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It refers to the reduction in the monetary value of fixed tangible assets over its useful life due to its wear and tear or, obsolescence. In other words, it is the method of distributing the cost of tangible fixed assets over its estimated useful life.
Straight-line Depreciation:
Under the straight-line method of depreciation, the same amount of depreciation is allocated every year over the estimated useful life of an asset. The formula to calculate the depreciation cost of the asset using the residual value is shown as below:
Sum-of- the-years’ digits method:
Sum-of-the years’ digits method determines the depreciation by multiplying the depreciable base and declining fraction.
Double-declining-balance method:
It is an accelerated method of depreciation under which the depreciation declines in each successive year until the value of asset becomes zero. Under this method, the book value (original cost less
Amortization:
It is the process of allocating the value of an intangible asset over its definite useful life.
To determine: The missing amounts in fixed assets and depreciation schedule of T Corporation.
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Explanation of Solution
1. Cost of Land A
Asset | Fair value ($) | Percent of total fair value (%) |
Initial valuation ($) |
Land A | 72,000 | 8% | 65,000 |
Building A | 828,000 | 92% | 747,500 |
Total | 900,000 | 100.0% | 812,500 |
Thus, the cost of land A is $65,000.
Note:
2. Cost of Building A
Refer 1 for calculation of cost of building. Hence, the cost of land is $474,500.
3. Estimated useful life of Building.
Thus, the estimated useful life is 50 years.
4. The amount of depreciation (Building A) for the year 2018
T Corporation used the
5. Cost of land B
Thus, the cost of land B is $85,400.
6. The amount of depreciation (Building B) for the year 2018
Building B is under construction, hence there is no depreciation value before the use of building.
7. Cost of donated equipment
The fair value of donated equipment is equal to the cost of donated equipment. Therefore, the cost of donated equipment is $16,000.
8. The amount of depreciation (Equipment) for the year 2017
The company uses 150% declining balance method. Therefore, depreciation is determined as follows:
Thus, the depreciation is $2,400.
Working note:
Calculate the depreciation rate
9. The amount of depreciation (Equipment) for the year 2018
The company uses 150% declining balance method. Therefore, depreciation is determined as follows:
Thus, the depreciation is $2,040.
10. Cost of Machine A
Thus, the cost of Machine A is $99,000.
11. The amount of depreciation (Machine A) for the year 2017
The company uses declining balance method. Therefore, depreciation is determined as follows:
Thus, the depreciation is $17,000.
Working note:
1. Calculate the sum-of-the-digits
2. Calculate the amount of depreciation base
12. The amount of depreciation (Machine B) for the year ended 2018
The company uses declining balance method. Therefore, depreciation is determined as follows:
Working note:
1. Calculate the sum-of-the-digits
2. Calculate the amount of depreciation base
13. Cost of Machine B
Note: PV factor (Present value of an annuity due of $1: n = 11, i =8%) is taken from the table value (Table 6 in Appendix from textbook).
14. The amount of depreciation for Machine B –Straight line method
Thus, the depreciation is $2,056
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INTERMEDIATE ACCOUNTING (LL) W/CONNECT
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