Choosing Depreciation Methods (Chapter 10: Choosing Accounting Methods) 693-706

to allocate the cost of fixed assets to the periods benefited by their use - Depreciation is the rational, systematic way companies record the expense of using an asset that lasts more than a year. Accounting rules require that all expenses that it takes to produce the revenues be recorded on the same income statement - That matching of revenues and expenses gives users of the financial statements a clearer picture of current -year performance and better predictive information. - Imagine a company buying a $2 million machine that will be used in the business for ten years. Without a systematic allocation of the cost to each of the ten years, the year of acquisition would show a $2 million expense, and each of the next nine years would show no expense related to using the machine, even though the revenues earned during those years were dependent on the use of the machine

693. What is the purpose of recording depreciation expense?

Depreciation expense is higher in the early years of an asset's use than in the last years of use. Accelerated depreciation methods speed up the recognition of expense by allocating more expense to the first few years of the asset's life.

694. Describe the main characteristic of accelerated depreciation methods.

Depreciation expense is $13,000, and book value is $62,000. Straight-line depreciation evenly allocates the depreciable cost, which is equal to the cost minus the estimated salvage, to the years of use +(75,000-10,000)/5= 13,000* Book value is equal to the cost of the asset less the depreciation taken so far, which is only one year. *75,000 -13, 000 = 62, 000*

695. On January 1, Tropics Company purchases a food truck to drive around the island and sell lunch items to beach goers and surfers. The *cost of the truck is $75,000*. Tropics plans to use the truck for *5 years* and then assess whether to expand or give it up. Either way, the company figures it should be able to *sell the truck for about $10,000*. Assuming Tropics decides to use the straight line depreciation method, calculate the depreciation expense on the income statement and the book value of the truck on the balance sheet at the end of the first year.

*12,000* Straight-line depreciation evenly allocates the depreciable cost, which is equal to the cost minus the estimated salvage, to the years of use *Land is not depreciable* +(800,000-400,000-100,000)/25= 12,000*

696. On January 1, Country Weddings buys a beautiful mansion situated on an old farm. It plans to rent out the property for weddings. It *buys the land and building for $800,000* and *allocates half the purchase price to the land and half to the house.* The house has a useful life of *25 years* and a *salvage value of $100,000.* If Country Weddings uses straight line depreciation, what is the total depreciation expense for a full year of use?

The desks, computers, printers, and file cabinets. The company only takes depreciation on assets owned and used in the business. Rented assets are not depreciated because the cost of using them is reflected in the rent expense.

697. Green Careers is a staffing agency specializing in jobs in environmentally friendly companies. The company rents an office and phone equipment but bought desks, computers, printers, and file cabinets. Which of the items listed must Green Careers depreciate?

*$937.50* Straight-line depreciation evenly allocates the depreciable cost, which is equal to the cost minus the estimated salvage, to the years of use +(19,250-500)/10 = 13,000*= 1,875 x 1/2 the year=

698. Minnesota Cookie Company buys new *mixing equipment* for the factory. The *order* for the equipment is placed on *June 15, 2015.* The equipment is delivered on June 20 but *isn't installed and ready for use until July 1, 2015*. The cost of the equipment is *$19,250.* The company believes that it will last for *10 years.* At the end of 10 years, the company expects to sell it for *$500*. If the company uses straight line depreciation, how much depreciation expense should the company record for 2015?

Straight-line depreciation evenly allocates the depreciable cost, which is equal to the cost minus the estimated salvage, to the years of use +(19,250-500)/10 = 13,000*= 1,875

699. Minnesota Cookie Company buys new mixing equipment for the factory. The order for the equipment is placed on June 1, 2015. The equipment is delivered on June 20 but isn't installed and ready for use until July 1, 2015. The cost of the equipment is $19,250. The company believes that it will last for 10 years. At the end of 10 years, the company expects to sell it for $500. If the company uses straight line depreciation, how much depreciation expense should the company record for 2016?

Depreciation expense is $13,000, and book value is $10,000. Straight-line depreciation evenly allocates the depreciable cost, which is equal to the cost minus the estimated salvage, to the years of use +(75,000-10,000)/5= 13,000* 13,00 x 5= 65,00 so only the salvage value is remaining on the books

700. On January 1, Tropics Company purchases a food truck to drive around the island and sell lunch items to beach goers and surfers. The cost of the truck is *$75,000*. Tropics plans to use the truck for *5 years* and then assess whether to expand or give it up. Either way, the company figures it should be able to *sell the truck for about $10,000* at the *end of 5 years*. Assuming Tropics decides to use the straight line depreciation method, calculate the depreciation expense on the income statement and the book value of the truck on the balance sheet at the *end of the fifth year*.

$16,437.50 2015: +(19,250-500)/10 = 13,000*= 1,875 x 1/2 the year= *$937.50* 2016: +(19,250-500)/10 = 13,000*= 1,875* *19,250 - (937.50 + 1875) = *

701. Minnesota Cookie Company buys new *mixing equipment *for the factory. The order for the equipment is placed on June 1, 2015. The equipment is delivered on June 20 but isn't installed and *ready for use until July 1, 2015.* The cost of the equipment is *$19,250*. The company believes that it will last for *10 years.* At the *end of 10 years*, the company expects to *sell it for $500.* The company properly records depreciation expense using the straight line method for 2015 and 2016. What is the book value of the asset at the end of 2016?

$32,000 - Depreciation expense using the double -declining method is calculated as the book value of the asset at the beginning of the year multiplied by a rate twice that of straight line. 1/25 x2= 0.8 or 8% (800,000 - 400,000) x .08 = -

702. On January 1, Country Weddings buys a beautiful mansion situated on an old farm. It plans to rent out the property for weddings. It buys the land and building for $800,000 and allocates half the purchase price to the land and half to the house. The house has a useful life of 25 years and a salvage value of $100,000. lf Country Weddings uses double -declining depreciation, what is the total depreciation expense for the first year of use?

Depreciation expense using the double -declining method is calculated as the book value of the asset at the beginning of the year multiplied by a rate twice that of straight line. The rate is calculated by dividing 1 by the useful life and then multiplying thatrate by 2. 1/25 x2= 0.8 or 8% 1st yr 400,000 x .08 = 32,000 2nd yr (400,000 - 32,000) x .08 = 29,440 *3rd yr (400,000 - 61,440) x .08 = 27,085*

703. On January 1, Country Weddings buys a beautiful mansion situated on an old farm. It plans to rent out the property for weddings. It buys the *land and building for $800,000 and allocates half the purchase price to the land and half to the house.* The house has a* useful life of 25 years* and a *salvage value of $100,000.* lf Country Weddings uses double -declining balance depreciation, what is the total depreciation expense for the third year of use?

Both methods record the same amount of depreciation expense, $300,000, over the useful life of the asset. Depreciation allocates the cost of the asset to the periods of use. The maximum amount any method can expense equals the cost less the salvage value.

704. On January 1, Country Weddings buys a beautiful mansion situated on an old farm. It plans to rent out the property for weddings. It buys the *land and building for $800,000* and allocates half the purchase price to the land and half to the house. The house has a *useful life of 25 years* and a *salvage value of $100,000*. Over the life of the asset, how much more depreciation expense will Country Weddings record using double -declining balance versus straight line depreciation?

$0 Five years of recording straight-line depreciation would result in the maximum of $65,000 being allocated to expense

705. On January 1, Tropics Company purchases a food truck to drive around the island and sell lunch items to beachgoers and surfers. The *cost of the truck is $75,000. *Tropics plans to use the truck for *5 years* and then assess whether to expand or give it up. Either way, the company figures it should be able to *sell the truck for about $10,000 *at the end of 5 years. The company uses straight line depreciation. Seven years later, Tropics is still using the truck. How much is the depreciation expense in the seventh year of use?

$19,250 - 500 = $18,750

706. Minnesota Cookie Company buys new mixing equipment for the factory. The order for the equipment is placed on June 1, 2015. The equipment is delivered on June 20 but isn't installed and ready for use until July 1, 2015. The cost of the equipment is $19,250. The company believes that it will last for 10 years. At the end of 10 years, the company expects to sell it for $500. If the company uses the equipment for 10 years, what is the total depreciation expense recorded for all years?