Intermediate Accounting-1 Review questions for chapter 26 2/Costing & Admin

Chapter 26- Review questions

1. A Gill, purchased a notebook PC for $2,600 in 1/ January/ 2007. It
has an estimated life of four years and a scrap value of $200. Using the
straight-line method for the purpose of calculating depreciation on the
computer.
Solution
Cost of asset - Scrap value
Number of expected years of use

Depreciation charge = Cost of

asset =
$2,600
Scrap value = $200
Number of expected years of use = 4years

Depreciation charge = 2,600 - 200

= $600 per year 4

2. A machine costs $12,000. It will be kept for five years, and then sold
for an estimated figure of $2,848. Show the calculations of depreciation
(to the nearest $) for each of the five years using the reducing balance
method, for this method using a depreciation rate of 25 per cent.
Solution
$
Cost 12,000
Year 1: depreciation (25% of $12,000) (3,000)
9,000
Year 2: depreciation (25% of $9,000) (2,250)
6,750
Year 3: depreciation (25% of $6,750) (1,688)
5,063
Year 4: depreciation (25% of $5,063) (1,266)

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Intermediate Accounting-1 Review questions for chapter 26 2/Costing & Admin

3,797
Year 5: depreciation (25% of $3,797) (949)
2,848
3. A company starts in business on 1. January 2016. The following show
details:
In 1. January 2016, it buys tools costing $2,000
Their estimated value at 31 December 2016 $1,750
Tools bought in the year ended 31 December 2017 S1,500
Estimated value of all tools in hand on 31 December 2017 $2,850
Tools bought in the year ended 31 December 2018 $1,150
Estimated value of all crates in hand on 31 December 2018 $3,480
Solution
Tools A/C
2016 2016
2,00
1/1 Cash 31/12 Profit and loss A/C 250
0
1,75
31/12 Balance c/d
0
2,00 2,00
0 0
2017 2017
1,75
1.1 Balance b/d 31/12 Profit and loss A/C 400
0
1,50 2,85
31/12 Cash 31/12 Balance c/d
0 0
3,25 3,25
0 0
2018 2018
2,85
1.1 Balance b/d 31/12 Profit and loss A/C 520
0
1,15 3,48
31/12 Cash 31/12 Balance c/d
0 0
4,00 4,00
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Intermediate Accounting-1 Review questions for chapter 26 2/Costing & Admin

0 0
Profit and Loss A/C
2016
31/12 depreciation for
250
tools
2017
31/12 depreciation for
400
tools
2018
31/12 depreciation for
520
tools

4. PQ Ltd. Acquired the lease of a quarry mine of $10,000,000 to

operate for 10 years. The total mineral deposit is estimated to be around
250,000 tonnes. Assuming that the extraction of minerals was 2,000 and
9,000 in 2017 and 2018 respectively. What should be the amount of
depreciation in 2017 and 2018(using depletion unit method)?
Solution:
Cost of asset - Scrap value
Expected total contents in units
Depreciation for period = × Number of units taken
Cost of asset = $10,000,000
Expected total contents in units = 250,000 tonnes.
Depreciation per unit = $10,000,000÷250,000 = 40 $/ tonnes
Therefore, depreciation is as:
Depreciation for 2017= 2,000 tonnes *40 $ = $ 80,000
Depreciation for 2018= 9,000 tonnes *40 $ = $ 360,000
5. A machinery having a life of 20,000 machine hours, and a scrap value
of $10,000 was purchased for $1,010,000. The machine was operated for
2,000 hours in 2019, and for 3,000 hours in 2020. what should be the
amount of depreciation in 2019 and 2020(using machine hour method)?
Solution
Machine hours Cost of asset - Scrap value = ×Number of machine hour in
Effective machine hours
period

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Intermediate Accounting-1 Review questions for chapter 26 2/Costing & Admin

Cost of asset = $1,010,000

Scrap value = $10,000
Effective machine hours = 20,000 machine hours
Machine hours rate = (1,010,000 - 10,000) ÷ 20,000 = 50$/ machine
hours
Therefore, depreciation is as:
Depreciation for 2019= 2,000 hours *50 $ = $ 100,000
Depreciation for 2020= 3,000 hours *50 $ = $ 150,000
6. X company purchased a machine on 1. January. 2013, the relevant
information is given below:
 Cost of the machine: $250,000
 Expected useful life of machine: 4 years
 Salvage value: $25,000
Required: Prepare a schedule showing the depreciation expense of each
year of the useful life of the machine using sum of years’ digits method.
Solution:
Depreciation charge = Cost of asset - scrap value * Number of years of remaining
life of assets (including current year) ÷ sum digits of life of assets.
Cost of asset- scrap value = 250,000-25,000=$225,000
Sum digits of life of assets = 4+3+2+1=10
year Depreciation Remaining Depreciation Depreciation
base life fraction charge
2013 $225,000 4 4/10 $90,000
2014 $225,000 3 3/10 $67,500
2015 $225,000 2 2/10 $45,000
2016 $225,000 1 1/10 $22,500
Total 10 $225,000
7. Q. M/s Cube textiles purchased machinery for $200,000 on 1-1-2015. It
has an estimated useful life of 10 years, and an estimated residual value of
$20,000. The machine has an expected production of 15000 units during
its useful life. Now the production is as follows:
No years Production per year
1 2015 2,000 units
2 2016 2,000 units

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Intermediate Accounting-1 Review questions for chapter 26 2/Costing & Admin

3 2017 1,800 units

4 2018 2,500 units
5 2019 1,700 units
What should be the amount of depreciation in 2016, 2018 and
2019(using Units of output method)?
Solution:
The depreciation per period is calculated =
(Cost - salvage value) Period’s production ×
Total expected production
Cost - salvage value = 200,000-20,000 = $180,000
Total expected production= 15000 units
Therefore, depreciation is as:
Depreciation for 2016= $180,000 × 2,000÷15,000 = $24000
Depreciation for 2018= $180,000 × 2,500÷15,000 = $30,000
Depreciation for 2019= $180,000 × 1,700÷15,000 = $20,400
7. Big Dog Carworks Corp. purchased a $20,000 piece of equipment on
January 1, 2018 with a $4,800 residual value and estimated productive
life of 10,000 units during 4 years. The depreciation rate 30% per year.
The company produced 4,000 units, 3,000 units, and 2,000 units, in
2018, 2019, 2020 respectively.
Required: Using suitable methods to calculate depreciation expense (to
the nearest dollar) for each year ending 2018, 2019 and 2020.
Solution
(a) Straight-line method:

Depreciation expense Cost of asset - Scrap value =

Number of expected years of use
Cost of asset = $20,000
Scrap value = $4,800
Number of expected years of use = 4years

Depreciation charge = 20,000- 4,800

= $3,800 per year 4

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Intermediate Accounting-1 Review questions for chapter 26 2/Costing & Admin

Therefore, depreciation is as:

Depreciation expense for 2018 = $3,800
Depreciation expense for 2019 = $3,800
Depreciation expense for 2020 = $3,800
(b) Reducing balance method:
Cost 20,000
2018: depreciation (30% of $20,000) (6,000)
14,000
2019: depreciation (30% of $14,000) (4,200)
9,800
2020: depreciation (30% of $9,800) (2,940)
6,860
Therefore, depreciation is as:
Depreciation expense for 2018 = $6,000
Depreciation expense for 2019 = $4,200
Depreciation expense for 2020 = $2,940
(c) Sum of years’ digits method:
Depreciation charge = Cost of asset - scrap value * Number of years of remaining
life of assets (including current year) ÷ sum digits of life of assets.
Cost of asset- scrap value = 20,000 - 4,800 = $15,200
life of assets = 4 years
Sum digits of life of assets = 4+3+2+1=10
year Depreciation Remaining Depreciation Depreciation
base life fraction charge
2018 $15,200 4 4/10 $6,080
2019 $15,200 3 3/10 $4,560
2020 $15,200 2 2/10 $3,040
2021 $15,200 1 1/10 $1,520
Total 10 $15,200
Therefore, depreciation is as:
Depreciation expense for 2018 = $6,080
Depreciation expense for 2019 = $4,560
Depreciation expense for 2020 = $3,040
(d) Units of output method

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Intermediate Accounting-1 Review questions for chapter 26 2/Costing & Admin

The depreciation per period is calculated =

(Cost - salvage value) Period’s production ×
Total expected production
Cost - salvage value = $15,200
Total expected production= 10,000 units
Therefore, depreciation is as:
Depreciation for 2018 = $15,200 × 4,000÷10,000 = $6,080
Depreciation for 2019 = $15,200 × 3,000÷10,000 = $4,560
Depreciation for 2020 = $15,200 × 2,000÷10,000 = $3,040

Prepared by:
Karrar Mohamed Hassan
Assistant Professor of Accounting

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