CHAPTER 27: DEPRECIATION

Problem 27-5 (AICPA Adapted)

Silent Company provided the following schedule of machinery:
Estimated Useful life
Total cost residual value in year
Machine A 550,000 50,000 20
Machine B 200,000 20,000 15
Machine C 40,000 5
What is the composite life of the assets?

a. 13.3
b. 16.0
c. 18.0
d. 19.8
Solution:
Asset Cost Residual Depreciable Useful Life Annual
Value Amount Depreciation
Machine A 550,000 50,000 500,000 20 25,000
Machine B 200,000 20,000 180,000 15 12,000
Machine C 40,000 40,000 5 8,000
790,000 70,000 720,000 45,000
The composite life of the assets is determined by dividing the total depreciable amount by total
annual depreciation. Thus, 720,000 divided by 45,000 equals 16 years.

Problem 27-6 (IAA)

Norraine Company used the composite method of depreciation based on a composite rate of
25%.

At the beginning of 2020, the total cost of equipment was P5,000,000 with a total residual value
of P600,000. The accumulated depreciation was P3,000,000 at that time.

In January 2020, the entity purchased an equipment for P2,500,000 with no residual value.

At the end of 2020, the entity sold an equipment with an original cost of P1,000,000 and a
residual value of P200,000 for P350,000. The asset was acquired on January 1, 2018.

1. What is the depreciation for 2020?

a. 1,625,000
b. 1,875,000
c. 1,125,000
d. 975,000
Solution:
Total cost - January 1, 2020 5,000,000
Cost of new assets acquired 2,500,000
Cost of asset sold
(1,000,000)
Remaining cost - December 31, 2020 6,500,000

Depreciation for 2020 (6,500,000 x 25%) 1,625,000

2. What is the gain or loss from the derecognition of the asset on December 31, 2020?

a. 100,000 gain
b. 150,000 loss
c. 50,000 loss
d. 0

Under the composite method, no gain or loss is recognized on the derecognition of an asset.

Problem 27-7 (AICPA Adapted)

Parable Company revealed the following depreciation policy on machinery:

 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, 2020, the entity sold for P2,300,000 a machine acquired in 2017 for P4,200,000.
The estimated residual value was P600,000.

What amount of gain on disposal should be recorded in 2020?

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

Solution:
Sales price 2,300,000
Carrying amount of machine:
Cost - 2017 4,200,000
Accumulated depreciation - December 31, 2019
(4,200,000 - 600,000/5 x 3 years) 2,160,000 2,040,000
Gain on disposal 260,000
Problem 27-8 (AICPA Adapted)
Wishful Company used straight line depreciation for the property, plant and equipment which
consisted of the following at the end of each year:

2020 2021
Land 250,000 250,000
Building 1,950,000 1,950,000
Machinery and equipment 6,500,000 6,950,000
Accumulated depreciation 3,700,000 4,000,000

The depreciation expense for 2020 and 2021 was P500,000 and P550,000, respectively.

What amount was debited to accumulated depreciation during 2021 because of property, plant
and equipment retirement?

a. 400,000
b. 250,000
c. 200,000
d. 100,000

Solution:
Accumulated depreciation - December 31, 2020 3,700,000
Add: Depreciation for 2021 550,000
Total 4,250,000
Less: Accumulated depreciation on PPE retirement (SQUEEZE) 250,000
Accumulated depreciation - December 31, 2021 4,000,000

Problem 27-9 (ACP)

Bitter Company acquired a machinery on April 1, 2020.
Cost 1,200,000
Residual value 120,000
Estimated useful life 8 years

1. What is the depreciation for 2020 using sum of years’ digits?

a. 180,000
b. 240,000
c. 120,000
d. 160,000

Solution:
Depreciation for each year of the useful life:
From April 1, 2020 to March 31, 2021 (1,080,000 x 8/36)
240,000
 From April 1, 2021 to March 31, 2022 (1,080,000 x 7/36)
210,000

Depreciation for 2020 (240,000 x 9/12)

180,000

2. What is the depreciation for 2021 using sum of years’ digits?

a. 157,500
b. 217,500
c. 210,000
d. 105,000

Solution:
SYD = 1+2+3+4+5+6+7+8 = 36

Depreciation for each year of the useful life

From April 1, 2020 to March 31, 2021 (1,080,000 x 8/36)
240,000
From April 1, 2021 to March 31, 2022 (1,080,000 x 7/36)
210,000

Depreciation for 2021

(240,000 x 3/12)
60,000
(210,000 x 9/12)
157,500

217,500
3. What is the depreciation for 2020 using double declining balance?

a. 300,000
b. 150,000
c. 225,000
d. 202,500

Solution:
Straight line rate (100%/8 years) 12.5%
Double declining rate (12.5% x 2) 25%
2020 (1,200,000 x 25% x 9/12) 225,000

4. What is the depreciation for 2021 using double declining balance?

a. 270,000
b. 135,000
 c. 243,750
d. 150,000

Solution:
Straight line rate (100%/8 years) 12.5%
Double declining rate (12.5% x 2) 25%
2021 (975,000 x 25%)
243,750

Problem 27-10 (AICPA Adapted)

On January 1, 2020, Domino Company purchased a new machine for P4,000,000. The new
machine has an estimated useful life of eight years and the residual value was estimated to be
P400,000.

Depreciation was computed on the sum of the years’ digits method.

What is the carrying amount of the machine on December 31, 2021?

a. 2,100,000
b. 2,500,000
c. 1,150,000
d. 3,300,000

Solution:
SYD = 1+2+3+4+5+6+7+8 = 36

Cost
4,000,000
Accumulated depreciation:
2020(3,600,000 x 8/36) 800,000
2021(3,600,000 x 7/36) 700,000 1,500,000
Carrying amount - December 31, 2021 2,500,000

Problem 27-11 (AICPA Adapted)

On January 1, 2018, Mogul Company acquired equipment to be used in the manufacturing
operations.

The equipment has an estimated useful life of 10 years and an estimated residual value of
P50,000.

The depreciation applicable to this equipment was P240,000 for 2020 computed under the sum
of years’ digits method.

What was the acquisition cost of the equipment?

 a. 1,650,000
b. 1,700,000
c. 2,400,000
d. 2,450,000

Solution:
SYD = 1+2+3+4+5+6+7+8+9+10 = 55

The first three fractions are 10/55 for 2017, 9/55 for 2018, and 8/55 for 2019.
The fractions are developed by getting the sum of the digits in the useful life of the asset. Thus,
the 2020 depreciation of 240,000 is equal to 8/55.
Depreciable cost (240,000/8/55) 1,650,000
Residual value 50,000
Total cost of the equipment 1,700,000

Problem 27-12 (AICPA Adapted)

On April 1, 2020, Kingdom Company purchased new machinery for P3,000,000. The machinery
has an estimated useful life of five years and depreciation is computed by the sum of years’ digits
method.

What is the accumulated depreciation of the machinery on March 31, 2022?

a. 1,920,000
b. 1,800,000
c. 1,200,000
d. 1,000,000

Solution:
SYD = 1+2+3+4+5 = 15
Depreciation for each year of the useful life
From April 1, 2020 to March 31, 2021 (3,000,000 x 5/15)
1,000,000
From April 1, 2021 to March 31, 2022 (3,000,000 x 4/15)
800,000
1,800,000
Problem 27-13 (AICPA Adapted)
Sahaya Company takes a full depreciation expense in the year of acquisition, and no depreciation
expense in the year of disposition. An asset was acquired in 2017.

Cost 1,100,000
Residual value 200,000
Accumulated depreciation – January 1, 2020 720,000
Estimated useful life 5 years

Using the same method in 2017, 2018 and 2019, what depreciation should be recorded in 2020?
 a. 120,000
b. 180,000
c. 220,000
d. 240,000

Solution:
The accumulated depreciation on December 31, 2019 is recomputed following a certain method.
The same is arrived at following the SYD as follows:

SYD = 1+2+3+4+5 = 15

2017 (900,000 x 5/15) 300,000

2018 (900,000 x 4/15) 240,000
2019 (900,000 x 3/15) 180,000
Accumulated depreciation - December 31, 2019 720,000

Accordingly, the SYD is followed for 2020

2020 (900,000 x 2/15) 120,000

Problem 27-14 (AICPA Adapted)

Iceberg Company purchased equipment which was installed and put into service January 1, 2020
at a total cost of P1,280,000. Residual value was estimated at P80,000.

The equipment is being depreciated over eight years by the double declining balance method.

What amount of depreciation should be recorded for 2021?

a. 225,000
b. 240,000
c. 300,000
d. 320,000

Solution:
Straight line rate (100%/8 years) 12.5%
Double declining rate (12.5% x 2) 25%
2020 (1,280,000 x 25%) 320,000
2021 [(1,280,000 - 320,000) x 25%] 240,000

Problem 27-15 (IAA)

On January 1, 2020, Contour Company acquired an equipment to be used in operation. The
equipment had a useful life of 8 years and residual value of P300,000.

The depreciation applicable to the equipment was P900,000 for 2021 computed under the double
declining balance method.

What was the acquisition cost of the equipment?

 a. 3,600,000
b. 4,500,000
c. 4,800,000
d. 5,100,000

Solution:
Straight line rate (100%/8 years) 12.5%
Double declining rate (12.5% x 2) 25%

Carrying amount - January 1, 2021 (900,000/25%) 3,600,000

Acquisition cost - January 1, 2020 (3,600,000/75%) 4,800,000

Problem 27-16 (AICPA Adapted)

Ambitious Company showed the following schedule of depreciable assets on January 1. 2020.

Accumulated Acquisition
Asset Cost depreciation date Residual

A 4,000,000 2,560,000 2018 400,000

B 2,000,000 1,440,000 2017 200,000
C 2,800,000 1,344,000 2017 560,000

The useful life of each asset is 5 years. The entity takes a full depreciation in the year of
acquisition and no depreciation in the year of disposition.

Asset C was sold for P1,700,000 on June 30, 2020.

Asset A is depreciated under the double declining method.

1. What is the depreciation of asset A for 2020?

a. 1,600,000
b. 1,440,000
c. 416,000
d. 576,000

Solution:
Straight line rate (100%/5 years) 20%
Double declining rate (20% x 2) 40%
2020 [(4,000,000 - 2,560,000) x 40%] 576,000

2. What is the depreciation of Asset B for 2020 assuming same method in prior years?
 a. 240,000
b. 480,000
c. 360,000
d. 400,000

Solution:
SYD = 1+2+3+4+5 = 15
2017 (1,800,000 x 5/15)
600,000
2018 (1,800,000 x 4/15)
480,000
2019 (1,800,000 x 3/15)
360,000
Accumulated depreciation - December 31, 2019 1,440,000
Accordingly, the SYD is followed for 2020
2020 (1,800,000 x 2/15) 240,000
3. What is the gain on sale of Asset C?

a. 244,000
b. 464,000
c. 356,000
d. 804,000

Solution:
Sales price 1,700,000
Carrying amount of machine:
Cost - 2017 2,800,000
Accumulated depreciation - December 31, 2019 1,344,000 1,456,000
Gain on sale 244,000

Problem 27-17 (AICPA Adapted)

Tarnish Company purchased equipment on January 1, 2020 for P5,000,000. The equipment had
an estimated 5-year useful life. The accounting policy for 5-year assets is to use the 200% double
declining balance method for the first two years of the asset’s life and then switch to straight line
depreciation.

On December 31, 2022, what amount should be reported as accumulated depreciation?

a. 3,000,000
b. 3,800,000
c. 3,920,000
d. 4,200,000

Solution:
Straight line rate (100%/5 years) 20%
Double declining rate (20% x 2) 40%
2020 (5,000,000 x 40%) 2,000,000
2021 (3,000,000 x 40%) 1,200,000
Accumulated depreciation - December 31, 2021 3,200,000
Depreciation for 2022 - straight line [(5,000,000 - 3,200,000)/3 years] 600,000
Accumulated depreciation - December 31, 2022 3,800,000

Problem 27-18 (IAA)

Saga Company purchased a machinery on January 1, 2017 for P7,200,000. The machinery had
useful life of 10 years with no residual value and was depreciated using the straight line method.

In 2020, a decision was made to change the depreciation method from straight line to sum of
years’ digits. The estimate of useful life and residual value remained unchanged.

What is the depreciation for 2020?

a. 1,260,000
b. 1,440,000
c. 916,360
d. 720,000

Solution:
Cost - January 1, 2017 7,200,000
Accumulated depreciation - December 31, 2019 (7,200,000/10 x 3 years) 2,160,000
Carrying amount - December 31, 2019 5,040,000

SYD for remaining years = 1+2+3+4+5+6+7 = 28

Depreciation for 2020 (5,040,000 x 7/28) 1,260,000

Problem 27-19 (AICPA Adapted)

On January 1, 2018, Bride Company purchased for P2,400,000 a machine with a useful life of
ten years and no residual value. The machine was depreciated by the double declining balance
method. The entity changed to the straight line method on January 1, 2020.

What is the depreciation for 2020?

a. 153,600
b. 192,000
c. 240,000
d. 307,200

Solution:
Straight line rate (100%/10 years) 10%
Double declining rate (10% x 2) 20%
Year Particular Depreciation Accumulated Carrying
Depreciation Amount
2,400,000
2018 20% x 2,400,000 480,000 480,000 1,920,000
2019 20% x 1,920,000 384,000 864,000 1,536,000
Depreciation for 2020 - straight line (1,536,000/8 years) 192,000

Problem 27-20 (IAA)

On January 1, 2020, Layman Company purchased personal computers for P6,000,000. The
management estimated that the computers would last approximately 4 years with residual value
of P600,000. The entity used the double declining balance method.

During January 2021, the management realized that technological advancement had made the
computers virtually obsolete and proceed changing the remaining useful life to 2 years.

What amount of depreciation should be recognized for 2021?

a. 3,000,000
b. 2,400,000
c. 1,500,000
d. 1,200,000

Solution:
Straight line rate (100%/4 years) 25%
Double declining rate (25% x 2) 50%

Cost 6,000,000
Depreciation for 2020 (50% x 6,000,000) 3,000,000
Carrying amount - January 1, 2021 3,000,000
Residual value
(600,000)
Maximum depreciation in 2021 2,400,000
Problem 27-21 (IAA)
Spiderman Company purchased a machine on January 1, 2017 for P3,760,000. The machine was
estimated to have a useful life of five years and a residual value of P240,000. The entity used the
sum of years’ digits method of depreciation.

On January 1, 2020, the entity determined that the total useful life of the machine should have
been for years and the residual value is P352,000.

What amount should be recorded as depreciation for 2020?

a. 192,000
b. 444,000
c. 592,000
 d. 704,000

Solution:
SYD = 1+2+3+4+5 = 15

Accumulated fraction for 2017, 2018 and 2019 (5/15 + 4/15 + 3/15) 12/15

Cost - January 1, 2017 3,760,000

Accumulated depreciation - [(3,760,000 - 240,000) x 12/15] 2,816,000
Carrying amount - January 1, 2020 944,000
Residual value 352,000
Remaining depreciable amount 592,000

Since the remaining useful life is only one year, the remaining depreciable amount is charged to
depreciation expense for 2020.

Problem 27-22 (IAA)

Superman Company acquired a machine on January 1, 2018 for P10,000,000. The machine had
an 8-year useful life with a P1,000,000 residual value and was depreciated using the sum of
years’ digits method.

In January 2020, the entity estimated that the asset’s useful life from the date of acquisition
should have been 6 years and the residual value is P400,000.

What is the accumulated depreciation on December 31, 2020?

a. 5,212,500
b. 6,090,000
c. 4,400,360
d. 6,250,000

Solution:
SYD = 1+2+3+4+5+6+7+8 = 36

Cost - January 1, 2018

10,000,000
Accumulated depreciation:
2018(9,000,000 x 8/36) 2,000,000
2019(9,000,000 x 7/36) 1,750,000 3,750,000
Carrying amount - January 1, 2020 6,250,000

Remaining life (6 years - 2 years) 4 years

SYD = 1+2+3+4 = 10

Accumulated depreciation - January 1, 2020 3,750,000

Depreciation for 2020 [(6,250,000 - 400,000) x 4/10] 2,340,000
Accumulated depreciation - December 31, 2020 6,090,000

Problem 27-23 (AICPA Adapted)

Patterson Company provided the following information on January 1, 2020:

Vehicle cost 5,000,000

Useful life in years 5
Useful life in miles 100,000
Residual value 1,000,000

Actual miles driven

2020 30,000
2021 20,000
2022 15,000

1. What is the depreciation for 2022 using the SYD method?

a. 1,000,000
b. 1,333,000
c. 800,000
d. 600,000

Solution:
SYD = 1+2+3+4+5 = 15

Depreciation:
2020[(5,000,000 - 1,000,000) x 5/15] 1,333,333.33
2021(4,000,000 x 4/15) 1,066,666.67
2022(4,000,000 x 3/15) 800,000

2. What is the accumulated depreciation on December 31, 2021 using the double declining
balance method?

a. 1,200,000
b. 1,600,000
c. 2,560,000
d. 3,200,000

Solution:
Straight line rate (100%/5 years) 20%
Double declining rate (20% x 2) 40%
Cost 5,000,000
Depreciation for 2020 (40% x 5,000,000) 2,000,000
Depreciation for 2021 (40% x 3,000,000) 1,200,000
Total 3,200,000

3. What is the accumulated depreciation on December 31, 2022 using the miles driven?

a. 2,000,000
b. 2,600,000
c. 800,000
d. 600,000

Solution:
Y Particular Deprec Accumulated Carrying
e iation Depreciation Amount
a
r
4,000,000
2 30,00 1,200,0 1,200,000 2,800,000
0 0 x 00
2 40
0
2 20,00 800,00 2,000,000 2,000,000
0 0 x 0
2 40
1
2 15,00 600,00 2,600,000 1,400,000
0 0 x 0
2 40
2
2,600,0
00
Under this method, a depreciation rate per mile is computed by dividing the depreciable
amount by the estimated useful life in terms of miles driven. Thus, the rate per mile is
P40, computed by dividing 4,000,000 by 100,000 miles.