CHAPTER 10: Plant Assets, Natural Resources and Intangible Assets

Ex. 231
Kemp Company purchased factory equipment with an invoice price of $80,000. Other costs
incurred were freight costs, $1,100; installation wiring and foundation, $2,200; material and
labor costs in testing equipment, $700; oil lubricants and supplies to be used with equipment,
$500; fire insurance policy covering equipment, $1,400. The equipment is estimated to have a
$5,000 salvage value at the end of its 5-year useful service life.

Instructions
(a) Compute the acquisition cost of the equipment. Clearly identify each element of cost.
(b) If the double-declining-balance method of depreciation was used, the constant percentage
applied to a declining book value would be __________.

Solution 231 (10 min.)

(a) Invoice cost $80,000
Freight costs 1,100
Installation wiring and foundation 2,200
Material and labor costs in testing 700
Acquisition cost $84,000

(b) If the double-declining-balance method of depreciation was used, the constant percentage
applied to a declining book value would be 40% (5 years = 20%  2).

Ex. 235
Conroy Company purchased a machine at a cost of $90,000. The machine is expected to have
a $5,000 salvage value at the end of its 5-year useful life.

Instructions
Compute annual depreciation for the first and second years using the
(a) straight-line method.
(b) double-declining-balance method.

Solution 235 (8 min.)

(a) Straight-line method:
Years 1 and 2 depreciation = $17,000/yr. ($90,000 – $5,000)  5

(b) Double-declining-balance method:

Year 1 depreciation = $36,000 ($90,000 – 0) × *40%
Year 2 depreciation = $21,600 ($90,000 – $36,000) × 40%
*(1/5 × 2)
Ex. 237
Marlow Company purchased equipment on January 1, 2009 for $70,000. It is estimated that the
equipment will have a $5,000 salvage value at the end of its 5-year useful life. It is also
estimated that the equipment will produce 100,000 units over its 5-year life.
Instructions
Answer the following independent questions.
1. Compute the amount of depreciation expense for the year ended December 31, 2009, using
the straight-line method of depreciation.
2. If 16,000 units of product are produced in 2009 and 24,000 units are produced in 2010, what
is the book value of the equipment at December 31, 2010? The company uses the units-of-
activity depreciation method.
3. If the company uses the double-declining-balance method of depreciation, what is the
balance of the Accumulated Depreciation—Equipment account at December 31, 2011?

Solution 237 (15 min.)

C–S ($70,000 – $5,000)

1. Straight-line method: = = = $13,000 per year
Years 5

C–S ($70,000 – $5,000)

2. Units-of-activity method: = = = $0.65 per unit
Units 100,000 units

2009 16,000 units × $.65 = $10,400

2010 24,000 units × $.65 = 15,600
Accumulated depreciation = $26,000

Cost of asset $70,000

Less: Accumulated Depreciation 26,000
Book value $44,000
Solution 237 (Cont.)
3. Double-declining-balance method:
Book Value
Beginning Declining Depreciation Accumulated
of Year × Balance Rate = Expense Depreciation
2009 $70,000 40% $28,000 $28,000
2010 42,000 40% 16,800 44,800
2011 25,200 40% 10,080 54,880
 PROBLEM 10-3A (9th Edition)
(a) (1) Purchase price................................................................... $
38,000
Sales tax.............................................................................   
1,700
Shipping costs...................................................................    
150
Insurance during shipping................................................      
80
Installation and testing.....................................................
70
Total cost of machine................................................ $
40,000

Machine................................................................ 40,000
Cash.............................................................
40,000

(2) Recorded cost.................................................................... $

40,000
Less: Salvage value.........................................................
5,000
Depreciable cost................................................................ $
35,000
Years of useful life............................................................. ÷
5
Annual depreciation.................................................. $  
7,000

Depreciation Expense........................................  7,000

Accumulated Depreciation.........................  
7,000

(b) (1) Recorded cost....................................................................

160,000
 Less: Salvage value.........................................................
10,000
Depreciable cost................................................................
$150,000
Years of useful life.............................................................
÷           4
Annual depreciation.................................................. $
37,500

(2) Book Value at

Beginning DDB Annual Depreciation Accumulated
of Year Rate Expense Depreciation
$160,000 *50%* $80,000 $ 80,000
 80,000 *50%*  40,000  120,000
 40,000 *50%*  20,000  140,000
 20,000 *50%* ** 10,000  150,000

**100% ÷ 4-year useful life = 25% X 2 = 50%.

PROBLEM 10-3A (Continued)

(3) Depreciation cost per unit = ($160,000 – $10,000)/125,000

units = $1.20 per unit.

Annual Depreciation Expense

2010:  $1.20 X 45,000 = $54,000

2011:   1.20 X 35,000 = 42,000
2012:   1.20 X 25,000 = 30,000
2013:   1.20 X 20,000 = 24,000

(c) The declining-balance method reports the highest amount of

depreciation expense the first year while the straight-line method
reports the lowest. In the fourth year, the straight-line method
reports the highest amount of depreciation expense while the
declining-balance method reports the lowest.

These facts occur because the declining-balance method is an

accelerated depreciation method in which the largest amount of
depreciation is recognized in the early years of the asset’s life. If
the straight-line method is used, the same amount of depreciation
expense is recognized each year. Therefore, in the early years less
depreciation expense will be recognized under this method than
under the declining-balance method while more will be recognized
in the later years.

The amount of depreciation expense recognized using the units-of-

activity method is dependent on production, so this method could
recognize more or less depreciation expense than the other two
methods in any year depending on output.

No matter which of the three methods is used, the same total

amount of depreciation expense will be recognized over the four-
year period.