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%).
Which one of the following characteristics is not required for an asset to be properly described as property, plant, and equipment?
Answer (B) is correct. These assets are known variously as property, plant, and equipment; fixed assets; or plant assets. 1. PPE are tangible. They have physical existence. 2. PPE may be either personal property (something movable, e.g., equipment) or real property (such as land or a building). 3. PPE are used in the ordinary operations of an entity and are not held primarily for investment, resale, or inclusion in another product. But they are often sold. 4. PPE are noncurrent. They are not expected to be used up within 1 year or the normal operating cycle of the business, whichever is longer. However, an asset need not be newly purchased to be properly described as property, plant, and equipment.
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).
The types of assets that qualify for interest capitalization are
Answer (C) is correct. Interest should be capitalized for (1) assets constructed or otherwise produced for an entity’s own use, including those constructed or produced by others; (2) assets intended for sale or lease that are constructed or produced as discrete projects (e.g., ships); and (3) certain equity-based investments. An asset constructed for an entity’s own use qualifies for capitalization of interest if (1) relevant expenditures have been made, (2) activities necessary to prepare the asset for its intended use are in progress, and (3) interest is being incurred. The investee must have activities in progress necessary to commence its planned principal operations and be expending funds to obtain qualifying assets for its operations.
Wellington Industries has owned its present facilities since 1981, and Mary Dunlap, CEO, has authorized various expenditures to repair and improve the building during the current year. The building was beginning to sag, and without repair, the building would only last another 8 years. To correct the problem, the foundation was reinforced, and several columns were added in the basement area at a cost of $47,200. As a result, engineers estimate that the building will have a remaining useful life of 20 years. To install a new computer local area network (LAN) and be ready for the next generation of computers, the phone lines and electrical systems were updated at a cost of $81,300. Wellington engineers estimate that these improvements should last 25 years. The offices and open work spaces were rearranged to reduce exposure to electronic emissions at a material cost of $31,000. The purchase and installation of the computers and software for the LAN cost $102,700. The LAN hardware and software will have to be replaced in 6 years, but further rearrangement of the offices and work spaces will not be necessary. After the above improvements were completed, the entire building was painted inside and outside at a cost of $9,450. As controller of Wellington Industries, which one of the following actions would you recommend to be in conformity with generally accepted accounting principles?
Answer (D) is correct. Expenditures on capital assets that improve the asset’s performance or extend its useful life are capitalized as part of the asset’s cost. Accordingly, the building repairs are capitalized. The substitution of a better computer system is classified as an improvement, and the costs also should be capitalized. Moreover, the entity capitalizes the costs of a that (1) requires material outlays, (2) is separable from recurring expenses, and (3) provides probable future benefits. However, expenditures that merely maintain the asset at an acceptable level of productivity are expensed as they are incurred. Thus, the costs of painting the building are routine, minor outlays that should be expensed immediately.
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