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Chapter 11 In-Class Problems Solution

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52 views4 pages

Chapter 11 In-Class Problems Solution

Uploaded by

liuxuhan3
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© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Intermediate Accounting I

In-Class Problems for Chapter 11


SOLUTION

1. Venus Company acquired equipment on January 1, 2020, for $470,000. The


equipment has an estimated useful life of 5 years and an estimated residual value
of $30,000. Calculate depreciation expense for 2020 and 2021 under each of the
following methods. The equipment is estimated to produce 150,000 units. During
2020 and 2021, the equipment produced 24,000 and 60,000 units, respectively.
Round the answer to the nearest dollar where necessary.

2020 2021
a. Straight-line method $88,000 $88,000
b. Activity method 70,400 176,000
c. Sum-of-the-years’-digits method 146,667 117,333
d. Double-declining balance method 188,000 112,800

a. ($470,000 -$30,000) ÷ 5 years = $88,000/year


b. ([$470,000 - $30,000] ÷ 150,000 units) x 24,000 units = $70,400
([$470,000 - $30,000] ÷ 150,000 units) x 60,000 units = $176,000
c. ([$470,000 - $30,000] x 5/15 = $146,667
([$470,000 - $30,000] x 4/15 = $117,333
d. DDB rate = 1/5 years x 2 = 40% (.40)
$470,000 x .40 = $188,000
($470,000 - $188,000) x .40 = $112,800

1
2. For the following group of assets, compute the composite depreciation rate, the
composite life, and the amount of depreciation recorded in the first year.

Asset Original Cost Salvage Value Estimated Life (yr.)


A $11,000 $500 5
B 7,000 200 4
C 12,500 800 3
D 16,000 1,000 6

If asset B is sold for $1,000 at the end of 3 years, what journal entry should be
recorded?

Depreciation
Original Salvage Depreciable Estimated per year
Asset Cost Value Cost Life (yr.) (straight-line)
A $11,000 $500 $10,500 5 $2,100
B 7,000 6,800 4 1,700
C 12,500 11,700 3 3,900
D 16,000 1,000 15,000 6 2,500
$46,500 $2,500 $44,000 $10,200

Composite rate = $10,200 = .219 or 22% 46,500

Composite life (44,000 ÷ 10,200) = 4.31 years

1st year’s depreciation ($46,500 × .22) = $10,230

Sale of asset B for $1,000 after 3 years:


Cash ....................................................................... 1,000
Accumulated depreciation...................................... 6,000
Asset B ............................................................ 7,000

2
3. Alfarabi Company has an asset that had an original cost of $560,000 and
depreciation taken to date of $240,000. Management of Alfarabi Company has
decided that the asset has suffered an impairment and its expected future net cash
flows total $80,000. Further, the asset has a remaining useful life of 3 years and a
salvage value of $15,000. No active market exists for the asset and its present
value of expected future net cash flows is $61,000.

Prepare the journal entry Alfarabi Company would make to record the impairment
in the value of the asset.

Current book value: Cost $560,000


Accumulated depreciation 240,000
Book value $320,000

After impairment: Cost $560,000


Accumulated depreciation 499,000
Book value $61,000

Journal entry:
Loss on impairment 259,000*
Accumulated depreciation 259,000

*($320,000 - $61,000)

3
4. Blue Corp. purchased computer equipment on July 1, 2020, for $21,000. The
computer equipment has a useful life of 8 years and a salvage value of $1,000.
For tax purposes, the MACRS class life is 5 years.

Assuming that the company uses the straight-line method for book and the
optional straight-line method tax purposes, what is the depreciation expense
reported in (1) the financial statements for 2020 and (2) the tax return for 2020?

(1) ($21,000 – $1,000) X 1/8 X 6/12 = $1,250 depreciation expense for book
purposes.
(2) $21,000 X 10% = $2,100 depreciation for tax purposes.

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