| 5. | At
the time of the expenditure, the accumulated depreciation was ($50,000/8) ×
4 = $25,000,
The expenditure reduces the accumulated depreciation to $10,000
and increases the total useful
life to 12 years. Therefore, the new depreciation
expense is $10,000/(12 − 4) = $1,250 per year. | | | |
| | Account/Explanation | Post.
Ref. | Dr. | Cr. |
| | | | | |
| | Accumulated
Depreciation—Computer | | 15,000 | |
| | Cash | | | 15,000 |
| | | | | |
| | Depreciation
Expense—Computer | | 1,250 | |
| | Accumulated
Depreciation—Computer | | | 1,250 |
| | | |
| 6. |
Depreciation
is the allocation of the cost of a plant and equipment asset
to expense over the
estimated useful life of the asset. Depreciation is an application of the
matching principle. |
| 7. |
Straight-line
depreciation allocates an equal amount of asset cost to
depreciation expense each
time period of an asset’s useful life. Double-declining balance is an
accelerated method that
allocates more cost into expense each time period
early in an asset’s life and less expense later in
an asset’s life.
Units of production depreciation allocates cost into expense only as an asset
is
used, so obsolescence and the passing of time is not a significant issue. | | As
a manager I might be less interested in the best theoretical matching and more
interested in
the effects on the financial statements. Straight-line will
have the same effect on net income
each year. Double-declining depreciation
will result in less net income in early years and more
net income in later
years because the depreciation expense is more in the early years. However,
this
method will result in greater tax savings (more deductible expense) in early years
and less
in later years. If obsolescence were not a factor and the asset would
not be used at the same rate
each period, units of production would be a good
choice. However, the effect on the financial
statements would depend on how
much the asset was used. | | 8. | |
| | Account/Explanation | Post.
Ref. | Dr. | Cr. |
| | | | | |
| | Accumulated
Depreciation—Machinery | | 60,000 | |
| | Loss
on Retirement | | 40,000 | |
| | Machinery | | | 100,000 |
| | | | | |
| | | Accumulated
depreciation: ($100,000 − $10,000)/6 = $15,000 per year. 4 × $15,000
= $60,000. |
| |
