Chapter 11, Problem 11.2P

Requirement – 1

To determine

Depreciation:

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.

Amortization:

It is the process of allocating the value of an intangible asset over its definite 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:

$\text{Depreciation = }\frac{\left(\text{Cost of the asset}-\text{Residual value}\right)}{\text{Estimated useful life of the asset}}$

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 accumulated depreciation) of the long-term asset is decreased by a fixed rate. It is double the rate of the straight-line depreciation. Use the following formula to determine the annual depreciation:

$\text{Depreciation = Purchase price × }\left(\frac{\text{2}}{\text{useful life}}\right)$

To prepare: A schedule for analyzing the changes in each of the plant asset accounts during 2018.

Explanation of Solution

Company C Analysis of changes in plant assets for the year ending December 31,  2018
Particulars	Balance 12/31/17	Increase	Decrease	Balance 12/31/18
Land	175,000	312,500	-	487,500
Land improvements	-	192,000	-	192,000
Buildings	1,500,000	937,500	-	2,437,500
Machinery and equipment	1,125,000	385,000	17,000	1,493,000
Automobiles and trucks	172,000	12,500	24,000	160,500
Leasehold improvements	216,000	-	-	216,000
Total	3,188,000	1,839,500	41,000	4,986,500

Table (1)

Working note:

1. Calculate the total allocation amount of land and building

$\begin{array}{c}\text{Total allocation amount = Number of common shares }\times \text{ Fair value per share }\\ \text{=25,000}\text{shares }\times \text{ \$50}\\ =\$1,250,000\end{array}$ (1)

2. Calculate the increased value of land, land improvements, and buildings at date of exchange

Asset	Fair value ($)	Percent of total fair value	Initial valuation ($)
Land	187,500	25%	312,500
Building	562,500	75%	937,500
Total	750,000	100.0%	1,250,000

Table (2)

(2)

Note:

$•\text{ Percent of total fair value = }\frac{\text{Fair value of land / building}}{\text{Total}\text{fair}\text{value}}$

$•\text{ Initital valuation = Percent of total fair value }\times \text{ Cash paid for the property}$

Requirement – 2

To determine

To prepare: A schedule showing depreciation or amortization expenses of each asset for the year ended December 31, 2018.

Explanation of Solution

Depreciation or amortization expenses of each asset are as follows:

Land improvements

Particulars	Amount ($)
Cost	192,000
Straight line rate $\frac{\text{100}}{\text{12}\text{years}}$	$\left(\times \text{8}\frac{\text{1}}{\text{3}}\%\right)$
Annual depreciation	16,000
Depreciation on land improvements for 2018 (March 25 to December 31,2018)	$\left(\times \frac{3}{4}\right)$
Land improvements	12,000

 Table (3)

Buildings

Particulars	Amount ($)
Book value, 1/1/2018	1,171,100
Add: Building acquired on 1/6/18	937,500
Total amount	2,108,600
Less: 150% declining balance rate (3)	6%
Buildings	126,516

Table (4)

Working note:

$\begin{array}{c}\text{Depreciation rate = }\frac{\text{100\%}}{\text{25 years}}\text{ ×1}\text{.5}\\ \text{= 4\%×1}\text{.5}\\ \text{=6\%}\end{array}$ (3)

Machinery and equipment

Particulars	Amount ($)	Amount ($)
Balance, 1/1/2018	1,125,000
Straight-line rate $\left(\frac{\text{1}}{\text{10}\text{years}}\right)$	$\times \text{10\%}$	112,500
Purchase made on 7/1/2018	385,000
Less: Depreciation for one-half year	$\times 5\text{\%}$	19,250
Depreciation on machinery and equipment for 2018		131,750

Table (5)

Automobiles and trucks

Particulars	Amount ($)	Amount ($)
Book value , 1/1/2018  (4)	71,675
Less: Sale of  truck (Book value) (5)	11,750
Amount subject to depreciation	59,925
Less: 150% declining balance rate (6)	$\times$  30%	17,978
Automobile  purchased on 8/30/2018	12,500
Less: Depreciation for 2018 (September 30-Decemeber 31)   $\left(30\%\times \frac{4}{12}\right)$	10%	1,250
Truck sold on 9/30/2018		2,650
Depreciation on automobiles and trucks  2018		21,878

Table (6)

Working note:

1. Calculate the book value automobiles and trucks.

$\begin{array}{c}\text{Book value = Fair value – Accumulated depreciation }\\ =\$172,000–\$100,325\\ =\$71,675\end{array}$ (4)

2. Calculate the total book value of truck sold.

$\begin{array}{c}\text{Book}\text{value = Book}\text{value + Depreciation }\\ \text{= \$9,100 + \$2,650}\\ \text{=\$11,750}\end{array}$ (5)

3. Calculate depreciation rate.

$\begin{array}{c}\text{Depreciation rate = }\frac{\text{100\%}}{\text{5 years}}\text{ ×1}\text{.5}\\ \text{= 20\%×1}\text{.5}\\ \text{=30\%}\end{array}$ (6)

Leasehold improvements

Particulars	Amount ($)
Book value , 1/1/2018	108,000
Amortization period	$\text{÷5}\text{years}$
Amortization of leasehold improvements	21,600

Table (7)

Determine the total depreciation and amortization expense for the year 2018.

Assets	Amount ($)
Land improvements	12,000
Buildings	126,516
Machinery and equipment	131,750
Automobiles and trucks	21,878
Leasehold improvements	21,600
Total depreciation and amortization expense	313,744

Table (8)