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DEPRECIATION

The document discusses the concept of depreciation, emphasizing that it is a method of cost allocation rather than asset valuation. It includes true-false statements about depreciation principles and provides various problems related to calculating depreciation expenses using different methods. The problems involve different companies and scenarios, requiring calculations based on provided asset costs, residual values, and useful lives.

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12 views7 pages

DEPRECIATION

The document discusses the concept of depreciation, emphasizing that it is a method of cost allocation rather than asset valuation. It includes true-false statements about depreciation principles and provides various problems related to calculating depreciation expenses using different methods. The problems involve different companies and scenarios, requiring calculations based on provided asset costs, residual values, and useful lives.

Uploaded by

lovely.laureles
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as DOCX, PDF, TXT or read online on Scribd
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DEPRECIATION.

TRUE-FALSE—Conceptual

1. Depreciation is a means of cost allocation, not a matter of valuation.

2. Depreciation is based on the decline in the fair value of the asset.

3. Depreciation, depletion, and amortization all involve the allocation of the


cost of a long-
lived asset to expense.

4. The cost of an asset less its residual value is its depreciation base.

5. The three factors involved in the depreciation process are the


depreciation base, the
useful life, and the risk of obsolescence.

6. Inadequacy is the replacement of one asset with another more efficient


and economical asset.

7. The major objection to the straight-line method is that it assumes the


asset’s economic
The usefulness and repair expenses are the same each year.

8. The units-of-production approach to depreciation is appropriate when


depreciation is a
function of time instead of activity.

9. An accelerated depreciation method is appropriate when the asset’s


economic usefulness is the same each year.

10. The declining-balance method does not deduct the residual value in
computing the depreciation base.

Answer:
PROBLEM:
1. Kinder Company purchased a depreciable asset for $200,000. The
estimated residual
value is $10,000, and the estimated useful life is 10,000 hours. Kinder used
the asset for
1,100 hours in the current year. The activity method will be used for
depreciation. What is
the depreciation expense on this asset?
a. $19,000
b. $20,900
c. $22,000
d. $190,000

2. Jamar Company purchased a depreciable asset for $150,000. The


estimated residual value is $10,000, and the estimated useful life is 8 years.
The double-declining balance method will be used for depreciation. What is
the depreciation expense for the second year on this asset?
a. $17,500
b. $26,250
c. $28,125
d. $37,500

3. The Engels Company purchased a depreciable asset for $600,000. The


estimated residual value is $30,000, and the estimated useful life is 10,000
hours. Engels used the asset for 1,100 hours in the current year. The activity
method will be used for depreciation. What is the depreciation expense on
this asset?
a. $57,000
b. $62,700
c. $66,000
d. $570,000
4. Hart Company purchased a depreciable asset for $360,000. The
estimated residual value is $24,000, and the estimated useful life is 8 years.
The double-declining balance method will be used for depreciation. What is
the depreciation expense for the second year on this asset?
a. $42,000
b. $63,000
c. $67,500
d. $90,000

5. On July 1, 2014, Gonzalez Corporation purchased factory equipment


for $150,000.
Residual value was estimated to be $4,000. The equipment will be
depreciated over ten
years using the double-declining balance method. Counting the year of
acquisition as one-
half year, Gonzalez should record depreciation expense for 2015 on this
equipment of
a. $30,000.
b. $27,000.
c. $26,280.
d. $24,000.

6.Krause Corporation purchased factory equipment that was installed and


put into service January 2, 2014, at a total cost of $60,000. Residual value
was estimated at $4,000. The equipment is being depreciated over four
years using the double-declining balance method. For the year 2015, Krause
should record depreciation expense on this equipment of
a. $14,000.
b. $15,000.
c. $28,000.
d. $30,000.

7. On April 13, 2014, Neill Co. purchased machinery for $120,000. Residual
value was
estimated to be $5,000. The machinery will be depreciated over ten years
using the
double-declining balance method. If depreciation is computed based on the
nearest
full month, Neill should record depreciation expense for 2015 on this
machinery of
a. $20,800.
b. $20,400.
c. $20,550.
d. $20,933.

8.Matile Co. purchased machinery that was installed and ready for use on
January 3, 2014, at a total cost of $69,000. Residual value was estimated at
$9,000. The machinery will be depreciated over five years using the double-
declining balance method. For the year 2015, Matile should record
depreciation expense on this machinery of
a. $14,400.
b. $16,560.
c. $18,000.
d. $27,600.

9. A plant asset has a cost of $24,000 and a residual value of $6,000. The
asset has a three-year life. If depreciation in the third year amounted to
$3,000, which depreciation method was used?
a. Straight-line
b. Declining balance
c. Sum-of-the-years'-digits
d. Cannot tell from information given

10.On January 1, 2014, Graham Company purchased a new machine for


$2,100,000. The new machine has an estimated useful life of nine years, and
the residual value was estimated to be $75,000. Depreciation was computed
on the sum-of-the-years'-digits method. What amount should be shown in
Graham’s balance sheet on December 31, 2015, net of accumulated
depreciation, for this machine?
a. $1,695,000
b. $1,335,000
c. $1,306,66
d. $1,244,250

11. On January 1, 2008, Forbes Company purchased equipment at a cost of


$50,000. The equipment was estimated to have a residual value of $5,000
and it is being depreciated over eight years under the sum-of-the-years'-
digits method. What should be the charge for depreciation of this equipment
for the year ended December 31, 2015?
a. $1,250
b. $1,389
c. $2,500
d. $5,625

12. On September 19, 2014, McCoy Co. purchased machinery for $190,000.
Residual value was estimated to be $10,000. The machinery will be
depreciated over eight years using the sum-of-the-years-digits method. If
depreciation is computed based on the nearest full month, McCoy should
record depreciation expense for 2015 on this machinery of
a. $40,903.
b. $38,845.
c. $38,750.
d. $35,000.

13.On January 3, 2013, Munoz Co. purchased machinery. The machinery has
an estimated
useful life of eight years and an estimated residual value of $30,000. The
depreciation
applicable to this machinery was $65,000 for 2015, computed by the sum-of-
the-years'-
digits method. The acquisition cost of the machinery was
a. $360,000.
b. $390,000.
c. $420,000.
d. $468,000.

14. On January 2, 2012, Stacy Company acquired equipment to be used in


its manufacturing operations. The equipment has an estimated useful life of
10 years and an estimated residual value of $15,000. The depreciation
applicable of this equipment was $70,000 for 2015, computed under the
sum-of-the-years'-digits method. What was the acquisition cost of the
equipment?
a. $535,000
b. $565,000
c. $550,000
d. $541,667

15. Orton Corporation, which has a calendar year accounting period,


purchased a new machine for $40,000 on April 1, 2010. At that time Orton
expected to use the machine for nine years and then sell it for $4,000. The
machine was sold for $22,000 on Sept. 30,
2015. Assuming straight-line depreciation, no depreciation in the year of
acquisition, and a
full year of depreciation in the year of retirement, the gain to be recognized
at the time of
sale would be
a. $4,000.
b. $3,000.
c. $2,000.
d. $0.

16. On January 1, 2015, the Accumulated Depreciation—Machinery account


of a particular company showed a balance of $370,000. At the end of 2015,
after adjusting entries were posted, it showed a balance of $395,000. During
2015, one of the machines which cost $125,000 was sold for $60,500 cash.
This resulted in a loss of $4,000. Assuming that no other assets were
disposed of during the year, how much was depreciation expense
for 2015?
a. $85,500
b. $93,500
c. $25,000
d. $60,500
17.During 2015, Noller Co. sold equipment that cost $98,000 for $58,800.
This resulted
in a gain of $4,300. The balance in Accumulated Depreciation—Equipment
was $325,000
on January 1, 2015, and $310,000 on December 31. No other equipment was
disposed of
during 2015. Depreciation expense for 2015 was
a. $15,000.
b. $19,300.
c. $28,500.
d. $58,500.

18.Lloyd Company purchased a depreciable asset for 1,360,000. The


estimated salvage
value is 360,000, and the estimated useful life is 8 years. The double-
declining balance
method will be used for depreciation. What is the depreciation expense for
the second
year on this asset?
a. 125,000
b. 170,000
c. 187,000
d. 255,000

19.Kleinschmidt Company purchased a depreciable asset for 2,000,000. The


estimated salvage value is 150,000, and the estimated useful life is 400,000
hours. Kleinschmidt
used the asset for 35,000 hours in the current year. The activity method will
be used for
depreciation. What is the depreciation expense on this asset?
a. 160,870
b. 161,875
c. 175,000
d. 350,000

20.On January 1, 2009, Fleming Company purchased equipment at a cost of


650,000.
The equipment was estimated to have a salvage value of 55,000 and it is
being
depreciated over seven years under the sum-of-the-year’s-digits method.
What should be
the charge for the depreciation of this equipment for the year ended
December 31, 2015.
a. 21,250
b. 23,214.
c. 85,000
d. 148,750

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