
Sum-of-the-years’-digits depreciation has the highest depreciation
expense in the early years of an asset’s life, resulting in lower net income.
Silken, Inc., a distributor of silk goods, is in its first year of operation. The company has
purchased ten computers at $3,500 each with an estimated life of 6 years; five desks at
$500 each with an estimated life of 10 years; and two word processors at $300 each, with
an estimated life of 4 years. No residual value is anticipated for any of these assets. Silken
wants to adopt a depreciation method that will be easy to use and reflect an appropriate
depreciation expense for the business each accounting period. The most appropriate
method would be
Answer (A) is correct.
Group and composite depreciation methods use the straight-line
technique for an aggregate of assets. The composite method is used for