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B EXERCISES

2 3 E11-1B (Depreciation Computations—SL, SYD, DDB) Vaughn Company purchases equipment on

January 1, Year 1, at a cost of $500,000. The asset is expected to have a service life of 10 years and a salvage
value of $50,000.
Instructions
(a) Compute the amount of depreciation for each of Years 1 through 3 using the straight-line depre-
ciation method.
(b) Compute the amount of depreciation for each of Years 1 through 3 using the sum-of-the-years’-
digits method.
(c) Compute the amount of depreciation for each of Years 1 through 3 using the double-declining
balance method. (In performing your calculations, round constant percentage to the nearest one-
hundredth of a point and round answers to the nearest dollar.)

2 3 E11-2B (Depreciation—Conceptual Understanding) Bayliner Company acquired a plant asset at the

beginning of Year 1. The asset has an estimated service life of 5 years. An employee has prepared depre-
ciation schedules for this asset using three different methods to compare the results of using one method
with the results of using other methods. You are to assume that the following schedules have been cor-
rectly prepared for this asset using (1) the straight-line method, (2) the sum-of-the-years’-digits method,
and (3) the double-declining-balance method.
Sum-of-the- Double-Declining-
Year Straight-Line Years’-Digits Balance
1 $15,000 $25,000 $34,000
2 15,000 20,000 20,400
3 15,000 15,000 12,240
4 15,000 10,000 7,344
5 15,000 5,000 1,016
Total $75,000 $75,000 $75,000

Instructions
Answer the following questions.
(a) What is the cost of the asset being depreciated?
(b) What amount, if any, was used in the depreciation calculations for the salvage value for this asset?
(c) Which method will produce the highest charge to income in Year 2?
(d) Which method will produce the highest charge to income in Year 5?
(e) Which method will produce the lowest book value for the asset at the end of Year 3?
(f) If the asset is sold at the end of Year 4, which method would yield the lowest gain (or highest loss)
on disposal of the asset?

2 3 E11-3B (Depreciation Computations—SYD, DDB—Partial Periods) Bonds Company purchased a new

plant asset on April 1, 2014, at a cost of $355,500. It was estimated to have a service life of 20 years and
a salvage value of $30,000. Bonds’s accounting period is the calendar year.
Instructions
(a) Compute the depreciation for this asset for 2014 and 2015 using the sum-of-the-years’-digits method.
(b) Compute the depreciation for this asset for 2014 and 2015 using the double-declining balance method.

2 3 E11-4B (Depreciation Computations—Five Methods) Wynn Furnace Corp. purchased machinery for
$345,000 on May 1, 2014. It is estimated that it will have a useful life of 10 years, scrap value of $45,000,
production of 120,000 units, and working hours of 12,500. During 2015 Wynn uses the machinery for
2,000 hours, and the machinery produces 25,000 units.
Instructions
From the information given, compute the depreciation charge for 2015 under each of the following meth-
ods. (Round to three decimal places).
(a) Straight-line.
(b) Units-of-output.
(c) Working hours.
(d) Sum-of-the-years’-digits.
(e) Declining-balance. (Use 20% as the annual rate.)

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2 • Chapter 1 1 Depreciation, Impairments, and Depletion

2 3 E11-5B (Depreciation Computations—Four Methods) Foster Corporation purchased a new machine for
its assembly process on August 1, 2014. The cost of this machine was $235,800. The company estimated
that the machine would have a trade-in value of $25,800 at the end of its service life. Its life is estimated
at 10 years, and its working hours are estimated at 42,000 hours. Year-end is December 31.

Instructions
Compute the depreciation expense under the following methods. Each of the following should be
considered unrelated.
(a) Straight-line depreciation for 2014.
(b) Activity method for 2014, assuming that machine usage was 800 hours.
(c) Sum-of-the-years’-digits for 2015.
(d) Double-declining balance for 2015.
2 3 E11-6B (Depreciation Computations—Five Methods, Partial Periods) Scott Company purchased equip-
ment for $250,000 on October 1, 2014. It is estimated that the equipment will have a useful life of 8 years
and a salvage value of $50,000. Estimated production is 20,000 units and estimated working hours 10,000.
During 2014 Scott uses the equipment for 900 hours, and the equipment produces 1,500 units.

Instructions
Compute depreciation expense under each of the following methods. Scott is on a calendar-year basis
ending December 31.
(a) Straight-line method for 2014.
(b) Activity method (units of output) for 2014.
(c) Activity method (working hours) for 2014.
(d) Sum-of-the-years’-digits method for 2016.
(e) Double-declining balance method for 2015.

2 3 E11-7B (Different Methods of Depreciation) Jester Industries presents you with the following information.
Accumulated
Date Salvage Life in Depreciation Depreciation to Depreciation
Description Purchased Cost Value Years Method 12/31/14 for 2015
Machine A 7/10/11 $216,000 $36,000 6 (a) $105,000 (b)
Machine B 10/5/13 (c) 15,000 5 SYD 46,667 (d)
Machine C 8/2/12 210,000 5,000 10 SL (e) (f)
Machine D 2/12/(g) 148,000 25,000 5 DDB 29,600 (h)

Instructions
Complete the table for the year ended December 31, 2015. The company depreciates all assets using the
half-year convention.

2 3 E11-8B (Depreciation Computation—Replacement, Nonmonetary Exchange) Sachs Corporation bought

a machine on October 1, 2010, for $68,000, f.o.b. the place of manufacture. Freight to the point where it
was set up was $300, and $700 was expended to install it. The machine’s useful life was estimated at 10
years, with a salvage value of $4,000. On October 1, 2013, an essential part of the machine is replaced, at
a cost of $7,000, with one designed to reduce the cost of operating the machine. The cost of the old part
and related depreciation cannot be determined with any accuracy.
On October 1, 2016, the company buys a new machine of greater capacity for $86,000, delivered, trad-
ing in the old machine which has a fair market value and trade-in allowance of $22,000. To prepare the
old machine for removal from the plant cost $75, and expenditures to install the new one were $3,000. It
is estimated that the new machine has a useful life of 10 years, with a salvage value of $10,000 at the end
of that time. The exchange has commercial substance.

Instructions
Assuming that depreciation is to be computed on the straight-line basis, compute the annual deprecia-
tion on the new equipment that should be provided for the fiscal year beginning October 1, 2014.
4 E11-9B (Composite Depreciation) Presented below is information related to Gant Manufacturing
Corporation.
Asset Cost Estimated Salvage Estimated Life (in years)
A $121,500 $16,500 10
B 100,800 14,400 9
C 108,000 10,800 9
D 57,000 4,500 7
E 70,500 7,500 6
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B Exercises • 3

Instructions
(a) Compute the rate of depreciation per year to be applied to the plant assets under the composite
method.
(b) Prepare the adjusting entry necessary at the end of the year to record depreciation for the year.
(c) Prepare the entry to record the sale of asset D for cash of $14,400. It was used for 6 years, and
depreciation was entered under the composite method.
2 3 E11-10B (Depreciation Computations, SYD) Vans Company purchased a piece of equipment at the be-
ginning of 2011. The equipment cost $860,000. It has an estimated service life of 8 years and an expected
salvage value of $140,000. The sum-of-the-years’-digits method of depreciation is being used. Someone
has already correctly prepared a depreciation schedule for this asset. This schedule shows that $120,000
will be depreciated for a particular calendar year.
Instructions
Show calculations to determine for what particular year the depreciation amount for this asset will be $120,000.
2 3 E11-11B (Depreciation—Change in Estimate) Machinery purchased for $100,000 by Deer Co. in 2010 was
originally estimated to have a life of 10 years with a salvage value of $20,000 at the end of that time.
Depreciation has been entered for 5 years on this basis. In 2015, it is determined that the total estimated life
should be 9 years with a salvage value of $6,000 at the end of that time. Assume straight-line depreciation.
Instructions
(a) Prepare the entry to correct the prior years’ depreciation, if necessary.
(b) Prepare the entry to record depreciation for 2015.
2 3 E11-12B (Depreciation Computation—Addition, Change in Estimate) In 1992, Lincoln Company com-
pleted the construction of a building at a cost of $4,000,000 and first occupied it in January 1995. It was
estimated that the building will have a useful life of 40 years and a salvage value of $200,000 at the end
of that time.
Early in 2002, an addition to the building was constructed at a cost of $1,500,000. At that time it was
estimated that the remaining life of the building would be, as originally estimated, an additional 32 years,
and that the addition would have a life of 32 years, and a salvage value of $20,000.
In 2016, it is determined that the probable life of the building and addition will extend to the end of
2054 or 10 years beyond the original estimate.
Instructions
(a) Using the straight-line method, compute the annual depreciation that would have been charged
from 1995 through 2001.
(b) Compute the annual depreciation that would have been charged from 2002 through 2015.
(c) Prepare the entry, if necessary, to adjust the account balances because of the revision of the esti-
mated life in 2016.
(d) Compute the annual depreciation to be charged beginning with 2016.
2 3 E11-13B (Depreciation—Replacement, Change in Estimate) Buhner Company constructed a building at
a cost of $3,000,000 and occupied it beginning in January 1995. It was estimated at that time that its life
would be 40 years, with no salvage value.
In January 2015, a new roof was installed at a cost of $500,000, and it was estimated then that the build-
ing would have a useful life of 25 years from that date. The cost of the old roof was $200,000.
Instructions
(a) What amount of depreciation should have been charged annually from the years 1995 to 2014?
(Assume straight-line depreciation.)
(b) What entry should be made in 2015 to record the replacement of the roof?
(c) Prepare the entry in January 2015, to record the revision in the estimated life of the building, if
necessary.
(d) What amount of depreciation should be charged for the year 2015?
2 3 E11-14B (Error Analysis and Depreciation, SL and SYD) Suzuki Company shows the following entries
in its Equipment account for 2015. All amounts are based on historical cost.
Equipment
2015 2015
Jan. 1 Balance 212,000 Mar. 15 Cost of equipment sold
Apr. 2 Purchases 81,000 (purchased prior
6 Freight on equipment to 2011) 20,000
purchased 500
10 Installation costs 3,000
Nov. 12 Repairs 1,250
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4 • Chapter 1 1 Depreciation, Impairments, and Depletion

Instructions
(a) Prepare any correcting entries necessary.
(b) Assuming that depreciation is to be charged for a full year on the ending balance in the asset
account, compute the proper depreciation charge for 2015 under each of the methods listed
below. Assume an estimated life of 10 years, with no salvage value. The machinery included in the
January 1, 2015, balance was purchased in 2013.
(1) Straight-line.
(2) Sum-of-the-years’-digits.
2 3 E11-15B (Depreciation for Fractional Periods) On June 15, 2016, Simply Company sells equipment that
it purchased for $300,000 on April 10, 2010. It was originally estimated that the equipment would have a
life of 10 years and a salvage value of $25,000 at the end of that time, and depreciation has been com-
puted on that basis. The company uses the straight-line method of depreciation.
Instructions
(a) Compute the depreciation charge on this equipment for 2010, for 2016, and the total charge for the
period from 2011 to 2015, inclusive, under each of the six following assumptions with respect to
partial periods.
(1) Depreciation is computed for the exact period of time during which the asset is owned. (Use
365 days for the base.)
(2) Depreciation is computed for the full year on the January 1 balance in the asset account.
(3) Depreciation is computed for the full year on the December 31 balance in the asset account.
(4) Depreciation for one-half year is charged on plant assets acquired or disposed of during the
year.
(5) Depreciation is computed on additions from the beginning of the month following acquisi-
tion and on disposals to the beginning of the month following disposal.
(6) Depreciation is computed for a full period on all assets in use for over one-half year, and no
depreciation is charged on assets in use for less than one-half year.
(b) Briefly evaluate the methods above, considering them from the point of view of basic accounting
theory as well as simplicity of application.
5 E11-16B (Impairment) Presented below is information related to equipment owned by Davis Company
at December 31, 2014.
Cost $6,750,000
Accumulated depreciation to date 750,000
Expected future net cash flows 5,250,000
Fair value 3,600,000

Assume that Davis will continue to use this asset in the future. As of December 31, 2014, the equipment
has a remaining useful life of 4 years.
Instructions
(a) Prepare the journal entry (if any) to record the impairment of the asset at December 31, 2014.
(b) Prepare the journal entry to record depreciation expense for 2015.
(c) The fair value of the equipment at December 31, 2015, is $3,825,000. Prepare the journal entry (if
any) necessary to record this increase in fair value.
5 E11-17B (Impairment) Assume the same information as E11-16B, except that Davis intends to dispose of
the equipment in the coming year. It is expected that the cost of disposal will be $15,000.
Instructions
(a) Prepare the journal entry (if any) to record the impairment of the asset at December 31, 2014.
(b) Prepare the journal entry (if any) to record depreciation expense for 2015.
(c) The asset was not sold by December 31, 2015. The fair value of the equipment on that date is
$3,975,000. Prepare the journal entry (if any) necessary to record this increase in fair value. It is ex-
pected that the cost of disposal is still $15,000.
5 E11-18B (Impairment) The management of Yastrzemski Inc. was discussing whether certain equipment
should be written off as a charge to current operations because of obsolescence. This equipment has a cost
of $1,200,000 with depreciation to date of $300,000 as of December 31, 2014. On December 31, 2014, man-
agement projected its future net cash flows from this equipment to be $700,000 and its fair value to be
$600,000. The company intends to use this equipment in the future.
Instructions
(a) Prepare the journal entry (if any) to record the impairment at December 31, 2014.
(b) Where should the gain or loss (if any) on the write-down be reported in the income statement?
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B Exercises • 5

(c) At December 31, 2015, the equipment’s fair value increased to $700,000. Prepare the journal entry
(if any) to record this increase in fair value.
(d) What accounting issues did management face in accounting for this impairment?
6 E11-19B (Depletion Computations—Timber) Carter Timber Company owns 10,000 acres of timberland
purchased in 2003 at a cost of $2,000 per acre. At the time of purchase the land without the timber was
valued at $500 per acre. In 2004, Carter built fire lanes and roads, with a life of 30 years, at a cost of
$90,000. Every year Carter sprays to prevent disease at a cost of $8,000 per year and spends $4,000 to
maintain the fire lanes and roads. During 2005, Carter selectively logged and sold 700,000 board feet of
timber, of the estimated 2,000,000 board feet. In 2004, Carter planted new seedlings to replace the trees
cut at a cost of $100,000.
Instructions
(a) Determine the depreciation expense and the cost of timber sold related to depletion for 2005.
(b) Carter has not logged since 2005. If Carter logged and sold 900,000 board feet of timber in 2016,
when the timber cruise (appraiser) estimated 4,000,000 board feet, determine the cost of timber
sold related to depletion for 2016.
6 E11-20B (Depletion Computations—Oil) Hometown Oil Company has leased property on which oil has
been discovered. Wells on this property produced 32,000 barrels of oil during the past year that sold at an
average sales price of $90 per barrel. Total oil resources of this property are estimated to be 500,000 barrels.
The lease provided for an outright payment of $1,200,000 to the lessor (owner) before drilling could
be commenced and an annual rental of $51,200. A premium of 5% of the sales price of every barrel of
oil removed is to be paid annually to the lessor. In addition, Hometown Oil (lessee) is to clean up all
the waste and debris from drilling and to bear the costs of reconditioning the land for farming when
the wells are abandoned. The estimated fair value, at the time of the lease, of this clean-up and recon-
ditioning is $265,000.
Instructions
From the provisions of the lease agreement, compute the cost per barrel for the past year, exclusive of
operating costs, to Hometown Oil Company.
6 E11-21B (Depletion Computations—Timber) Fisk Company owns a 8,000-acre tract of timber pur-
chased in 2007 at a cost of $1,500 per acre. At the time of purchase the land was estimated to have a value
of $500 per acre without the timber. Fisk Company has not logged this tract since it was purchased. In
2014, Fisk had the timber cruised. The cruise (appraiser) estimated that each acre contained 5,000 board
feet of timber. In 2014, Fisk built 10 miles of roads at a cost of $8,000 per mile. After the roads were com-
pleted, Fisk logged and sold 3,500 trees containing 1,000,000 board feet.
Instructions
(a) Determine the cost of timber sold related to depletion for 2014.
(b) If Fisk depreciates the logging roads on the basis of timber cut, determine the depreciation expense
for 2014.
(c) If Fisk plants five seedlings at a cost of $2 per seedling for each tree cut, how should Fisk treat the
reforestation?
6 E11-22B (Depletion Computations—Mining) Aaron Company purchased land on February 1, 2014, at
a cost of $2,000,000. It estimated that a total of 50,000 tons of mineral was available for mining. After it
has removed all the natural resources, the company will be required to restore the property to its previous
state because of strict environmental protection laws. It estimates the fair value of this restoration obliga-
tion at $200,000. It believes it will be able to sell the property afterwards for $300,000. It incurred devel-
opmental costs of $500,000 before it was able to do any mining. In 2014 resources removed totaled 10,000
tons. The company sold 5,000 tons.
Instructions
Compute the following information for 2014. (Round to two decimals.)
(a) Per unit mineral cost.
(b) Total material cost of December 31, 2014, inventory.
(c) Total materials cost in cost of goods sold at December 31, 2014.
6 E11-23B (Depletion Computations—Mining) Levi Company purchased land on February 1, 2014, at a
cost of $5,000,000. It estimated that a total of 50,000 tons of ore is available for mining. After it has
removed the ore, the company will be required by law to restore the property to its previous state. It
estimates the fair value of this restoration obligation at $400,000. It believes it will be able to sell the
property afterwards for $800,000. It incurred developmental costs of $1,000,000 before it was able to do
any mining. In 2014 resources removed totaled 30,000 tons. The company sold 22,000 tons.
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6 • Chapter 1 1 Depreciation, Impairments, and Depletion

Instructions
Compute the following information for 2014. (Round to two decimals.)
(a) The total amount of depletion for 2014.
(b) The amount that is changed as an expense for 2014 for the cost of the minerals sold during 2014.
7 E11-24B (Ratio Analysis) The 2012 Annual Report of Brinker International contains the following
information.
(in millions) June 29, 2011 June 27, 2012
Total assets $1,484 $1,436
Total liabilities 1,045 1,126
Net sales 2,761 2,820
Net income 141 151

Instructions
Compute the following ratios for Brinker International for 2012.
(a) Asset turnover ratio.
(b) Rate of return on assets.
(c) Profit margin on sales.
(d) How can the asset turnover ratio be used to compute the rate of return on assets?
8 *E11-25B (Book vs. Tax (MACRS) Depreciation) Package Corp. purchased a delivery truck on January 1,
2014, at a cost of $54,000. The truck has a useful life of 6 years with an estimated salvage value of $6,000.
The straight-line method is used for book purposes. For tax purposes the truck, having an MACRS class
life of 6 years, is classified as 5-year property; the MACRS tax rate tables are used to compute deprecia-
tion. In addition, assume that for 2014 and 2015 the company has revenues of $600,000 and operating
expenses (excluding depreciation) of $440,000.

Instructions
(a) Prepare income statements for 2014 and 2015. (The final amount reported on the income statement
should be income before income taxes.)
(b) Compute taxable income for 2014 and 2015.
(c) Determine the total depreciation to be taken over the useful life of the delivery truck for both book
and tax purposes.
(d) Explain why depreciation for book and tax purposes will generally be different over the useful life
of a depreciable asset.
8 * E11-26B (Book vs. Tax (MACRS) Depreciation) Blue Corp. purchased computer equipment on July 1,
2014, 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.

Instructions
(a) Assuming that the company uses the straight-line method for book and tax purposes, what is the
depreciation expense reported in (1) the financial statements for 2014 and (2) the tax return for 2014?
(b) Assuming that the company uses the double-declining-balance method for both book and tax pur-
poses, what is the depreciation expense reported in (1) the financial statements for 2014 and (2)
the tax return for 2014?
(c) Why is depreciation for tax purposes different from depreciation for book purposes even if the
company uses the same depreciation method to compute them both?