Connect Access Card for Financial Accounting
Connect Access Card for Financial Accounting
9th Edition
ISBN: 9781259738678
Author: Robert Libby, Patricia Libby, Frank Hodge Ch
Publisher: McGraw-Hill Education
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Chapter 8, Problem 8.9E

Computing Depreciation under Alternative Methods

Assume Purity Ice Cream Company, Inc., in Ithaca, NY, bought a new ice cream maker at the beginning of the year at a cost of $9,000. The estimated useful life was four years, and the residual value was $1,000. Assume that the estimated productive life of the machine was 16,000 hours. Actual annual usage was 5,500 hours in Year 1; 3,800 hours in Year 2; 3,200 hours in Year 3; and 3,500 hours in Year 4.

Required:

  1. 1. Complete a separate depreciation schedule for each of the alternative methods. Round your answers to the nearest dollar.
    1. a. Straight-line.
    2. b. Units-of-production (use four decimal places for the per unit output factor).
    3. c. Double-declining-balance.
Method:_________
Year Computation

Depreciation

Expense

Accumulated Depreciation Net Book Value
At acquisition
1
2
etc.

  2.    Assuming that the machine was used directly in the production of one of the products that the company manufactures and sells, what factors might management consider in selecting a preferable depreciation method in conformity with the expense principle?

1. a.

Expert Solution
Check Mark
To determine

Prepare the depreciation expense schedule under straight-line method.

Explanation of Solution

Straight-line method:

The depreciation method which assumes that the consumption of economic benefits of long-term asset could be distributed equally throughout the useful life of the asset is referred to as straight-line method.

Formula for straight-line depreciation method:

Depreciation expense}=Depreciable cost ×Depreciation rate(Cost–Residual value)×1Useful life

Depreciation expense:

Depreciation expense is a non-cash expense, which is recorded on the income statement reflecting the consumption of economic benefits of long-term asset.

Accumulated depreciation:

The total amount of depreciation expense deducted, from the time asset acquired till date, as reported in the account as on a particular date, is referred to as accumulated depreciation.

Formula for accumulated depreciation:

Accumulated depreciation = {Depreciation expense in the previous years+Depreciation in current year}

Book value:

The amount of acquisition cost of less accumulated depreciation as on a particular date is referred to as book value.

Formula for book value:

Book value = {Acquisition cost–Accumulated depreciation}

Depreciation schedule under straight-line method:

YearComputationDepreciation ExpenseAccumulated DepreciationNet Book Value
At Acquisition   $9,000
1($9,000$1,000)×14$2,000 $2,000 7,000
2($9,000$1,000)×142,0004,0005,000
3($9,000$1,000)×142,0006,0003,000
4($9,000$1,000)×142,0008,0001,000

Table (1)

b.

Expert Solution
Check Mark
To determine

Prepare the depreciation expense schedule under units-of-production method.

Explanation of Solution

Units-of-production method:

The depreciation method which assumes that the consumption of economic benefits of long-term asset is based on the production capacity or output is referred to as units-of-production method.

Formula for units-of-production depreciation method:

Depreciation expense}=Depreciable cost ×Depreciation rate(Cost–Residual value)×Actual productionEstimated total production

Depreciation schedule under units-of-production method:

YearComputationDepreciation ExpenseAccumulated DepreciationNet Book Value
At Acquisition   $9,000
1($9,000$1,000)×5,500 hours16,000 hours$2,750 $2,750 6,250
2($9,000$1,000)×3,800 hours16,000 hours1,9004,6504,350
3($9,000$1,000)×3,200 hours16,000 hours1,6006,2502,750
4($9,000$1,000)×3,500 hours16,000 hours1,7508,0001,000

Table (2)

c.

Expert Solution
Check Mark
To determine

Prepare the depreciation expense schedule under double-declining-balance method.

Explanation of Solution

Double-declining-balance method:

The depreciation method which assumes that the consumption of economic benefits of long-term asset is high in the early years but gradually declines towards the end of its useful life is referred to as double-declining-balance method.

Formula for double-declining-balance depreciation method:

Depreciation expense}=(Book value at the beginning of the period ) ×Depreciation rate(Cost–Accumulated depreciation)×2Useful life

Depreciation schedule under double-declining-balance method:

YearComputationDepreciation ExpenseAccumulated DepreciationNet Book Value
At Acquisition   $9,000
1($9,000$0)×24$4,500 $4,500 $4,500
2($9,000$4,500)×242,2506,7502,250
3($9,000$6,750)×241,1257,8751,125
4($9,000$7,875)×24Connect Access Card for Financial Accounting, Chapter 8, Problem 8.9E 1258,0001,000

Table (3)

Note: The net book value of the asset cannot be less than the residual value of such asset. Hence, calculate the depreciation expense as given in the working note below.

Working Note:

Compute depreciation expense in Year 4.

Depreciation in Year 4 =(Cost–Accumulated depreciation in Year 3–Residual value)=$9,000–$7,875–$1,000=$125

2.

Expert Solution
Check Mark
To determine

Identify the factors which the management might consider in selecting a preferable depreciation method in conformity with the expense principle.

Explanation of Solution

  • If there is an equal consumption of asset during the useful life of the asset and if there is a steady decline in its efficiency every year over its useful life, then the management can prefer straight-line depreciation method.
  • If there is high consumption of asset in the early years of useful life and decline in usage towards the end of its useful life and if it perform efficiently in their earlier useful life and earn more revenue than in their later years, then the management can prefer double-declining-balance depreciation method.
  • If the asset is not used at a uniform rate from period to period and if its efficiency varies from year to year in accordance with the rate of the output, then the management can prefer units-of-production depreciation method, as the depreciation expense would be better matched with the revenue earned under this method.

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Chapter 8 Solutions

Connect Access Card for Financial Accounting

Ch. 8 - Prob. 11QCh. 8 - Prob. 12QCh. 8 - Prob. 13QCh. 8 - Prob. 14QCh. 8 - Prob. 15QCh. 8 - Why is depreciation expense added to net income...Ch. 8 - Miga Company and Porter Company both bought a new...Ch. 8 - Leslie, Inc.. followed the practice of...Ch. 8 - Prob. 3MCQCh. 8 - Prob. 4MCQCh. 8 - Prob. 5MCQCh. 8 - Prob. 6MCQCh. 8 - Prob. 7MCQCh. 8 - Prob. 8MCQCh. 8 - Prob. 9MCQCh. 8 - (Chapter Supplement) Irish Industries purchased a...Ch. 8 - Prob. 8.1MECh. 8 - Prob. 8.2MECh. 8 - Prob. 8.3MECh. 8 - Prob. 8.4MECh. 8 - Computing Book Value (Double-Declining-Balance...Ch. 8 - Computing Book Value (Units-of-Production...Ch. 8 - Identifying Asset Impairment LO8-4 For each of the...Ch. 8 - Prob. 8.8MECh. 8 - Prob. 8.9MECh. 8 - Prob. 8.10MECh. 8 - Prob. 8.1ECh. 8 - Prob. 8.2ECh. 8 - Computing and Recording Cost and Depreciation of...Ch. 8 - Determining Financial Statement Effects of an...Ch. 8 - Determining Financial Statement Effects of an...Ch. 8 - Recording Depreciation and Repairs (Straight-Line...Ch. 8 - Prob. 8.7ECh. 8 - Prob. 8.8ECh. 8 - Computing Depreciation under Alternative Methods...Ch. 8 - Computing Depreciation under Alternative Methods...Ch. 8 - Prob. 8.11ECh. 8 - Prob. 8.12ECh. 8 - Prob. 8.13ECh. 8 - Computing Depreciation and Book Value for Two...Ch. 8 - Prob. 8.15ECh. 8 - Recording the Disposal of an Asset at Three...Ch. 8 - Prob. 8.17ECh. 8 - Prob. 8.18ECh. 8 - Prob. 8.19ECh. 8 - Prob. 8.20ECh. 8 - Prob. 8.21ECh. 8 - Prob. 8.22ECh. 8 - (Chapter Supplement) Recording a Change in...Ch. 8 - Prob. 8.24ECh. 8 - Prob. 8.25ECh. 8 - Explaining the Nature of a Long-Lived Asset and...Ch. 8 - Analyzing the Effects of Repairs, an Addition, and...Ch. 8 - Prob. 8.3PCh. 8 - Best Buy Co., Inc., headquartered in Richfield,...Ch. 8 - Evaluating the Effect of Alternative Depreciation...Ch. 8 - Recording and Interpreting the Disposal of Three...Ch. 8 - Prob. 8.7PCh. 8 - Prob. 8.8PCh. 8 - Computing Goodwill from the Purchase of a Business...Ch. 8 - Prob. 8.10PCh. 8 - Prob. 8.11PCh. 8 - Explaining the Nature of a Long-Lived Asset and...Ch. 8 - Prob. 8.2APCh. 8 - Computing the Acquisition Cost and Recording...Ch. 8 - Prob. 8.4APCh. 8 - Recording and Interpreting the Disposal of Three...Ch. 8 - Prob. 8.6APCh. 8 - Prob. 8.7APCh. 8 - Asset Acquisition, Depreciation, and Disposal Pool...Ch. 8 - Case A. Dr Pepper Snapple Croup, Inc., is a...Ch. 8 - Prob. 8.1BCOMPCh. 8 - Prob. 8.1CCOMPCh. 8 - Case D. Stewart Company reports the following...Ch. 8 - Case E. Matson Company purchased the following on...Ch. 8 - Prob. 8.1CPCh. 8 - Finding Financial Information LO8-1, 8-2, 8-6...Ch. 8 - Comparing Companies within an Industry Refer to...Ch. 8 - Prob. 8.4CPCh. 8 - Prob. 8.5CPCh. 8 - Prob. 8.6CPCh. 8 - Evaluating the Impact of Capitalized Interest on...
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