Chapter 11 Supplemental Questions

E11-3

(Depreciation Computations–SYD, DDB–Partial Periods)

Cosby Company purchased a new plant asset on April 1, 2010, at a cost of $774,000. It was estimated to have a service life
of 20 years and a salvage value of $60,000. Cosby' accounting period is the calendar year.

(a) Compute the depreciation for this asset for 2010 and 2011 using the sum-of-the-years'-digits method.
Depreciation 2010 $ 51,000
Depreciation 2011 $ 65,450
(b) Compute the depreciation for this asset for 2010 and 2011 using the double-declining balance method.
Depreciation 2010 $ 58,050
Depreciation 2011 $ 71,595

(a) 20 (20 + 1)
= 210
2

3/4 × 20/210 × ($774,000 - $60,000) = $51,000 for 2010

1/4 × 20/210 × ($774,000 - $60,000) $17,000

3/4 × 19/210 × ($774,000 - $60,000) 48,450
$65,450 for 2011

(b) 100%
= 5%; 5% × 2 = 10%
20

3/4 × 10% × $774,000 = $58,050 for 2010

10% × ($774,000 - $58,050) = $71,595 for 2011

E11-4

(Depreciation Computations–Five Methods)

Wenner Furnace Corp. purchased machinery for $279,000 on May 1, 2010. It is estimated that it will have a useful life of 10
years, salvage value of $15,000, production of 240,000 units, and working hours of 25,000. During 2011 Wenner Corp. uses
the machinery for 2,650 hours, and the machinery produces 25,500 units.

From the information given, compute the depreciation charge for 2011 under each of the following methods.

(a) Straight-line.

$26,400

(b) Units-of-output. (Round depreciation cost per unit to 2 decimal places, i.e. 12.25 and and final answer to 0
decimal places, i.e. 25,240.)

$28,050

(c) Working hours.

$27,984

(d) Sum-of-the-years'-

digits. $44,800

(e) Declining-balance (use 20% as the annual rate).

 $48,360

(a) $279,000 – $15,000 = $264,000; $264,000 ÷ 10 yrs. = $26,400

(b) $264,000 ÷ 240,000 units = $1.10; 25,500 units × $1.10 = $28,050

(c) $264,000 ÷ 25,000 hours = $10.56 per hr.; 2,650 hrs. × $10.56 = $27,984
n(n + 1) 10(11)
(d) 10 + 9 + 8 + 7 + 6 + 5 + 4 + 3 + 2 + 1 = 55 OR = 55
2 2
10
55 × $264,000 ×1/3 = $16,000

9
55 × $264,000 × 2/3 28,800
Total for 2011 $44,800
(e) $279,000 × 20% × 1/3 $18,600
[$279,000 - ($279,000 × 20%)] × 20% × 2/3 29,760
Total for 2011 $48,360

E11-5

(Depreciation Computations–Four Methods))

Maserati Corporation purchased a new machine for its assembly process on August 1, 2010. The cost of this machine
was $150,000. The company estimated that the machine would have a salvage value of $24,000 at the end of its service
life. Its life is estimated at 5 years and its working hours are estimated at 21,000 hours. Year-end is December 31.

Compute the depreciation expense under the following methods. Each of the following should be considered unrelated.

(a) Straight-line depreciation for

2010. $10,500

(b) Activity method for 2010, assuming that machine usage was 800

hours. $4,800

(c) Sum-of-the-years'-digits for 2011.

$38,500

(d) Double-declining balance for 2011.

$50,000

(a) ($150,000 - $24,000)

= $25,200/yr = $25,200 × 5/12 = $10,500
5

2010 Depreciation - Straight line = $10,500

(b) ($150,000 - $24,000)
= $6.00/hr
21,000

2010 Depreciation - Machine Usage = 800 × $6.00 = $4,800

Machine Allocated to
(c) Year Total 2010 2011
 1 5/15 × $126,000 = $42,000 *$17,500 **$24,500
2 4/15 × $126,000 = $33,600 ***14,000
$17,500 $38,500
* $42,000 × 5/12 = $17,500
* $42,000 × 7/12 = $24,500
* $33,600 × 5/12 = $14,000

2011 Depreciation - Sum-of-the-Years'-Digits = $38,500

(d) 2010 40% × ($150,000) × 5/12 = $25,000
2011 40% × ($150,000 - $25,000) = $50,000

OR

1st full year (40% × $150,000) = $60,000

2nd full year [40% × ($150,000 - $60,000)] = $36,000

2010 Depreciation = 5/12 × $60,000 = $25,000

2011 Depreciation = 7/12 × $60,000 = $35,000

5/12 × $36,000 = 15,000
$50,000

E11-7

(Different Methods of Depreciation)

Jeeter Industries presents you with the following information.

Complete the table for the year ended December 31, 2011. The company depreciates all assets using the half-year
convention. (Round all answers to 0 decimal places.)

Accumulated
Depreciation Depreciation to Depreciation for
Description Date Purchased Cost Salvage Life Method 12/31/10 2011
Machine A 2/12/09 $159,000 $16,000 10 (a) SYD $37,700 (b)$ 22,100
Machine B 8/15/08 (c) 79,000 21,000 5 SL 29,000 (d)11,600
Machine C 7/21/07 88,000 28,500 8 DDB (e) 55,516 (f) 3,984
Machine D (g)10/12/09 219,000 69,000 5 SYD 70,000 (h) 35,000

Accumulated
Date Depreciation Depreciation 2011
Description Purchased Cost Salvage Life Method to 2010 Depreciation
Machine A 2/12/09 $159,000 $16,000 10 SYD $37,700 $22,100
Machine B 8/15/08 79,000 21,000 5 SL 29,000 11,600
Machine C 7/21/07 88,000 28,500 8 DDB 55,516 3,984

(a)
Machine D 10/12/09 219,000 69,000 5 SYD 70,000 35,000
Machine A - Testing the methods
Straight-line method for 2009 $7,150 [($159,000 - $16,000) ÷ 10] × 1/2
Straight-line method for 2010 14,300
Total Straight Line $21,450

Double-declining balance for 2009 $15,900 ($159,000 × 0.2 × 0.5)

Double-declining balance for 2010 28,620 [($159,000 - $15,900) × 0.2]
Total Double Declining Balance $44,520

Sum-of-the-years-digits for 2009 $13,000 [($159,000 - $16,000) × 10/55 × 0.5]

Sum-of-the-years-digits for 2010 24,700 ($143,000 × 10/55 × 1/2) + ($143,000 × 9/55 × 0.5)
Total Sum-of-the-years-digits $37,700
 Method used must be SYD

(b) Using SYD, 2011 Depreciation is $22,100 ($143,000 × 9/55 × 1/2) + ($143,000 × 8/55 × 0.5)
(c)
Machine B – Computation of the cost

1
Asset has been depreciated for 2 /2 years using the straight-line method.
1
Annual depreciation is then equal to $29,000 divided by 2 /2 or $11,600. $11,600 times 5 plus the salvage value is equal
to the cost.
Cost is $79,000 [($11,600 × 5) + $21,000].
(d) Using SL, 2011 Depreciation is $11,600.
(e) Machine C - Using the double declining balance method of depreciation
2007's depreciation is $11,000 ($88,000 × 0.25 × 0.5)
2008's depreciation is 19,250 ($88,000 - $11,000) × 0.25
2009's depreciation is 14,438 ($88,000 - $30,250) × 0.25
2010's depreciation is 10,828 ($88,000 - $44,688) × 0.25
$55,516
(f)
Using DDB, 2011 Depreciation is $3,984 [($88,000 - $55,516) × 0.25 = $8,121] restricted to ($88,000 - $55,516 - $28,500
= $3,984)
(g) Machine D - Computation of Year Purchased
First Half Year using SYD = $25,000 [($219,000 - $69,000) × 5/15 × 0.5]
Second Year using SYD = 45,000 ($150,000 × 5/15 × 0.5) + ($150,000 × 4/15 × 0.5)
$70,000

Thus asset must have been purchased on October 12, 2009

(h) Using SYD, 2011 Depreciation is $35,000 ($150,000 × 4/15 × 0.5) + ($150,000 × 3/15 × 0.5)

E11-13

(Depreciation–Replacement, Change in Estimate)

Peloton Company constructed a building at a cost of $2,400,000 and occupied it beginning in January 1991. It was estimated
at that time that its life would be 40 years, with no salvage value.
In January 2011, a new roof was installed at a cost of $300,000, and it was estimated then that the building would
have a useful life of 25 years from that date. The cost of the old roof was $180,000.

(a) What amount of depreciation should have been charged annually from the years 1991 to 2010? (Assume straight-
line depreciation.)

$60,000
(b) What entry should be made in 2011 to record the replacement of the roof?
Description/Account Debit Credit
Loss on disposal of plant assets 90,000
Accumulated depreciation-Building 90,000
Building 180,000
Building 300,000
Cash 300,000
(c) Is an entry to record the revision in the estimated life of the building in January 2011
necessary? No
(d) What amount of depreciation should be charged for the year

2011? $56,400

(a) $2,400,000 ÷ 40 = $60,000

(b) Description/Account Debit Credit
Loss on disposal of plant assets 90,000
 $2,520,000
1,110,000
1,410,000
25 years
$56,400

Accumulated depreciation-Building ($180,000 × 20/40) 90,000

Building 180,000
Building 300,000
Cash 300,000

Note: The most appropriate entry would be to remove the old roof and record a loss on disposal, because the cost
of the old roof is given. Another alternative would be to debit Accumulated Depreciation on the theory that the
replacement extends the useful life of the building. The entry in this case would be as follows:
Description/Account Debit Credit
Accumulated depreciation-Building 300,000
Cash 300,000

(c) No entry necessary

(d) (Assume the cost of old roof is removed)
Building ($2,400,000 - $180,000 + $300,000)
Accumulated depreciation ($60,000 × 20 - $90,000)

Remaining useful life

Depreciation-2011 ($1,410,000 ÷ 25)

E11-16

(Impairment)
 Presented below is information related to equipment owned by Pujols Company at December 31, 2010.

Cost $9,000,000
Accumulated depreciation to date 1,000,000
Expected future net cash flows 7,000,000
Fair value 4,400,000

Assume that Pujols will continue to use this asset in the future. As of December 31, 2010, the equipment has a
remaining useful life of 4 years.

(a) Prepare the journal entry (if any) to record the impairment of the asset at December 31, 2010.
Description/Account Debit Credit
Loss on impairment 3,600,000
Accumulated depreciation-Equipment 3,600,000
(b) Prepare the journal entry to record depreciation expense for 2011.
Description/Account Debit Credit
Depreciation expense 1,100,000
Accumulated depreciation-Equipment 1,100,000
(c) The fair value of the equipment at December 31, 2011, is $5,100,0000. Is a journal entry necessary to record
this increase in fair value?

No

(a) Description/Account Debit Credit

Loss on impairment 3,600,000
Accumulated depreciation-Equipment 3,600,000
Cost $9,000,000
 Accumulated depreciation 1,000,000
Carrying Amount 8,000,000
Fair value 4,400,000
Loss on impairment $3,600,000
(b) Description/Account Debit Credit
Deprecation expense 1,100,000
Accumulated depreciation-Equipment 1,100,000
New carrying amount $4,400,000
Useful life 4 years
Depreciation per year $1,100,000
(c) No entry necessary. Restoration of any impairment loss is not permitted.

E11-17

(Impairment)

Presented below is information related to equipment owned by Suarez Company at December 31, 2010.

Cost $9,000,000
Accumulated depreciation to date 1,000,000
Expected future net cash flows 7,000,000
Fair value 4,400,000

As of December 31, 2010, the equipment has a remaining useful life of 4 years. Assume that Suarez intends to dispose
of the equipment in the coming year. It is expected that the cost of disposal will be $20,000.

(a) Prepare the journal entry (if any) to record the impairment of the asset at December 31, 2010.
Description/Account Debit Credit
Loss on impairment 3,620,000
Accumulated depreciation-Equipment 3,620,000
(b) Is it necessary to prepare the journal entry to record depreciation expense for
2011? No
(c) The asset was not sold by December 31, 2011. The fair value of the equipment on that date is $5,100,000. Prepare
the journal entry (if any) necessary to record this increase in fair value. It is expected that the cost of disposal is
still $20,000.
Description/Account Debit Credit
Accumulated depreciation-Equipment 700,000
Recovery of loss on Impairment 700,000

(a) Description/Account Debit Credit

Loss on impairment 3,620,000
Accumulated depreciation-Equipment 3,620,000
Cost $9,000,000
Accumulated depreciation 1,000,000
Carrying Amount 8,000,000
Less Fair value 4,400,000
Plus: Cost of disposal 20,000
Loss on impairment $3,620,000
(b) No entry necessary. Depreciation not taken on assets intended to be sold.
(c) Description/Account Debit Credit
Accumulated depreciation-Equipment 700,000
Recovery of loss on impairment 700,000
 Fair value $5,100,000
Less: Cost of disposal 20,000 $5,080,000
Carrying Amount *4,380,000
Recovery of impairment loss $700,000

*($9,000,000 - $1,000,000 - $3,620,000)

E11-19

(Depletion Computations–Timber)

Hernandez Timber Company owns 9,000 acres of timberland purchased in 1999 at a cost of $1,400 per acre. At the time of
purchase the land without the timber was valued at $400 per acre. In 2000, Hernandez built fire lanes and roads, with a life
of 30 years, at a cost of $87,000. Every year Hernandez sprays to prevent disease at a cost of $3,000 per year and spends
$7,000 to maintain the fire lanes and roads. During 2001, Hernandez selectively logged and sold 700,000 board feet of
timber, of the estimated 3,000,000 board feet. In 2002, Hernandez planted new seedlings to replace the trees cut at a cost
of $100,000.

(a) Determine the depreciation expense and the cost of timber sold related to depletion for 2001.
Depreciation expense $ 2,900
Cost of timber sold $ 2,100,000
(b) Hernandez has not logged since 2001. If Hernandez logged and sold 900,000 board feet of timber in 2012, when
the timber cruise (appraiser) estimated 5,000,000 board feet, determine the cost of timber sold related to depletion
for 2012.

$1,260,000

$87,000
(a) Depreciation Expense = = $2,900 per year
30 years

Cost of timber sold: $1,400 - $400 = $1,000

$1,000 × 9,000 acres = $9,000,000 of value of timber
($9,000,000 ÷ 3,000,000 bd. ft.) × 700,000 bd. ft. = $2,100,000

(b) Cost of timber sold: $9,000,000 - $2,100,000 = $6,900,000

$6,900,000 + $100,000 = $7,000,000
($7,000,000 ÷ 5,000,000 bd.ft.) × 900,000 bd. ft. = $1,260,000
Note: The spraying costs as well as the costs to maintain the fire lanes and roads are expensed each period and are
not part of the depletion base.

E11-20

(Depletion Computations–Oil)

Federer Drilling Company has leased property on which oil has been discovered. Wells on this property produced 18,000
barrels of oil during the past year that sold at an average sales price of $65 per barrel. Total oil resources of this property are
estimated to be 250,000 barrels.
The lease provided for an outright payment of $600,000 to the lessor (owner) before drilling could be commenced and
an annual rental of $31,500. A premium of 5% of the sales price of every barrel of oil removed is to be paid annually to the
lessor. In addition, Federer (lessee) is to clean up all the waste and debris from drilling and to bear the costs of
reconditioning the land for farming when the wells are abandoned. The estimated fair value, at the time of the lease, of this
clean-up and reconditioning is $30,000.

From the provisions of the lease agreement, you are to compute the cost per barrel for the past year, exclusive of operating
costs, to Federer Drilling Company. (Round answer to 2 decimal places, i.e. 2.75.)

$7.52 per barrel

Cost per barrel of oil:

$600,000
Initial payment: $2.40
250,000

$31,500
Rental: 1.75
18,000

Premium, 5% of $65: 3.25

$30,000
Reconditioning of land: 250,000 0.12
Total cost per barrel $7.52

E11-22

(Depletion Computations–Mining)

Henrik Mining Company purchased land on February 1, 2010, at a cost of $1,250,000. It estimated that a total of 60,000
tons of mineral was available for mining. After it has removed all the natural resources, the company will be required to
restore the property to its previous state because of strict environmental protection laws. It estimates the fair value of this
restoration obligation at $90,000. It believes it will be able to sell the property afterwards for $100,000. It incurred
developmental costs of $200,000 before it was able to do any mining. In 2010 resources removed totaled 30,000 tons.
The company sold 24,000 tons.

Compute the following information for 2010.

(a) Per unit material

cost. $24
(b) Total material cost of December 31, 2010,
inventory. $144,000
(c) Total materials cost in cost of goods sold at December 31,

2010. $576,000

Depletion base: $1,250,000 + $90,000 - $100,000 + $200,000 = $1,440,000

Depletion rate: $1,440,000 ÷ 60,000 = $24/ton

(a) Per unit material cost: $24/ton

(b) 12/31/10 inventory: $24 × 6,000 tons = $144,000

(c) Cost of goods sold 2010: $24 × 24,000 tons = $576,000