Financial Accounting
Financial Accounting
9th Edition
ISBN: 9781259738692
Author: Libby
Publisher: MCG
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Chapter 8, Problem 8.11E

1. a.

To determine

Prepare the depreciation expense schedule under straight-line method.

1. a.

Expert Solution
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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   $45,000
1($45,000$5,000)×14$10,000 $10,000 35,000
2($45,000$5,000)×1410,00020,00025,000
3($45,000$5,000)×1410,00030,00015,000
4($45,000$5,000)×1410,00040,0005,000

Table (1)

b.

To determine

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

b.

Expert Solution
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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   $45,000
1($45,000$5,000)×120,000 units400,000 units$12,000 $12,000 33,000
2($45,000$5,000)×90,000 units400,000 units9,00021,00024,000
3($45,000$5,000)×110,000 units400,000 units11,00032,00013,000
4($45,000$5,000)×80,000 units400,000 units8,00040,0005,000

Table (2)

c.

To determine

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

c.

Expert Solution
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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   $45,000
1($45,000$0)×24$22,500 $22,500 22,500
2($45,000$22,500)×2411,25033,75011,250
3($45,000$33,750)×245,62539,3755,625
4($45,000$39,375)×2462540,0005,000

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)=$45,000–$39,375–$5,000=$625

2.

To determine

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

2.

Expert Solution
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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

Financial Accounting

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