T17-1 REVIEW EXERCISES CHAPTER 17 SECTION I. Calculate the total cost, total depreciation, and annual depreciation for the following
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1 T17-1 REVIEW EXERCISES CHAPTER 17 SECTION I Calculate the total cost, total depreciation, and annual depreciation for the following assets by using the straight-line method: Freight Setup Total Salvage Useful Life Total Annual Estimated Cost Charges Charges Cost Value (years) Depreciation Depreciation 1. $4,000 $10 $00 $4,60.00 $3, $88,600 $62 $2,00 91,72.00 $9, $18,200 $0 $1, , $20,000 $42, , , $4,.00 11, , $70,000 $0 $10, , $70, , ,020.00
2 T17-2 REVIEW EXERCISES CHAPTER 17 SECTION I. The Fluffy Laundry purchased new washing machines and dryers for $7,000. Freight charges were $470, and installation amounted to $00. The machines are expected to last 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. Fluffy Laundry Depreciation Schedule Straight-line Method End of Annual Accumulated Book Year Depreciation Depreciation Value (new) $7, To 1 $11, $11, , , , ,82.00 To 3 11, , , , , , An 11,194.00, , Total cost 7, $7, Total depreciation 7, ,000.00, Annual depreciation, , Canmore Supply Company purchases warehouse shelving for $18,600. Freight charges were $370, and assembly and setup amounted to $7. 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? Total cost 18, $19,4.00 Total depreciation 19, $18,64.00 Annual depreciation 18, $2,663.7 b. What is the accumulated depreciation after the third year? Accumulated depreciation after 3rd year $2, $7, c. What is the book value of the shelving after the fifth year? Book value after th year 19,4 2 (2, ) $6,227.1
3 T17-3 REVIEW EXERCISES CHAPTER 17 SECTION I Complete Exercises 7 9 as they relate to the sum-of-the-years digits method of depreciation: Useful Sum-of-the- Depreciation Rate Fraction Life (years) Years Digits Year 1 Year 3 Year /1 3/1 1/1 28 7/28 /28 3/ / 8/ 6/
4 T17-4 REVIEW EXERCISES CHAPTER 17 SECTION I 10. New Age Manufacturing, Inc., purchased production-line machinery for $44,000. It is expected to last for 6 years and have a trade-in value of $2,000. Using the sum-ofthe-years digits method, prepare a depreciation schedule for New Age. New Age Manufacturing, Inc. Machinery SYD Depreciation Schedule End of Total Depreciation Annual Accumulated Book Year Depreciation Rate Fraction Depreciation Depreciation Value $420, , , , , $120, ,000 80,000 60,000 40,000 $120, , , , ,000 (new) $44,000 32,000 22,000 14,000 8,000 4, ,000 20, ,000 2,000 Original cost Trade-in value Total depreciation $44, ,000 $420,000
5 T17- REVIEW EXERCISES CHAPTER 17 SECTION I Complete Exercises as they relate to the declining-balance method of depreciation: Straight-Line Declining-Balance Years Rate (%) Multiple (%) Rate (%) A U-Haul franchise bought a fleet of new trucks for $180,000. The fleet is expected to have an 8-year useful life and a trade-in value of $3,000. Prepare a depreciation schedule by using the 10% declining-balance method for the trucks. U-Haul Depreciation Schedule Truck Fleet 8-year, 10% declining-balance End of Beginning Depreciation Depreciation Accumulated Ending Year Book Value Rate for the Year Depreciation Book Value $180, , , , , , , , *Maximum allowed to reach salvage value Total depreciation $180, ,000 $14,000 $33, , , , , , , ,076.16* (new) $33, , , , , , , , $180, , , , , , , , ,000.00
6 T17-6 REVIEW EXERCISES CHAPTER 17 SECTION I Complete the following as they relate to the units-of-production method of depreciation (round to the nearest tenth of a cent when necessary): Salvage Units of Depreciation Asset Cost Value Useful Life per Unit 1. Pump $1,000 $2, ,000 hours 16. Automobile $27,400 $3,400 60,000 miles 17. Assembly robot $77,000 $2,000 3,000,000 units $ Millennium Manufacturing purchased a new stamping machine for $4,000 with a salvage value of $,000. For depreciation purposes, the machine is expected to have a useful life of 20,000 units of production. Complete the following depreciation schedule by using the units-of-production method: Millennium Manufacturing, Inc. Depreciation Schedule, Units-of-Production Stamping Machine 20,000 Units End of Depreciation Units Annual Accumulated Book Year per Unit Produced Depreciation Depreciation Value (new) $4, $0.16 0,000 $8, $8, , ,000 11, , , ,000 7, , , ,000 10, , , ,000 $3,040.00* 40,000.00, *Maximum allowed to reach salvage value Total cost 4, , , Depreciation per unit 40, ,000 $.16
7 T17-7 BUSINESS DECISION CHAPTER 17 SECTION I THE REVISED ESTIMATE 19. You are the accountant for Simplex 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? Annual depreciation b. What is the book value of the property at the end of the twentieth year of use? Accumulated depreciation 8, $1,700,000 Book value 3,800, ,700,000 $2,100,000 c. If at the start of the twenty-first year you revise your estimate so that the remaining useful life is 1 years and the residual value is $120,000, what should be the depreciation expense for each of the remaining 1 years? Annual depreciation Total depreciation Estimated useful life Total depreciation Estimated useful life 3,800, , ,100, ,000 1 $8,000 $132,000
8 T17-8 REVIEW EXERCISES CHAPTER 17 SECTION II 1. Cudjoe Key Developers purchased a computer system for $7,000 on October 4, The computer system will be used for business 100% of the time. The accountant for the company has elected to take a $10,000 section 179 deduction and the asset qualifies for a special depreciation allowance (see Table 17-4). a. What is the basis for depreciation for the computer system? Tentative basis $7,000 2 $10,000 $6,000 The asset qualifies for a 30% special depreciation allowance Basis for depreciation $6,000(100% 2 30%) $4,00 b. What is the amount of the first year s depreciation using MACRS? Computers are in the -year property class First year depreciation 20% $4, $9, Atlantis Fantasy Company constructed roads and a bridge at AtlantisWorld in Orlando, Florida, at a cost of $1,000,000. Atlantis uses MACRS for tax purposes. No section 179 or special depreciation allowances were taken. a. What is the second year s depreciation deduction? Roads and bridges are in the 1-year property class. Second year cost recovery percent 9.0% MACRS, year 2 1,000, % $1,42, b. What is the ninth year s depreciation deduction? Ninth year cost recovery percent.91% MACRS, year 9 1,000, % $886,00.00
9 T17-9 REVIEW EXERCISES CHAPTER 17 SECTION II 3. Minute Maid Orange Groves planted fruit trees valued at $37,000 on February 12, The accountant for the company took a $7,000 section 179 deduction and the asset is entitled to a special depreciation allowance. a. What is the basis for depreciation for the fruit trees? Tentative basis $37,000 - $7,000 $300,000 The asset qualifies for a 0% special depreciation allowance Basis for depreciation $300,000(100% 2 0%) $10,000 b. What is the property class for this asset under MACRS? 10-year property c. What is the percentage for the sixth year of depreciation for this property? Sixth-year cost recovery percent 7.37% d. What is the amount of the depreciation expense in the final year of write-off? Final year (11th year) depreciation 10, % $4,920.00
10 T17-10 REVIEW EXERCISES CHAPTER 17 SECTION II 4. 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. Commercial airplanes are in the 7-year property class. See Appendix B following the index for schedule.. Lake Tahoe Timber Company purchased land containing an estimated 6,00,000 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? Total cost of asset 3,700, , ,000 $3,120,000 Average depletion cost 3,120,000 6,00,000 $.48 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? Second year depletion 782, $37,360
11 T17-11 BUSINESS DECISION CHAPTER 17 SECTION II INTANGIBLE WRITE-OFFS 6. 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 Bayview 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 1 years remaining as its useful life. In January 200, Bayview Pharmaceuticals successfully defended its right to the patent in a lawsuit at a cost of $0,000 in legal fees. a. Using the straight-line method, calculate the patent s annual amortization expense for the years before the lawsuit. Annual amortization expense Asset value Estimated useful life 9,000,000 1 b. Calculate the amortization expense per year for the remaining years after the lawsuit. Accumulated expense 600,000 3 years $3,000,000 Asset value 9,000, ,000,000 $6,000,000 Revised asset value Revised annual expense Estimated useful life 6,000, , $600,000 $6,000
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