Deck 17: Depreciation

Question 1

________________ depreciation is a method of depreciation that provides for equal periodic charges to be written off over the life of an asset. (17-1)

Answer 1

Straight line depreciation is a method of depreciation that provides for equal periodic charges to be written off over the life of an asset.
This is the correct solution because this is the definition of straight line depreciation.

Question 2

The IRS system named in item 11 lists assets in various timecategories known as ____________ classes. Once an asset's class has been determined, a table is used to find the cost __________ percentage for recovery year in question.(17-6)

Answer 2

The IRS System named in item 11 lists assets in various time categories know as property classes. Once an asset's class has been determined, a table is used to find the cost recovery percentage for the recovery year in question.
Property class is one of several time categories to which property is assigned under MACRS that shows how many years are allowed for cost recovery.

Question 3

White Mountain Supply Company purchases warehouse shelving for $18,600. Shipping charges were $370, and assembly and setup amounted to $575. The shelves are expected to last for 7 years and have a scrap value of $900. Using the straight-line method of depreciation,
a. What is the annual depreciation expense of the shelving
b. What is the accumulated depreciation after the third year
c. What is the book value of the shelving after the fifth year

Answer 3

a)
To calculate the Annual depreciation, first calculate Total cost and then Total depreciation. In the final step calculate annual depreciation.
Total cost can be calculated by the sum of all the charges i.e. the initial cost, shipping charges and the set up charges.
Scrap Value
Total depreciation can be calculated by subtracting the scrap value from the total cost.
Annual depreciation can be calculated by dividing the total depreciation by the total useful years.
So, Annual Depreciation
b)
Accumulated depreciation after 3 rd year
So, Accumulated depreciation after 3 rd year
c)
So, Book value of shelving after 5 th year

Question 4

Complete Exercises 25-30 as they relate to the units-of-production method of depreciation. Round to the nearest tenth of a cent when necessary.

Question 5

Complete the following as they relate to the sum-of-the-years' digits method of depreciation.

Question 6

Stone Age Concrete, Inc., purchased cement manufacturing equipment, valued at $420,000 on March 14, 2014. The equipment is used for business 100% of the time. The firm's accountant elected to take a $100,000 section 179 deduction. You have been asked to review the depreciation figures used for this equipment.
a. What is tire basis for depreciation of this equipment
b. Prepare a depreciation schedule for the first five years of operation of this equipment by using MACRS.

Question 7

Complete Exercises 11-16 as they relate to the sum-of-the-years' digits method of depreciation.

Question 8

Complete Exercises 25-30 as they relate to the units-of-production method of depreciation. Round to the nearest tenth of a cent when necessary.

Question 9

Depreciation methods that assume an asset depreciates morein the early years of its useful life are known as _____________depreciation. (17-2)

Question 10

The depreciation of natural resources is known as_________________ The accounting term used to describe these natural resources is_____________ assets. (17-6)

Question 11

Complete Exercises 11-16 as they relate to the sum-of-the-years' digits method of depreciation.

Question 12

Complete Exercises 25-30 as they relate to the units-of-production method of depreciation. Round to the nearest tenth of a cent when necessary.

Question 13

Fix-It purchased a service truck for $32,400. It has an estimated useful life of 3 years and a trade-in value of $3,100. Using the sum-of-the-years' digits method, prepare a depreciation schedule for the truck.

Question 14

The Platinum Touch Mining Company paid $4,000,000 for a parcel of land, including themining rights. In addition, the company spent $564,700 to prepare the site for milling operations. When mining is completed, it is estimated that the residual value of the asset will be $800,000. Scientists estimate that the site contains 15,000 ounces of platinum.
a. What is the average depletion cost per ounce
b. If 1,220 ounces were mined in the first year of operation, what is the amount of the depletion cost

Question 15

Complete Exercises 11-16 as they relate to the sum-of-the-years' digits method of depreciation.

Question 16

Complete Exercises 25-30 as they relate to the units-of-production method of depreciation. Round to the nearest tenth of a cent when necessary.

Question 17

_______digits is a method of accelerated depreciation that allows an asset to depreciate the most during the first year of its useful life. (17-2)

Question 18

When natural resources are depleted, the average depletion cost per unit is equal to ___________. (17-6)

Question 19

Complete Exercises 11-16 as they relate to the sum-of-the-years' digits method of depreciation.

Question 20

Complete Exercises 25-30 as they relate to the units-of-production method of depreciation. Round to the nearest tenth of a cent when necessary.

Question 21

Complete the following as they relate to the declining-balance method of depreciation. Round to the nearest hundredth if necessary.

Question 22

In January 2002, Marine Science Corporation was awarded a patent for a new boat hull design. The life of the patent is 20 years. The company estimates the value of the patent over its lifetime is $7,500,000. Marine Science's accountant amortizes the patent using straight-line depreciation to zero value at the end of the 20 years. In January 2010, Marine Science successfully defended its patent in a lawsuit at a legal expense of $486,000.
a. Using the straight-line method, calculate the patent's annual amortization expense for the years before the lawsuit.
b. Calculate the revised annual amortization expense for the remaining years after the lawsuit.

Question 23

Complete Exercises 11-16 as they relate to the sum-of-the-years' digits method of depreciation.

Question 24

Thunderbird Manufacturing purchased a new stamping value of $5,000. For depreciation purposes, the machine is expected to have a useful life of 250,000 units of production. Complete the following depreciation schedule by using the units-of-production method:

Question 25

Write the formula for the sum of the digits of the useful life of an asset, where n is the number of years of useful life. (17-2)

Question 26

You are the accountant for the Millenium Corporation. Last year the company purchased a $2,500,000 corporate jet to be used for executive travel. To help offset the cost of the airplane, your company occasionally rents the jet to the executives of two other corporations when it is not in use by Millenium.
When the corporate tax return was filed this year, you began depreciating the jet by using MACRS. Today you received a letter from the IRS informing you that because your company occasionally rents the airplane to others, it is considered a commercial aircraft and must be depre­ciated as such. The corporate lawyers are considering disputing this IRS ruling and have asked you the following questions:
a. How much depreciation did you claim this year
b. Under the new category, how much depreciation would be claimed
c. If the company pays 30% income tax what effect will this change have on the amount of tax owed, assuming the company made a net profit this year

Question 27

Complete Exercises 11-16 as they relate to the sum-of-the-years' digits method of depreciation.

Question 28

You are the accountant for Raleigh Industries, a manufacturer of plastic gears for electric motors. The company's production facility in Pittsburgh has a cost of $3,800,000, an estimated residual value of $400,000, and an estimated useful life of 40 years. You are using the straight-line method of depreciation for this asset.
a. What is the amount of the annual depreciation
b. What is the book value of the property at the end of the twentieth year of use
c. If at the start of the twenty-first year you revise your estimate so that the remaining useful life is 15 years and the residual value is $120,000, what should be the depreciation expense for each of the remaining 15 years

Question 29

Complete the following as they relate to the declining-balance method of depreciation. Round to the nearest hundredth if necessary.

Question 30

Calculate the total cost, total depreciation, and annual depreciation for the following assets by using the straight-line method.

Question 31

Vanguard Manufacturing, Inc., purchased production-line machinery for $445,000. It is expected to last for 6 years and have a trade-in value of $25,000. Using the sum-of-the-years' digits method, prepare a depreciation schedule for Vanguard.

Question 32

Supreme Auto Service opened a new service center three decades ago. At the time the center was preparing to open, new equipment was purchased totaling $388,000. Residual value of the equipment was estimated to be $48,000 after 20 years. The company accountant has been using straight-line depreciation on the equipment.
a. How much was the annual depreciation for the original equipment
b. If the hydraulic lift had originally cost $11,640, what would its residual value be after 20 years
c. After six years of operation, the original hydraulic lift was replaced with a new model that cost $22,000. Book value was allowed for the old machine as a trade-in. What was the old hydraulic lift's book value when the replacement machine was bought
d. What was the book value of the equipment inventory at the six-year point, substituting the new hydraulic lift for the original after the new lift had joined the inventory

Question 33

A method of accelerated depreciation that uses a multiple (150% or 200%) of the straight-line rate is known as the __________ method. (17-3)

Question 34

Calculate the total cost, total depreciation, and annual depreciation for the following assets by using the straight-line method.

Question 35

Complete Exercises 18-23 as they relate to the declining-balance method of depreciation. Round to the nearest hundredth of a percent when necessary.

Question 36

Ink Masters Printing purchased a new printing press for $660,000 on February 9, 2010. The press is used for business 90% of the time. As the accountant for the company, you elected to take a $100,000 Section 179 deduction. The press also qualified for a special depreciation allowance. (See Table 17-4.)
a. What was the basis for depreciation of the printing press

b. What was the amount of the third year's depreciation using MACRS

Question 37

Calculate the total cost, total depreciation, and annual depreciation for the following assets by using the straight-line method.

Question 38

Award Makers bought a computerized engraving machine for $33,800. It is expected to have a 5-year useful life and a trade-in value of $2,700. Prepare a depreciation schedule for the first three years by using the 150% declining-balance method for the machine.

Question 39

Calculate the total cost, total depreciation, and annual depreciation for the following assets by using the straight-line method.

Question 40

Complete Exercises 18-23 as they relate to the declining-balance method of depreciation. Round to the nearest hundredth of a percent when necessary.

Question 41

Trident Developers purchased a computer system for $75,000 on April 27, 2014. The computer system is used for business 300% of the time. The accountant for the company elected to take a $10,000 Section 179 deduction, and the asset qualified for a special depreciation allowance, (see Table 17-4)
a. What was the basis for depreciation of the computer system
b. What was the amount of the first year's depreciation using MACRS

Question 42

The decrease in value from the original cost of a long-term asset over its useful life is known as ________.(17-1)

Question 43

Write the formula for the declining-balance rate. (17-3)

Question 44

Calculate the total cost, total depreciation, and annual depreciation for the following assets by using the straight-line method.

Question 45

Complete Exercises 18-23 as they relate to the declining-balance method of depreciation. Round to the nearest hundredth of a percent when necessary.

Question 46

Mid-State Construction built roads and a bridge at Atlantis World in Orlando, Florida, at a cost of $15,000,000. Atlantis World uses MACRS for tax purposes. No Section 179 or special depreciation allowances were taken.
a. What is the second year's depreciation deduction
b. What is the ninth year's depreciation deduction

Question 47

Calculate the total cost, total depreciation, and annual depreciation for the following assets by using the straight-line method.

Question 48

Complete the following as they relate to the units-of-production method of depreciation. Round answers to the nearest tenth of a cent.

Question 49

Calculate the total cost, total depreciation, and annual depreciation for the following assets by using the straight-line method.

Question 50

Complete Exercises 18-23 as they relate to the declining-balance method of depreciation. Round to the nearest hundredth of a percent when necessary.

Question 51

Sunny land Orange Groves planted fruit trees valued at $375,000 on February 12, 2014. The accountant for the company took a $75,000 Section 179 deduction, and the asset is entitled to a special depreciation allowance.
a. What is the basis for depreciation of the fruit trees
b. What is the properly class for this asset under MACRS
c. What is the percentage for the sixth year of depreciation for this property
d. What is the amount of the depreciation expense in the final year of write-off

Question 52

The total cost or original ___________ is the total amount a company pays for an asset. The __________ value is an asset's value at any given time during its useful life. (17-1)

Question 53

Write the formula for the depreciation per unit in the units-of-production method. (17-4)

Question 54

Calculate the total cost, total depreciation, and annual depreciation for the following assets by using the straight-line method.

Question 55

Complete Exercises 18-23 as they relate to the declining-balance method of depreciation. Round to the nearest hundredth of a percent when necessary.

Question 56

Island Hoppers Airways of Hawaii purchased a new commercial airplane for $2,400,000. The airplane is used for business 100% of the time. No Section 179 or special allowances are available for this asset. As the accountant for the company, prepare a depreciation schedule for the asset by using MACRS.

Question 57

Oxford Manufacturing, Inc., purchased new equipment totaling $648,000. Shipping charges were $2,200, and installation amounted to $1,800. The equipment is expected to last 4 years and have a residual value of $33,000. If the company elects to use the straight-line method of depreciation, prepare a depreciation schedule for these assets.

Question 58

Complete the following as they relate to the units-of-production method of depreciation. Round answers to the nearest tenth of a cent.

Question 59

Calculate the total cost, total depreciation, and annual depreciation for the following assets by using the straight-line method.

Question 60

Complete Exercises 18-23 as they relate to the declining-balance method of depreciation. Round to the nearest hundredth of a percent when necessary.

Question 61

All-That-Glitters Mining Company paid $49,250,000 for a parcel of land, including the gold mining rights. In addition, the company spent $7,462,500 to prepare the site for mining operations. It is estimated that the residual value of the asset will be $5,300,000. Geologists estimate the site contains a total of 225,000 ounces of gold.
a. What is the average depletion cost per ounce

b. If 16,200 ounces were mined in the first year of operation, what is the amount of the depletion cost

Question 62

The useful __________ is the length of time an asset is expected to generate revenue. The value of an asset at the time it is taken out of service is known as its _________ scrap, salvage, or trade-in-value. (17-1)

Question 63

According to the IRS, the depreciation system for getting back, or recovering, the cost of property used to produce income is known as the _______ system. This system is abbreviated as___________. (17-5)

Question 64

Calculate the total cost, total depreciation, and annual depreciation for the following assets by using the straight-line method.

Question 65

A U-Haul franchise bought new trucks for $180,000. The trucks are expected to have an 8-year useful life and a trade-in value of $35,000. Prepare a depreciation schedule by using the 150% declining-balance method for the trucks.

Question 66

Sequoia Timber Company purchased land containing an estimated 6,500,000 board feet of lumber for $3,700,000. The company invested another $300,000 to construct access roads and a company depot. The residual value of the property and equipment is estimated to be $880,000.
a. What is the average depletion cost per board foot of lumber
b. If 782,000 board feet were cut in the second year of operation, what is the amount of the depletion cost for that year

Question 67

Complete the following as they relate to the sum-of-the-years' digits method of depreciation.

Question 68

Screen Gems Movie Theater purchased a new projector for $155,000 with a salvage value of $2,000. Delivery and installation amounted to $580. The projector is expected to have a useful life of 15,000 hours. Complete the following depreciation schedule for the first four years of operation by using the units-of-production method.

Question 69

The Fluffy Laundromat purchased new washing machines and dryers for $57,000. Shipping charges were $470, and installation amounted to $500. The machines are expected to last 5 years and have a residual value of $2,000. If Fluffy elects to use the straight-line method of depreciation, prepare a depreciation schedule for these machines.
The Fluffy Laundromat Straight-Line Depreciation Schedule Laundry Equipmen t

Question 70

Complete Exercises 25-30 as they relate to the units-of-production method of depreciation. Round to the nearest tenth of a cent when necessary.

Question 71

As you have seen in this chapter, companies depreciate, or write off, the expense of tangible assets such as trucks and equipment over a period of their useful lives. Many companies also have intangible assets that must be accounted for as an expense over a period of time.
Intangible assets are resources that benefit the company but do not have any physical substance. Some examples are copyrights, franchises, patents, trademarks, and leases. In account­ing, intangible assets are written off in a procedure known as asset amortization. This is much like straight-line depreciation, but there is no salvage value.
You are the accountant for Front Line Pharmaceuticals, Inc. In January 2000, the company purchased the patent rights for a new medication from Novae, Inc., for $9,000,000. The patent had 15 years remaining as its useful life. In January 2005, Front Line Pharmaceuticals successfully defended its right to the patent in a lawsuit that cost $550,000 in legal fees.
a. Using the straight-line method, calculate the patent's annual amortization expense for theyears before the lawsuit.
b. Calculate the revised annual amortization expense for the remaining years after the lawsuit.