aie, the asstt's brok value: is som tne ase cost FOE a Sarma the wot of te third year 8 compulod cease . . : the eeaight 0 ES res bene gendered te ore ee 'by the detining-balance method compared with the straight-line method, ‘Notice that the estimated residual value of the delivery truck does not enter inte the com Putation of depreciation expense until the end. This is because the declining-balance method . Provides an “automatic” residual value. As long as each year’s depreciation expense is equal, to only a portion of the undepreciated cost of the asset, the asset will never be entirely written off, However, if the asset has a significant residual vahie, depreciation should stop at this point. Since our delivery truck has an estimated residual value of $2,000, the deprecia- tion expense for the fifth year is Hmiled to $203, rather than the $881 indicated by taking 40 percent of the remaining book value (40% x $2.203 = $881). With the last year's depre- ciation expense limited inthis manner, the book value of the truck at the end of the fifth year is exactly equal to its $2,000 estimated residual value, In Exhibit 9-5 we computed a full year’s depreciation in the first year because the asset was soquired on January 2. But if the half-year convention were in use, depreciation in the first year would be reduced by half, to $3,400. The depreciation in the second year would be ($17,000 - $3,400) x 40%, or $5,440, 150 Percent Declining-Balance Now assume that we wanted to depreciate this truck using 150 percent of the straight-line rate, In this Case, the depreciation rate will be 30 percent, instead of 40 percent (a 20% straightline rate X 150% = 30%), This depreci schedule is in Exhibit 9-6, Se: NE Ce pReaASN Notice that we switched to straight-line depreciati on in the fast two year ated cost ofthe truck at the end of Year 3 was $543), r, ee Ryagieis, ech ereerldnc CTE en eee wf h Point, larger de : ke 7 wwe simply allocate this $3,831 by the wralghtdne nection charges can be recognized if 22 prsot ofthe remaining book value (rear (ne ter than continuing ts compu io the nearest dollar.) wi © Found the allocation of this amountAsma tat Fane & Hama for oanane 6 | othe on Comp mcg ys 6g Sos wt 1 pert a Doan a ga ce Aa ar! ws Bw mE ce ea Fagan Hie Kortware pervnasad sew sig fir 9 Fe wore whew 6 2070" 18 wl weal agen Th eiweng PROuLEM 9.44 pote paee lnsuee invotving Aternative a Merron Depts deprncition epenae the yeas t Sunigiedinn,Loss INTERNET CASE 5.4 ‘Annual Report Disclosures Oi. syive officer) and CFO (chief Financia) thar the CEO (oie OT ricaron inthe Haywood, Inc., purchased a truck to use for deliveries and is attempting to determine how much tia ize ‘depreciation expense would be recognized under tree different methods. The truck cost $24,000 Dagrectati and is expected to have a value of $6,000 at the end of its six-year life, The truck is expected to be Mamative Depreciation 4 atthe rate of 15,000 miles inthe frst year, 20,000 miles in the second and third year, and ad 12,000 miles i cach of the fourth, fifth, and sixth years. . Instructions , Delermine the amount of depreciation expense'that would be recognized under each of the -preciation methods in the first and second years of the truck’s useful life. A full following de year's depreciation Will be recognized i he fct year the tuck is used. * 4, Straight-line, 3 2, Double-declining- balance. 3. Units-of-output (based on miles) i KS ye IBN Se y Dive yysty i aarti ; PAlamairy 2. 215, a connie axe Ines The eatefaeneaoomion eet Ce eee ane ‘Year of deprecintion woe taken i 2015, 1 Siphon ; 2 200 percent dectaitg-planee "315d persSat dectning lace wit eth iain wt laior ema: { ~~ be Comuiiget on tignifioant ferences or imitans that you cbectye! Sepia gays ssah areata aes ee a AA recent annua! report , i im BXBROISE 0.5 Depreciation: For fininclal reporting purpose, depreciation i provided bin the: tekigh(-line Evaluation of Disclosures in. tethod over the eetimued seul lives ofthe aus, whch generally have the fllaing ene: Annual Reports uikling™—40 years or len mach)néry end-equipeent—1$ your o lea compat 4ativtre—3-7 ‘years; and Ieese hold improverems—over the lift'Of the ‘not to exceed 15 yearns. Accelerated ». Why do you think tit the company uses eceleaied deprecation methods its come wx pacer of L093 ection in the financial statements be more gonsetvative or practice of using the straight-line maethon!? Explain nal Industries uses straight-line depreciation on wl of ita Gepredible anuet Thi Gotnpeny Lowa ation expense atthe end of each calendar year. On January 11, 2041, the mxanciss s ¢ machine's uveful life wan evtimated to be Revislo ; ; preciaton for partial year is recorded Estimate:{progeny ain of marketable secure f i arm plant assets Ue ab ciptonarary Soboite IE picasa oalon ot lari ane ‘Nt cinh used injverting atte Gaah flows trom financing actvton: E. Ghooneds rom shorter booing “i! Payments fo settle short-term debts Proceeds rem ising bord pay Proceeds tom suing cit stock Dividends pal. Nel cash povided by traning activites Nat increas (rose) n cosh ash td ath equvsients. Jen. 1, (Gab ae cah exikinents, Dec 31,20 Suppleyrentary Schedula A: Net Cash Provided! by Operating Activites te is opty Bee) en onse the indirect method of rease ii ed Interast receivable determining cash flows ay i om nefeate in accounts payable Nat cash provide, Supplementary Schedule B: Nono: Less ash Investing and Financing Activities 7"& The $70,870 of the mortgage ‘note that will be repeid within Pak (Ga 8169950 es ere ini one ee Babe - 1, 2016. is Tong-term debt. 4, Athough the bonds payable mature in seven ° ats, they will be repaid fiom a sink- ing fund, cather than from current assets. Therefore, these bonds retain their long-term classification. “Self-Test Questions - ery agin: heatineerrenae more mane orsmectaae The answers.to these questions appear on page 483. 1, Which of the following is chacacteristic of liabilities rather than of equity? (More than one answer may be correct.) 4. The obligation matures. b, interest paid to the provider of the capital is deductible in the determination of taxable income, . The capital providers’ clalms are residual (a the event of liquidation of the business . , The capital providers normally have the right to exercise control over business operations. * 2. On October 1, Dalton Corp. borrows $100,000 from Natiogal Bank, signing a six-month note payable for that amount, plus interest to be computed at a rate of 9 percent pper annum. Indicate all correct answers, 4, Dalton’s liability at October 1 is only $100,000, ‘b. The maturity value of this note is $104,500, & At December 31, Dalton will have a liability for accrued {nterest payable in the amount of $4,500, 4 Dalton's total lability for this loan at November 30/4 $101,800, |. Identity all correct statements concerning payrolls an related payroll cost 4. Both employers and employees pay Social Security ar Medicare taxes. asoe rques wire hen mT “he foaming cis Hast es ‘te Tse) eine rowing mone oes 140.000 ent em Dee ries Sreportormal nal pa ae ; 450,000 : i ian rend ofthat punted =I TT getters 7 ie SRR S Serta 0 end ofthe ET) a aunty quate 222 = omcember at (ond Compt iow mc vee ‘ : “Apwil Lthrongh September 30> i Beer tgieerpec3! ae ou hough December 31. é prea ¥ hon in Exhibit 5-13, 08 page 211 cone shown fered from the adjusted trial jothe we worksheets similar io the O86 ST ef the aU ane are as folOws 1os-8 -Accoumtants ft Warner Co i ES . taper otra a raya Maat a ae Jet cam ete ee * 5 410000 Ce iat oan tare Soom Tr eared aot cone te 4 e ‘Tota amount transferred t0 the credit column o! TS foc the year? A Wd zany? ce i from the adjusted trial 1b. Vhat was the otal amount transferred column ofthe inca «termeat? . connect balance col Exercises oe rete a LOS through LO5-7 __Lisedbelow are nine etnias ued in his chap EXERCISE 8.1 Liguity Nomina accounts Accounting Terminology ‘Adequate disclosure Afcr-closing tit balan Closing entries Income summary Interim financial statement ds Each ofthe follwing staternis ray (or may net) descr a! terms: For each statement, indicate the accounting term described, or ans ne stalement does net f describe any ofthe items a The accountng principle intended to a ' Bb. A term used to describe a company's ability to ps he A ter used in reference to accounts that are close A term vse in reference to accounts that A documtnt prepared to assist manage the losing entries: £2 A policy decision by a corporation tod & The process by which the Retained Ea : Re Mrseee rate ees &s arcsec. plex transactions : < LOS-1,LOS-2,LOS-6 Green Layns, EXERCISE 5.2 end. The company's Soe zi ; pic, “The Werke: —— eeINDIRECT METHOD MAY BE REQUIRED IN A > SUPPLEMENTARY SCHEDULE The FASB recomumends usé of the direct method in presenting net cash flows from ‘tvites The majority of companics, however, elect to use the indieet method. One reason is that {be FASB requires companies using the direct method to meet an additional reporting requirement They are required to provide 1 supplementary schedule showing the computation of net cash fows from operating activities by the indirect method. However, no supplementary computa- toes are required of companies that present the indirect method computations in their cash low satements because this sime information is already presented in the body of the statement. THE STATEMENT OF CASH FLOWS: A SECOND LOOK We heve now completed our explanation of Allison Corporation's statement of cash flows. ¢ bf cash flow ling amounts included in the other two nent and the balance sheet—to determine the amounts cash flows, In computing cash flows from od, in which major ¢ Positive and negative cash flows were determined and presented. 0 illustrated the indirect method to determine the amo pernting activities, we began by using the direct& Accumulated depreciation at the end of 2017: Depreciation expense, 2015 Depreciation expense, 2016 Depreciation expense, 2017 Acoymulated depreciation at the end of 2 Original cost of equipment in 2015 ‘ Less: Accumulated depreciation at the anc:of 2017 «+» Book value of equipment at time of disposal Cash proceeds from sale Less: Book value of equip’ Bain on sae of dispose! ; aT ETN 017. «+» ment at time of disposal.= 16.98 bead 18562 rn oss 1366 or 3004 7 w or, 08 * os, % mu 7 2 o ta ss bie « st eal = on thea a sn nortiz~ 2 2 id bale — Oe ste pts wor ol he tr porno vin fe wenn ed bare harges Nei bn earsery one ct mang revel eneume woe mason came ble at - than ‘Theinterest rat used in the table is of spec tance, this ate must coincide with the nent pavid of time Berwren payment dates—in this case, ne month. Thu, if payments are made cipal Tatty columa Bm sed on the monthly rate of interest. If payments were made rate of interest jal amount of the lis The monthly inter monthly interest rate to the unpaid bal ach aay, thé column w he quater ward An amortization (al twp ofthe Unpaic aa A, aze speci cau B is com waee at the begin (he liability (colun Pauly the unpaid bs te ‘ndicated in c Rather than . Anytime by pa aS eure ol * Notice that the Deaute the un Prepari lity ($16,398) listed at tly p ion of each payment that reduces the 19 A minus colume 8} this Liability at uations, base Ife menehly payme: vad coos te Senote would incre: i agri £001) “rte ipa 837800 RT 07° Het we dat i th aio ows.on 4 tale a8) BRIEF RXERCIOR p,y Natural Resources Logs a Alternative Dep Methode RRR ENN Los-2, 109.3 BXERCIEn 9.4 ‘oprécation EXERCIsE 9.10 asa aE aay eve Miron veel 4 abt Over b Oe sped wl fra: tod of the geconi > te hrs 0 Ge Peer Ts : i iy in dadet to expand i! iney ay con ng «png ean in at eee acs a ee ot ies phn nei sta uty of 570,00, wch oy sna aplenty oper Tap UA mp TPs, eek oper ee ln ae J" Wunt makes the purchase for $700,000, at 1 ‘explain your ansver. bf la Wil dhe eat of aStAtibg Frm the land aha sae a ac ae va imatet £0,000 tors ofthe tninehafane acted ithe Fir a Year Mille Mining sequiced able mineral The cos of te sghts We 82,500,000 and do non i Jae deere eet Aamining tt 1,50 lo of ie nner ae ely ‘Yat determive te amount of deplétitn Expense thei sould be recognized M,C. Sones purchased a tric Yo ‘$30,500 to be used ‘in, his citing the track ty two mln en sr 9 ile declining blage (ascming x lveyear usa Hie) ah clon atl $6 500 te end of sok i, Pepatog cores actualy acts that would be recagnizid by Jones ities ee methods, assuring sa gre, ht 10000 ile inte hee yea Beth nee a diffe ee ine’s. He ia Considering depres alles driven of 80; xercises arma What factrg ation Nd" Aecounting principles ‘ciation methods in their “companies use straight-line depreciation in ‘ode (variations of the declining: balance method) in their income tax returns. The Differences in Depreciation Methods: Are They “Real? Using the stmight-line depreciation method will cause 8 company to report higher profits than in ae im the early years of the sneer’ life an accelersted method”. The answer is no! simply measuring its net ne. However, the benefits of mate has no ejfect on the an accelerated depreciatios income more conservative using an accelerated method fc imed af increased cash avasla In the pre h income tax for depre:ha rate of 4, or 1214 percent 1» Fractional Periods When ar set is sequired Depreciation fo! ane accounting petiad, it is not necessary to compute depreciation exp ae neck. In fact, such a computation would give a misleading impression of great preciain ‘Since depreciation is based on an estimated useful life of many years, the depreciation api cable to any one year is only an approximation. ‘One widely used method of computing depreciation for part of a year is to.round thecal: lation to the nearest whole month. In our example, S&G acquired the delivery truck on fam |) ary 2, Therefore, we computed a full year's depreciation for the year of acquisition, Asin, Detober 1. Thus the truck wos however, that the truck had been acquired later in the year have been in use for only three months (or ¥2) of the first year, In this case, depredatin expense for the first year would be only $750, or ¥iz of a full year's depreciation ($3,000X Ya = $750). ‘Another widely used approach, called the half-year convention, is to record one-half yest depreciation on all assets acquired during the ye ch is based on the assump, that the actual purchase dates will average out t vention is widely used for a a € equipm comobiles, and machinery. 12 complete the depreciation process r vention, « one-halfeyelit depreciation is also taken inthe last yearof the asset's lif Assunie that S&G Wholesale Grocery uses straight-lin ‘ation with the bale (000 delivery truck ¥# convention, In Exhibit 9-4, we summari depreciation ot A oe j use, we ign . the asset was #2 ally purchased, We simply recognize ane-ho sth the fet yee the last year ofthe depreciation sche ae no nei p schedule now nea Taking onty 4epreciation in the 1 depreciation expense in the sixth year always extends the recognition of dep, a one addi eat. &L ‘The note payable owed to Williamsburg Bank is due in 30 days. Bachman has iis bank to renew te toe fc an addtional wo ming the company’s pumps are ‘Rot probable, that a loss has et motth dver the next three yeats During the! the principal amount of this w $160,904 7 ote will be reduced to $169,994, vt 2 Payable mature in um fil mara of his bond arg MOMS A Siting fund has boon cumulated ong Inetructions © Using thi i vaca, ed se re lsbiltis and tong.terrn Tables setl % Brpiin bit how te in eee MEE, 2018 Presentation of the copays ase Gach of the fo . ur numbe; paragraphs affected jit