3-2 Homework Chapter 11

11-02 Depreciation Methods

Vorst Corporation's schedule of depreciable assets at December 31, 2016, was as follows:

Asset Cost Accumulated Depreciation Acquisition Date Residual Value

A $100,000 $ 64,000 2015 $20,000
B 55,000 36,000 2014 10,000
C 70,000 33,600 2014 14,000
$225,000 $133,600 $44,000

Vorst takes a full year's depreciation expense in the year of an asset's acquisition and no depreciation
expense in the year of an asset's disposition. The estimated useful life of each depreciable asset is 5
years.

Vorst depreciates Asset A on the double-declining-balance method. How much depreciation expense
should Vorst record in 2017 for Asset A?

a. $14,400 b. $25,600 c. $32,000 d.$6,400

Problem Solve:

Year Beg Book Value X Rate Depreciation Accumulated End Value

Expense Depreciation
2015 100,000 x 40% 40,000 40,000 60,000
2016 60,000 x 40% 24,000 64,000 36,000
2017 36,000 x 40% 14,400 78400 21600
11-12

At the beginning of the current year, Andy Company has equipment that originally cost $50,000, has
$35,000 accumulated depreciation, and is being depreciated at $5,000 per year. Andy sells this
equipment for $12,000 at the end of the current year.

CHART OF ACCOUNTS
Andy Company
General Ledger
RE
VE
NU
E
Sal
es
4
Re
1
ve
1
nu
e
EXP
ENS
ES
Cos
t of
ASSETS 5
Goo
111 Cash 0
ds
0
121 Accounts Receivable Sol
d
141 Inventory
Insu
152 Prepaid Insurance
ran
181 Equipment 5
ce
1
189 Accumulated Depreciation Exp
1
LIABILITIES ens
e
211 Accounts Payable
Utili
221 Notes Payable 5 ties
224 Interest Payable 1 Exp
231 Salaries Payable 2 ens
e
EQUITY
Sala
311 Common Stock 5 ries
331 Retained Earnings 2 Exp
1 ens
e
Bad
Deb
5
t
3
Exp
2
ens
e
Dep
reci
5 atio
3n
3 Exp
ens
e
 Inte
5 rest
4 Exp
0 ens
e
Mis
cell
5 ane
5 ous
9 Exp
ens
es
Gai
n
on
Dis
pos
al
of
8
Pro
8
pert
2
y,
Pla
nt,
and
Equ
ipm
ent
Loss
on
Dis
pos
al
of
8 Pro
9 pert
2 y,
Pla
nt,
and
Equ
ipm
ent

General Journal
Prepare journal entries to record both the current year’s depreciation and the disposal of the equipment
at December 31.

Problem solve – cost 50,000 – 35,000 (accumulated depreciation) - $5,000 (current year depreciation) =
$10,000
Sold for $12,000 - $10,000 = $2,000 (gain)
11-12 At the beginning of the current year, Andy Company has equipment that originally cost $50,000,
has $35,000 accumulated depreciation, and is being depreciated at $5,000 per year. Andy sells this
equipment for $11,500 at the end of the current year.

Required:
Prepare journal entries to record both the current year’s depreciation and the disposal of the
equipment.

CHART OF ACCOUNTS
Andy Company
General Ledger
ASSETS REVENUE
111 Cash 411 Sales Revenue
121 Accounts Receivable EXPENSES
141 Inventory 500 Cost of Goods Sold
152 Prepaid Insurance 511 Insurance Expense
181 Equipment 512 Utilities Expense
189 Accumulated Depreciation 521 Salaries Expense
LIABILITIES 532 Bad Debt Expense
211 Accounts Payable 533 Depreciation Expense
221 Notes Payable 540 Interest Expense
224 Interest Payable 559 Miscellaneous Expenses
231 Salaries Payable Gain on Disposal of Property, P
882
EQUITY Equipment
311 Common Stock Loss on Disposal of Property, P
892
331 Retained Earnings Equipment

General Journal - Prepare journal entries to record both the current year’s depreciation and the disposal
of the equipment at December 31. Additional Instruction

Problem solve – cost 50,000 – 35,000 (accumulated depreciation) - $5,000 (current year depreciation) =
$10,000
Sold for $11,500 - $10,000 = $1,500 (gain)

11-01 Depreciation Methods

Gruman Company purchased a machine for $220,000 on January 2, 2016. It made the following
estimates:

Service life 5 years or 10,000 hours

Production 200,000 units
Residual value $20,000

In 2016, Gruman uses the machine for 1,800 hours and produces 44,000 units.

In 2017, Gruman uses the machine for 1,500 hours and produces 35,000 units.

If required, round your final answers to the nearest dollar.

1 & 2. Compute the depreciation for 2016 and 2017 under each of the following methods:

Straight Line Method

Year Book Value of Asset at Beg. Of Year Depreciation Exp Accumulated Book Value at Year End (cost-Accu
Depreciation at depr year end)
Year End
2016 220,000 40,000 40,000 180,000
2017 180,000 40,000 80,000 140,000
Straight-Line Depreciation Expense = Cost – Estimated Residual
Estimated Service Life
SL Dep Expe = $220,000 - $20,000/5 years = $40,000

Sum of the Years Digits Method

Year Depreciation Fraction Depreciation Accumulated Depreciation at Year Book Value at Year End (cost-Accu depr
Base Exp End year end)
2016 200,000 5/15 66,667 66,667 153,333
2017 200,000 4/15 53,333 120,000 100,000
The denominator of the fraction is the sum of the years of the asset's service life. Therefore, for an asset with a 5-year life, the
sum is. The numerator of the fraction is the number of years remaining in the asset's life as of the beginning of the year.
Depreciation Base = Cost - Residual Value

Depreciation Base = 220,000 - 20,000 = 200,000 Sum of Years = 1+2+3+4+5 = 15 Fraction = 5/15,4/15,3/15,2/15,1/15

Double-Declining Balance
Year Book Value of Asset at Beg. Of Rate Depreciation Exp Accumulated Book Value at Year End
Year Depreciation at (cost-Accu depr year end)
Year End
2016 220,000 40% 88,000 88,000 132,000
2017 132,000 40% 52,800 140,800 79,200
Depreciation Expense = Declining-Balance Rate (2 x Straight Line Rate) X Net Book at Beginning of Period

Declining-Balance Depreciation Rate = 2 x Straight Line Rate = 2 x (1/5) = 40% (calculate the rate)

In 2016, Gruman uses the machine for 1,800 hours and produces 44,000 units. In 2017, Gruman uses the machine for 1,500
hours and produces 35,000 units.

Depreciation Based on Activity ( Hours Worked)

Year Activity Level (hours) Depreciation Rate per Depreciation Exp Accumulated Book Value at Year End
hour Depreciation at (cost-Accu depr year end)
Year End
2016 1,800 $20 36,000 36,000 184,000
2017 1,500 $20 30,000 66,000 154,000
Depreciation Rate per Hour = Depreciation Base $200,000 = $20/hour
Service Life in Hours 10,000

Depreciation Based on Activity ( Units of Output)

Year Activity Level (Units) Depreciation Rate per Depreciation Exp Accumulated Book Value at Year End
hour Depreciation at (cost-Accu depr year end)
Year End
2016 44,000 $1 $44,000 $44,000 $176,000
2017 35,000 $1 $35,000 $79,000 $141,000
Depreciation Rate per Unit = Depreciation Base $200,000 = $1/ Unit
Production Units 200,000

3. If Gruman used a service life of 8 years or 15,000 hours and a residual value of $10,000, what would
be the effect on the following under the straight-line, sum-of-the-years'-digits, and double-declining-
balance depreciation methods?
Gruman Company purchased a machine for $220,000 on January 2, 2016.

Service life 8 years or 15,000 hours

Production 200,000 units
Residual value $10,000

Depreciation expense
Straight Line Method
Year Book Value of Asset at Beg. Of Year Depreciation Exp Accumulated Book Value at Year End (cost-Accu
Depreciation at depr year end)
Year End
2016 220,000 26,250 26,250 193,750
2017 193,750 26,250 52,500 167,500
Straight-Line Depreciation Expense = Cost – Estimated Residual
Estimated Service Life
SL Dep Expe = $220,000 - $10,000/8 years = $26,250

Sum of the Years Digits Method

Year Depreciation Fraction Depreciation Accumulated Depreciation at Year Book Value at Year End (cost-Accu depr
Base Exp End year end)
2016 210,000 8/36 46,667 46,667 173,333
2017 210,000 7/36 40,833 87,500 132,500
The denominator of the fraction is the sum of the years of the asset's service life. Therefore, for an asset with a 8-year life, the
sum is. The numerator of the fraction is the number of years remaining in the asset's life as of the beginning of the year.

Depreciation Base = Cost - Residual Value

Depreciation Base = 220,000 - 10,000 = 210,000 Sum of Years = 1+2+3+4+5 +6+7+8= 36
Fraction = 8/36,7/36,6/36,5/36,4/36,3/36,2/36,1/36

Double-Declining Balance
Year Book Value of Asset at Beg. Of Rate Depreciation Exp Accumulated Book Value at Year End
Year Depreciation at (cost-Accu depr year end)
Year End
2016 220,000 25% 55,000 55,000 165,000
2017 165,000 25% 41,250 96,250 123,750
Depreciation Expense = Declining-Balance Rate (2 x Straight Line Rate) X Net Book at Beginning of Period

Declining-Balance Depreciation Rate = 2 x Straight Line Rate = 2 x (1/8) = 25% (calculate the rate)

Feedback:

1.

a. The straight-line method allocates an equal amount of an asset's cost to depreciation expense
for each period of the asset's service life. Straight-line depreciation expense is calculated as
follows:

Straight-Line = Cost – Estimated Residual

Depreciation Value
Estimated Service Life

b. The sum-of-the-years'-digits method recognizes a declining depreciation expense each period

by applying a decreasing fraction each year to the depreciable base of the asset. The denominator
of the fraction is the sum of the years of the asset's service life. Therefore, for an asset with a 5-
year life, the sum is 5 + 4 + 3 + 2 + 1 = 15. The numerator of the fraction is the number of years
remaining in the asset's life as of the beginning of the year. Note that in this method, the
depreciation base remains constant, while the fraction decreases each year.

c. The declining-balance methods recognize a declining depreciation expense amount each

period by applying a constant rate to the book value of the asset at the beginning of each period.
The declining balance depreciation rate is some multiple (m) of the straight-line rate:
 Declining Balance Depreciation Straight-Line
= (m) x
Rate Rate

You should compute the depreciation expense for each period of an asset's life as follows:

Depreciation = Declining x Net Book Value at

Expense Balance Beginning of
Depreciation Period
Rate

You should note two important points:

 The periodic depreciation declines because the book value is used and not the
depreciation base.
 Because you should ignore the residual value in the calculation of depreciation
expense, the application of the declining balance method can cause an asset's
book value to be different from its residual value at the end of the asset's service
life. Therefore, you should adjust depreciation expense toward the end of the
asset's service life so that the book value will equal the residual value.

d. When the service life of the asset is affected primarily by the amount the asset is used and not
by the passage of time, you should recognize depreciation expense using an activity method. You
should usually measure activity, or usage, in terms of an input measure such as the number of
hours worked or an output measure such as miles driven or units produced. To compute
depreciation expense under the activity method, the depreciation rate is determined as follows:

Depreciation Rate = Cost – Residual Value

Estimated Usage of the Asset

Next, depreciation expense is computed as follows:

Depreciation Depreciation Actual Usage of the

= x
Expense Rate Asset

e. When the service life of the asset is affected primarily by the amount the asset is used and not
by the passage of time, you should recognize depreciation expense using an activity method. You
should usually measure activity, or usage, in terms of an input measure such as the number of
hours worked or an output measure such as miles driven or units produced. To compute
depreciation expense under the activity method, the depreciation rate is determined as follows:

Depreciation Rate = Cost – Residual Value

Estimated Usage of the Asset
Next, depreciation expense is computed as follows:

Depreciation Depreciation Actual Usage of the

= x
Expense Rate Asset

2. (Items a through e) Book Value = Cost - Accumulated Depreciation

3. Depreciation

a. The straight-line method allocates an equal amount of an asset's cost to depreciation expense
for each period of the asset's service life. Straight-line depreciation expense is calculated as
follows:

Straight-Line Depreciation = Cost – Estimated Residual Value

Estimated Service Life

b. The sum-of-the-years'-digits method recognizes a declining depreciation expense each period

by applying a decreasing fraction each year to the depreciable base of the asset. The denominator
of the fraction is the sum of the years of the asset's service life. Therefore, for an asset with a 5-
year life, the sum is 5 + 4 + 3 + 2 + 1 = 15. The numerator of the fraction is the number of years
remaining in the asset's life as of the beginning of the year. Note that in this method, the
depreciation base remains constant, while the fraction decreases each year.

c. The declining-balance methods recognize a declining depreciation expense amount each

period by applying a constant rate to the book value of the asset at the beginning of each period.
The declining balance depreciation rate is some multiple (m) of the straight-line rate:

Declining Balance Depreciation Straight-Line

= (m) x
Rate Rate

You should compute the depreciation expense for each period of an asset's life as follows:

Depreciation = Declining x Net Book Value at

Expense Balance Beginning of
Depreciation Rate Period

You should note two important points:

 The periodic depreciation declines because the book value is used and not the
depreciation base.
 Because you should ignore the residual value in the calculation of depreciation
expense, the application of the declining balance method can cause an asset's
book value to be different from its residual value at the end of the asset's service
 life. Therefore, you should adjust depreciation expense toward the end of the
asset's service life so that the book value will equal the residual value.

3. Book value
Items a through c) Book Value = Cost - Accumulated Depreciation
11-01 ALgo Depreciation Methods

Gruman Company purchased a machine for $198,000 on January 2, 2016. It made the following
estimates:

Service life 5 years or 10,000 hours

Production 180,000 units
Residual value $ 18,000

In 2016, Gruman uses the machine for 1,700 hours and produces 45,000 units.

In 2017, Gruman uses the machine for 1,400 hours and produces 34,000 units. If required, round your
final answers to the nearest dollar.

Straight Line Method

Year Book Value of Asset at Beg. Of Year Depreciation Exp Accumulated Book Value at Year End (cost-Accu
Depreciation at depr year end)
Year End
2016 198,000 36,000 36,000 162,000
2017 162,000 36,000 72,000 126,000
Straight-Line Depreciation Expense = Cost – Estimated Residual
Estimated Service Life
SL Dep Expe = $198,000 - $18,000/5 years = $36,000

Sum of the Years Digits Method

Year Depreciation Fraction Depreciation Accumulated Depreciation at Year Book Value at Year End (cost-Accu depr
Base Exp End year end)
2016 180,000 5/15 60,000 60,000 138,000
2017 180,000 4/15 48,000 108,000 90,000
The denominator of the fraction is the sum of the years of the asset's service life. Therefore, for an asset with a 5-year life, the
sum is. The numerator of the fraction is the number of years remaining in the asset's life as of the beginning of the year.

Depreciation Base = Cost - Residual Value

Depreciation Base = 198,000 - 18,000 = 180,000 Sum of Years = 1+2+3+4+5 = 15 Fraction = 5/15,4/15,3/15,2/15,1/15

Double-Declining Balance
Year Book Value of Asset at Beg. Of Rate Depreciation Exp Accumulated Book Value at Year End
Year Depreciation at (cost-Accu depr year end)
Year End
2016 198,000 40% 79,200 79,200 118,800
2017 118,000 40% 47,520 126,720 71,280
Depreciation Expense = Declining-Balance Rate (2 x Straight Line Rate) X Net Book at Beginning of Period

Declining-Balance Depreciation Rate = 2 x Straight Line Rate = 2 x (1/5) = 40% (calculate the rate)
In 2016, Gruman uses the machine for 1,700 hours and produces 45,000 units. In 2017, Gruman uses the machine for 1,400
hours and produces 34,000 units.

Service life 5 years or 10,000 hours

Production 180,000 units
Residual value $ 18,000
Depreciation Based on Activity (Hours Worked)
Year Activity Level (hours) Depreciation Rate per Depreciation Exp Accumulated Book Value at Year End
hour Depreciation at (cost-Accu depr year end)
Year End
2016 1,700 $18 30,600 30,600 167,400
2017 1,400 $18 25,200 55,800 142,200

Depreciation Rate per Hour = Depreciation Base $180,000 = $18/hour

Service Life in Hours 10,000

Depreciation Based on Activity (Units of Output)

Year Activity Level (Units) Depreciation Rate per Depreciation Exp Accumulated Book Value at Year End
hour Depreciation at (cost-Accu depr year end)
Year End
2016 45,000 $1 $45,000 $45,000 $153,000
2017 34,000 $1 $34,000 $79,000 $119,000
Depreciation Rate per Unit = Depreciation Base $180,000 = $1/ Unit
Production Units 180,000

3. If Gruman used a service life of 8 years or 15,000 hours and a residual value of $9,000, what would
be the effect on the following under the straight-line, sum-of-the-years'-digits, and double-declining-
balance depreciation methods? Gruman Company purchased a machine for $198,000 on January 2,
2016. It made the following estimates:

Service life 8 years or 15,000 hours

Production 189,000 units
Residual value $ 9,000
Straight Line Method
Year Book Value of Asset at Beg. Of Year Depreciation Exp Accumulated Book Value at Year End (cost-Accu
Depreciation at depr year end)
Year End
2016 189,000 23,625 23,625 174,375
2017 174,374 23,625 47,,250 150,750
Straight-Line Depreciation Expense = Cost – Estimated Residual
Estimated Service Life
SL Dep Expe = $198,000 - $9,000/8 years = $23,625

Sum of the Years Digits Method

Year Depreciation Fraction Depreciation Accumulated Depreciation at Year Book Value at Year End (cost-Accu depr
Base Exp End year end)
2016 189,000 8/36 42,000 42,000 156,000
2017 189,000 7/36 36,750 78,750 119,250
The denominator of the fraction is the sum of the years of the asset's service life. Therefore, for an asset with a 8-year life, the
sum is. The numerator of the fraction is the number of years remaining in the asset's life as of the beginning of the year.

Depreciation Base = Cost - Residual Value

Depreciation Base = 198,000 - 9,000 = 189,000 Sum of Years = 1+2+3+4+5 +6+7+8= 36
Fraction = 8/36,7/36,6/36,5/36,4/36,3/36,2/36,1/36
Double-Declining Balance
Year Book Value of Asset at Beg. Of Rate Depreciation Exp Accumulated Book Value at Year End
Year Depreciation at (cost-Accu depr year end)
Year End
2016 198,000 25% 49,500 49,500 148,500
2017 148,500 25% 37,125 86,625 111,375
Depreciation Expense = Declining-Balance Rate (2 x Straight Line Rate) X Net Book at Beginning of Period

Declining-Balance Depreciation Rate = 2 x Straight Line Rate = 2 x (1/8) = 25% (calculate the rate)

CHART OF ACCOUNTS
Bailand Company
General Ledger
ASSETS
111 Cash
121 Accounts Receivable
141 Inventory
REVENUE
181 Building
411 Sales Revenue
198 Accumulated Depreciation
EXPENSES
LIABILITIES
500 Cost of Goods Sold
211 Accounts Payable
511 Insurance Expense
231 Salaries Payable
512 Utilities Expense
250 Unearned Revenue
521 Salaries Expense
261 Income Taxes Payable
531 Depreciation Expense
EQUITY 532 Bad Debt Expense
559 Miscellaneous Expenses
311 Common Stock

331 Retained Earnings

11-13 Bailand Company purchased a building for $210,000 that had an estimated residual value of
$10,000 and an estimated service life of 10 years. Bailand purchased the building 4 years ago and has
used straight-line depreciation. At the beginning of the fifth year (before it records depreciation expense
for the year), the following independent situations occur:

1. Bailand estimates that the asset has 8 years’ life remaining (for a total of 12 years).
2. Bailand changes to the sum-of-the-years’-digits method.
Bailand discovers that the estimated residual value has been ignored in the computation of
3.
depreciation expense.
Required:
For each of the independent situations, prepare all the journal entries relating to the building for the
fifth year. Ignore income taxes.
 10 years
Service life
Building Cost 210,000
Residual value $ 10,000

General Journal –
1. Bailand estimates that the asset has 8 years’ life remaining (for a total of 12 years). Prepare the
journal entry on December 31 to record depreciation in the fifth year after the change in estimate.
Ignore income taxes.
Straight Line Method
Year Book Value of Asset at Beg. Of Year Depreciation Exp Accumulated Book Value at Year End (cost-Accu
Depreciation at depr year end)
Year End
1-4 210,000 20,000 80,000 130,000
5 130,000 15,000 95,000 115,000
Straight-Line Depreciation Expense = Cost – Estimated Residual
Estimated Service Life

SL Dep Expe = $210,000 - $10,000/10 years = $20,000/year

Accumulated depreciation at the end of 4 years = $20,000 x 4 = $80,000

Book Value at the begging of year 5 = 210,000-80,000 = 130,000

Depreciation of the rest of the years

Depreciation = Remaining Book Value – Residual Value 130,000 – 10,000 = $15,000
Remaining Life 8

2. Prepare the journal entry on December 31 to record depreciation in the fifth year after the change in
depreciation method. Round your answers to the nearest dollar. Bailand changes to the sum-of-the-
years’-digits method.

Sum of the Years Digits Method

Year Depreciation Fraction Depreciation Accumulated Depreciation at Year Book Value at Year End (cost-Accu depr
Base Exp End year end)
5 130,000 5/21 34,286
The denominator of the fraction is the sum of the years of the asset's service life. Therefore, for an asset with a 8-year life, the
sum is. The numerator of the fraction is the number of years remaining in the asset's life as of the beginning of the year.
Book Value at Beginning of Year 5 = 130,000
Sum of Years digits = n (n+1)/2 = 6(6+1)/2 = 42/2=21
Depreciation = (remaining book value – residual value) x sum of the years digits fraction
= (130,000 – 10,000) x 6/21
= 120,000 x 6/21 = 34,285.71 = 34,286

3. Prepare the journal entries on December 31 to record the prior period adjustment for the error and
depreciation in the fifth year. Ignore income taxes.
Bailand discovers that the estimated residual value has been ignored in the computation of depreciation
expense.
Depreciation without Residual Value = $210,000/10 years = $21,000/year
Incorrect Accumulated Depreciation = $21,000 x 4 years = $84,000
Correct Depreciation = 210,000 - 10,000/10 years = $20,000/year
Correct Accumulated Depreciation = $20,000 x 4 years = $80,000
Accumulated Depreciation = Incorrect Accumulated Depreciation - Correct Accumulated Depreciation
Accumulated Depreciation = 84,000 – 80,000 = 4,000
Journal Entry
Accumulated Depreciation $4,000
Retained Earnings $4,000
Prior Period adjustment for error ($84,000 - $80,000)
Depreciation expense $20,000
Accumulated Depreciation $20,000
11-13 Algo

CHART OF ACCOUNTS
Bailand Company
General Ledger
RE
VE
NU
E
Sal
es
4
Re
1
ve
1
nu
e
EXP
ENS
ASSETS ES
111 Cash Cos
121 Accounts Receivable t of
5
141 Inventory Go
0
ods
181 Building 0
Sol
198 Accumulated Depreciation d
LIABILITIES Ins
211 Accounts Payable ura
5
231 Salaries Payable nce
1
250 Unearned Revenue Exp
1
ens
261 Income Taxes Payable e
EQUITY Utili
311 Common Stock 5 ties
331 Retained Earnings 1 Exp
2 ens
e
Sala
5 ries
2 Exp
1 ens
e
Dep
5 reci
3 atio
1n
Exp
 ens
e
Bad
Deb
5
t
3
Exp
2
ens
e
Mis
cell
5 ane
5 ous
9 Exp
ens
es
Bailand Company purchased a building for $366,000 that had an estimated residual value of $16,000
and an estimated service life of 10 years. Bailand purchased the building 4 years ago and has used
straight-line depreciation. At the beginning of the fifth year (before it records depreciation expense for
the year), the following independent situations occur:

Building Cost $366,000

Residual Value $16,000
Estimated Service Life 10 years
Purchased 4 years ago

Bailand estimates that the asset has 8 years’ life remaining (for a total of 12 years). Prepare the journal
entry on December 31 to record depreciation in the fifth year after the change in estimate. Ignore
income taxes. Additional Instruction

1. Bailand estimates that the asset has 8 years’ life remaining (for a total of 12 years).

Straight Line Method

Year Book Value of Asset at Beg. Of Year Depreciation Exp Accumulated Book Value at Year End (cost-Accu
Depreciation at depr year end)
Year End
1-4 366,000 35,000 140,000 226,000
5 226,000 26,250 166,250 199,750
Straight-Line Depreciation Expense = Cost – Estimated Residual
Estimated Service Life

SL Dep Expe = $366,000 - $16,000/10 years = $35,000/year

Accumulated depreciation at the end of 4 years = $35,000 x 4 = $140,000

Book Value at the begging of year 5 = 366,000-140,000 = 226,000

Depreciation of the rest of the years

Depreciation = Remaining Book Value – Residual Value 226,000 – 16,000 = $26,250
Remaining Life 8
2. Bailand changes to the sum-of-the-years’-digits method.

Sum of the Years Digits Method

Year Depreciation Fraction Depreciation Accumulated Depreciation at Year Book Value at Year End (cost-Accu depr
Base Exp End year end)
5 226,000 5/21 60,000
The denominator of the fraction is the sum of the years of the asset's service life. Therefore, for an asset with a 6-year life, the
sum is. The numerator of the fraction is the number of years remaining in the asset's life as of the beginning of the year.

Book Value at Beginning of Year 5 = 226,000

Sum of Years digits = n (n+1)/2 = 6(6+1)/2 = 42/2=21 (10YEARS EST. LIFE – 4 YEARS AGO = 6)
Depreciation = (remaining book value – residual value) x sum of the years digits fraction
= (226,000 – 16,000) x 6/21
= 210,000 x 6/21 = 60,000

3. Bailand discovers that the estimated residual value has been ignored in the computation of
depreciation expense

Depreciation without Residual Value = $366,000/10 years = $36,600/year

Incorrect Accumulated Depreciation = $36,600 x 4 years = $146,400
Correct Depreciation = 366,000 - 16,000/10 years = $35,000/year
Correct Accumulated Depreciation = $35,000 x 4 years = $140,000
Accumulated Depreciation = Incorrect Accumulated Depreciation - Correct Accumulated Depreciation
Accumulated Depreciation = 146,400 – 140,000 = 6,400
Journal Entry
Accumulated Depreciation $6,400
Retained Earnings $6,400
Prior Period adjustment for error ($84,000 - $80,000)
Depreciation expense $35,000
 Accumulated Depreciation $35,000

11-20 Dinkle Company purchased equipment for $50,000. The equipment has an estimated residual
value of $5,000 and an expected useful life of 10 years. Dinkle uses straight-line depreciation for its
financial statements.

Equipment Cost $50,000

Residual Value $5,000
Estimated Service Life 10 years

Straight Line Method

Year Book Value of Asset at Beg. Of Year Depreciation Exp Accumulated Book Value at Year End (cost-Accu
Depreciation at depr year end)
Year End
2016 50,000 4,500 4,500 45,500
2017 45,500 4,500 9,000 41,000
Straight-Line Depreciation Expense = Cost –Residual Value
Estimated Service Life
Straight- Line Depreciation = $50,000 – $5,000/10 years = $4,500

What is the difference between the company's income before taxes reported on its financial statements
and the taxable income reported on its tax return in each of the first 2 years of the asset's life if the
asset was purchased on January 2, 2016, and its MACRS life is 5 years
 MACRS - Double-Declining
Year Book Value of Asset at Beg. Of Rate Depreciation Exp Accumulated Book Value at Year End
Year Depreciation at (cost-Accu depr year end)
Year End
2016 50,000 20% 10,000 10,000 40,000
2017 50,000 32% 16,000 26,000 24,000

Depreciation Year 1 Year 2

As per Income Tax $10,000 $16,000
As per Financial Statements $4,500 $4,500
Difference 5,500 11,500