CHAPTER 55

DEPRECIATION
Straight line and variable method

Problem 55-1 (AICPA Adapted)

At the beginning of current year, Lem Company bought machinery under a contact that required
a down payment of P100,000, plus 24 monthly payments of P50,000 each, for total cash
payments of P1,300,000. The cash price of the machinery was P1,100,000.

The machinery has a useful life of 10 years and residual value of P50,000. The entity used straight
line depreciation.

What amount should be reported as depreciation for the current year?

a. 105,000
b. 110.000
c. 125,000
d. 130,000

SO2 55 I Answer 4
Cost of machinery 1,100,000
Residual value (50,000)
Depreciable amount 1,050,000

Straight line depreciation (1,050,000/10) 105,000

If an asset is acquired by installment, the cost is equal to the cash price or present value of future
payments.

The difference between the total payments and cash price is an interest expense.

Down payment 100,000

Monthly payments (50,000 x 24) 1,200,000
Total cash payments 1,300,000
Cash price (1,100,000)
Interest expense 200,000

Problem 55-2 (AICPA Adapted)

Poe Company disclosed that the depreciation policy on machinery is as follows:
• A full year depreciation is taken in the year of acquisition.
• No depreciation is taken in the year of disposition.

The estimated useful life is five years.

• The straight line method is used.

On June 30, 2019, the entity sold for P2,300,000 machine acquired in 2016 for P4,200,000. The
residual value was P600,000.

What amount of gain on the disposal should be recorded in 2019?

a. 140,000
b. 260,000
c. 620,000
d. 980,000

Solution 55-2 Answer b

Sale price 2,300,000
Carrying amount of machine:
Cost - 2016 4,200,000
Accumulated depreciation - 12/31/2018
(4,200,000 - 600,000/5 x 3 years) 2,160,000 2,040,000
Gain on disposal 260,000

No depreciation is recognized from January 1 to June 30, 2019 because the depreciation policy is
that no depreciation is taken in the year of disposition and full year depreciation in the year
acquisition.

Problem 55-3 (AICPA Adapted)

At the beginning of current year. Diamond Company acquired P1,000,000 a new machinery with
useful life of 10 years.

The machine had drum costing P200.000 that must be replaced under five years.

Continued operation of the machine required an inspection every four years after purchase and
the inspection cost is P80,000. The straight line method of depreciation is used.
What is the depreciation for the current year?
a. 100,000
b. 108,000
c. 120,000
d. 140,000

Solution 55-3 Answer c

Depreciation of machinery (1,000,000 - 200,000/10) 80,000
Depreciation of drum (200,000/5) 40,000
Total depreciation for the current year 120,000

Problem 55-4 (IAA)

On March 30, 2018, Camia Company purchased a drilling machine for P8,400,000. The estimated
useful life of the machine is 10 years with no residual value. An important component of the
machine is the drill housing component that will need to be replaced in five years.

The P2,000,000 cost of the drill housing component is included in the P8.400.000 cost of the
machine. The entity used the straight-line depreciation. The fiscal year ends on December 31.

What total amount of depreciation should be recorded in 2018?

a. 630,000
b. 840,000
c. 780,000
d. 480,000

Solution 55-4 Answer c

Depreciation - drilling machine (6,400,000/10 x 9/12) 480,000
Depreciation-drill housing component
(2,000,000/ 5 x 9/12) 300,000
Total depreciation for 2018 780,000

Problem 55-5 (IAA)

Jade Company acquired a new milling machine on April 1, 2012. Th. machine has a special
component that required replacement before the end of the useful life. The asset was originally
recorded in two account one representing the main unit and the other for the special component
Depreciation is recorded by the straight line method and residual value is disregarded.
On April 1. 2018, the special component is scrapped and is replaced with a similar component.
This new component is expected to have a residual value of approximately 20% of cost at the end
of the useful life of the main unit, and because of materiality, the residual value will be
considered in calculating depreciation.

Main milling machine:

Purchase price in 2012 7,500,000
Residual value 100,000
Estimated useful life 10 years
First special component:
Purchase price 1,200,000
Residual value 60,000
Estimated useful life 6 years
Second special component:
Purchase price 2,000,000
Residual value (20% x 2,000,000) 400,000

What is the total depreciation for 2018?

a. 1,100,000
b. 1,087,500
C. 1.350.000
d. 1,175,000

Solution 55-5 Answer a

Main machine (7,500,000/10) 750,000
First component -- from January 1 to April 1, 2018
(1,200,000/6 x 3/12) 50,000
Second component -- from April) to December 31, 2018
(2,000,000 - 400,0000/4 x 9/12) 300,000
Total depreciation for 2018 1,100,000

The second component is depreciated over the remaining life of the main machine of 4 years.

The original life of the main machine is 10 years and 6 years already expired from April 1, 2012 to
April 1, 2018.
Problem 55-6 (AICPA Adapted)
Lester Company provided the following:
Total cost Residual value Estimated life
Machine A 5,500,000 500,000 20
Machine B 2,000,000 200,000 15
Machine C 400,000 5
The entity computed depreciation on the straight line method.

1. What is the composite life of the assets?

a. 13.3
b. 16.0
c. 18.0
d. 19.8

2. What is the composite rate of depreciation?

a. 6.25%
b. 5.70%
c. 2.50%
d. 7.50%

Solution 35-6
Question 1 Answer b
Cost Residual Depreciable Life Annual
Value amount depreciation
A 5,500,000 500,000 5,000,000 20 250,000
B 2,000,000 200,000 1,800,000 15 120,000
C 400,000 400,000 5 80,000
7,900,000 7,200,000 450,000

Composite life = 7,200,000/450,000

16 years

Question 2 Answer b

Composite life = Total annual depreciation / total cost

= 450,000/7,900,000 = 5.7%
Problem 55-7 (IAA)
Norraine Company used the composite method of depreciation based on a composite rate of
25%. At the beginning of 2018, the total cost of equipment was P5,000,000 with a total residual
value of P600,000 and accumulated depreciation of P3,000,000.

In January 2018, the entity purchased an equipment for P2,500,000 with no residual value.

At the end of 2018, the entity sold an equipment with an original cost of P1,000,000 and a
residual value of P200,000 for P350,000. This asset was acquired on January 1, 2016.

1. What is the depreciation for 2018?

a. 1,625,000
b. 1,875,000
c. 1.125.000
d. 975,000

2. What is the gain or loss from the derecognition of the asset on December 31, 2018?
a. 100,000 gain
b. 150,000 loss
c. 50,000 loss
d. 0

Solution 55-7
Question 1 Answer a

Total cost - January 1, 2018 5,000,000

Cost of new asset acquired 2,500,000
Cost of asset sold (1,000,000)
Remaining cost - December 31, 2018 6,500,000
Depreciation for 2018 (25% x 6,500,000) 1,625,000

Question 2 Answer d
Under the composite method, no gain or loss is recognized on the derecognition of an asset.
Cash 350,000
Accumulated depreciation 650,000
Equipment 1,000,000
Problem 55-8 (AICPA Adapted)
Canada Company purchased a machine at an invoice price. P4,500,000 with terms 2/10, n/30.
The entity paid the required amount for the machine beyond the discount period.

The entity paid P80,000 for delivery of the machine and P310,000 for installation and testing. The
machine was ready for use on January 1, 2018.

It was estimated that the machine would have a useful life of 5 years and a residual value of
P800,000.

Engineering estimate indicated that the useful life in productive units was 200,000.

Units actually produced during the first two years were 30,000 in 2018 and 48,000 in 2019. The
entity decided to use the output method of depreciation.

What is the accumulated depreciation of the machine on December 31, 2019?

a. 1,560,000
b. 1,600,000
c. 960,000
d. 600,000

Solution 55-8 Answer a

Invoice price 4,500,000
Cash discount (2% x 4,500,000) (90,000)
Delivery cost 80,000
Installation and testing 310,000
Total cost 4,800,000
Residual value (800,000)
Depreciable amount 4,000,000

Rate per unit (4,000,000/200,000) 20

Depreciation for 2018 (30,000 x 20) 600,000

Depreciation for 2019 (48,000 x 20) 960,000
Accumulated depreciation - December 31, 2019 1,560,000
Problem 55-9 (IFRS)
Tania Company purchased a boring machine on January 1, 2018 for P3,100,000. The useful life of
the machine is estimated at 3 years with a residual value at the end of this period of P600,000.

During the useful life, the expected units of production are 12,000 units in 2018, 7,000 units in
2019, and 6,000 units in 2020.

What is the depreciation expense for 2019 using the appropriate depreciation method?
a. 2,100,000
b. 2,268,000
c. 3,600,000
d. 1,800,000

Solution 55-9 Answer a

Rate per unit (8,100,000 --600,000/25,000 bits) 300

Depreciation for 2019 (7,000 x 300) 2,100,000

Problem 55-10 (IAA)

Leonard Company acquired a machine on July 1, 2018 and paid P5,200,000 including freight
P50,000 and installation P150,000. The estimated life of the machine is 8 years or a total of
100,000 working hours with no residual value.

The operating hours of the machine totaled 5,000 hours in 2018 and 12,000 hours in 2019. The
entity followed the working hours method of depreciation.

On December 31, 2019, what is the carrying amount of the machine?

a. 3,900,000
b. 4,299.000
c. 4,940,000
d. 4,316,000

Solution 55-10 Answer d

Cost -- July 1, 2018 5,200,000
Accumulated depreciation - December 31, 2019
(17,000 hours x 52) 884,000
Carrying amount -- December 31, 2019 4,316,000

Rate per hour (5,200,000/100,000) 52