Depreciation(Quick Test #3 with Coaching)

The cost of an asset is defined as all costs necessary to get the asset in place and ready for use.

Since the $40,000 cost to remove the old structures and trees was necessary to get the land ready for use as the site for the new office building, the entire $160,000 should be recorded in the Land account.

The amount to be systematically depreciated over the useful life of the new equipment is its depreciable cost of $200,000 (the equipment's cost of $220,000 minus the estimated salvage value of $20,000 at the end of the equipment's useful life).

The depreciation for a full year = the depreciable cost of $200,000 divided by the equipment's useful life of 10 years = $20,000.

The depreciation for the current year is $10,000 (half of the full year amount of $20,000). The reason for using half of the full year amount is that the equipment was put into service on July 1. (July 1 through December 31 is the second half of the company's accounting year.)

The amount to be systematically depreciated over the useful life of this equipment is the depreciable cost of $150,000 (the equipment's cost of $180,000 minus its salvage value of $30,000 at the end of the equipment's useful life).

When the units-of-activity method is used, the equipment's depreciation is expressed as an amount per document produced. (Years are not relevant.)

To calculate the depreciation rate per document produced, we divide the depreciable cost of $150,000 by the estimated 50,000 documents to be produced during the equipment's life. The result is a depreciation rate of $3 per document produced.

Since the depreciation expense calculated using the units-of-activity method is not concerned about years (including partial years), the current accounting year's depreciation expense is $6,000 (2,000 documents produced X $3 per document).

In the subsequent year, the depreciation expense is $21,000 (7,000 documents produced X $3 per document).

The total amount of depreciation over the equipment's 10-year useful life will be $100,000 (cost of $110,000 – salvage value of $10,000).

However, when calculating the double-declining-balance (DDB) depreciation, you begin with the equipment's book value (BV) at the start of the year. [This is different from other depreciation methods which will use the equipment's depreciable cost.]

In this question, the equipment's book value at the start of 2025 is $110,000 (cost of $110,000 minus accumulated depreciation of $0).

The DDB depreciation calculation also uses double (or 200% of) the straight-line depreciation rate. Since the equipment in this question has a useful life of 10 years, the straight-line depreciation rate is 10% (100% divided by 10 years). Therefore, the DDB depreciation rate is 20% (double or two times the 10% straight-line rate).

With the above information, we calculate the DDB depreciation expense for the full year 2025 to be $22,000 ($110,000 of BV times the 20% DDB depreciation rate).

This question is a continuation of Question 4. In this question, you are asked to first calculate the equipment's book value (BV) as of December 31, 2025. The answer is $88,000 (the equipment's cost of $110,000 minus the equipment's accumulated depreciation of $22,000 (see the depreciation calculation in Question 4).

To calculate the depreciation expense for the year 2026 you multiply the equipment's book value as of the beginning of 2026 (which is also the book value at the end of 2025) times the DDB depreciation rate. The calculation is BV of $88,000 X 20% = $17,600.

Although not required in the question, the equipment's BV at the end of 2026 (and at the beginning of 2027) will be $70,400 (equipment's cost of $110,000 minus the accumulated depreciation of $39,600).

Since the asset's useful life is 8 years, the sum of the digits in the useful life = 8 + 7 + 6 + 5 + 4 + 3 + 2 + 1 = 36. This could also be calculated using the formula, [n(n+1)] / 2 = [8(8+1)] / 2 = [8(9) / 2] = 72 / 2 = 36.

Since the asset has no salvage value, its depreciable cost is the same amount as the asset's cost. In the first year of the asset's useful life, the asset's depreciable cost is multiplied by 8/36. The fraction 8/36 is the same as 22.22%.

Since the equipment's useful life is 6 years, the sum of the years in the equipment's useful life = 6 + 5 + 4 + 3 +2 + 1 = 21. This is confirmed with the formula [n(n+1)] / 2 = [6(6+1)] / 2 = [(6)7] / 2 = 42 / 2 = 21.

To calculate the SYD depreciation for the current year, the equipment's depreciable cost of $210,000 (cost of $240,000 minus the estimated salvage value of $30,000) is multiplied by the fraction 6/21. As a result, the depreciation expense for the first year of the equipment's life is 6/21 X $210,000 = $60,000.

The depreciation for the second year of the equipment's life is: 5/21 X $210,000 = $50,000.

This question involves a change in two estimates: the estimated useful life and the estimated salvage value. Changes in estimates are not accounting errors and therefore any previously reported amounts are not changed. Any change in the estimates are recorded in the current and future accounting years.

The first step is to compute the depreciation that has already been reported in each of the years 2022, 2023, and 2024. The equipment's depreciable cost of $200,000 (cost of $210,000 minus the estimated salvage value of $10,000) divided by 10 years of useful life = $20,000 of depreciation expense in each of the years 2022, 2023, and 2024. As a result, the accumulated depreciation at the end of 2024 is $60,000 ($20,000 X 3 years). Therefore, the equipment's book value as of December 31, 2024 was $150,000 (cost of $210,000 minus accumulated depreciation of $60,000).

Beginning in 2025, the company estimated that the salvage value will be $0 at the end of the equipment's useful life. Since the useful life is now estimated to be a total of 7 years, there are only 4 years remaining in which to expense the $150,000 of book value. Therefore, the depreciation expense in each of the years 2025, 2026, 2027, and 2028 will be $37,500 ($150,000 / 4 years).

The first step is to calculate the truck's depreciation up to the time of the sale (January 31, 2025). The original depreciation calculation was the cost of $94,000 minus $10,000 of estimated salvage value = $84,000. That amount divided by 7 years = $12,000 per year.

The accumulated depreciation (AD) as of December 31, 2024 is: $12,000 X 4 years (2021, 2022, 2023, 2024) = $48,000. The depreciation expense for January 2025 is $1,000 ($12,000 per year / 12 months). Therefore, the AD as of January 31, 2025 is $49,000 and the truck's BV is $45,000 (cost of $94,000 minus AD of $49,000).

Since the cash of $35,000 was less than the truck's book value of $45,000, the retailer must report a $10,000 loss on the sale of the truck.

The accounting entries on January 31, 2025 include the following:

The account Warehouse Building is not debited for any of the amounts listed. The reason is that the amounts were not an improvement to the building, nor did they extend the useful life of the building.

The amounts spent merely restored the building to its previous condition. Therefore, all the amounts shown are recorded as an expense or loss on the income statements that include the month of December.