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P. 31
Chapter 11
Chapter 11
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Test bank for chapter 11.....intermediate accounting 12th edition
Test bank for chapter 11.....intermediate accounting 12th edition
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CHAPTER 11

DEPRECIATION, IMPAIRMENTS, AND DEPLETION
TRUE-FALSE
Conceptual
Answer No. Description
T 1. Nature of depreciation.F 2. Nature of depreciation.T 3. Depreciation, depletion, and
amortization.T 4. Definition of depreciation base.F 5. Factors involved in depreciation
process.F 6. Definition of inadequacy.T 7. Objection to straight-line method.F 8. Units-
of-production approach.F 9. Accelerated depreciation method.T 10. Declining-balance
method.T 11. Group or composite approach.F 12. Use of the composite approach.T 13.
Accounting for changes in estimates.F 14. Computation of impairment loss amount.T
15. First step in determining an impairment.T 16. Reporting impaired assets held for
disposal.F 17. Method used to compute depletion.T 18. Costs included in depletion
base.F 19. Computing asset turnover ratio.T 20 Profit margin on sales ratio.
MULTIPLE CHOICE
Conceptual
d 21. Knowledge of depreciation accounting.b 22. Conceptual rationale for depreciation
accounting.c 23. Depreciation and retaining funds.b
S
24. Definition of depreciation.a
S
25. Service life vs. physical life.a
P
26. Definition of depreciable cost.d 27. Economic factors affecting useful service life.a
28. Activity method of depreciation.a 29. Units-of-production method of depreciation.d
30. Units-of-production method of depreciation.d 31. Knowledge of double-declining
balance method.c 32. Components of sum-of-the-years'-digits method.c 33. Graphic
depiction of straight-line and sum-of-the-years'-digits methods.b 34. Disadvantage of
using straight-line method.b 35. Group method of depreciation.d 36. Identification of
composite life.
Test Bank for Intermediate Accounting, Twelfth Edition11 - 2
MULTIPLE CHOICE
Conceptual (cont.)
c
P
37. Group method of depreciation.c
S
38. Composite or group depreciation.b 39. Depreciation for part year.c 40. Change in
estimated life of depreciable asset.b 41. Reporting a change in estimate.b 42.
Recording an asset impairment.d 43. Depreciation and liquidating dividends.a 44.
Classification of depletion expense.d 45. Units-of-production depletion expense.d 46.
Reserve recognition accounting.c
S
47. Items part of depletion cost.b
S
48. Required disclosures for depreciation.b
P
49. Definition of book value.d 50. Disclosure of depreciation policy.d 51. Asset turnover
ratio.c *52. Objectives of MACRS method.d *53. Factors to consider in MACRS tax
depreciation.c *54. Effect of accelerated depreciation on the income statement.
P
These questions also appear in the Problem-Solving Survival Guide.
S
These questions also appear in the Study Guide.* This topic is dealt with in an Appendix
to the chapter.
MULTIPLE CHOICE
Computational
c 55. Factors involved in depreciation.c 56. Calculate depreciation using activity
method.b 57. Calculate depreciation using activity method.c 58. Calculate depreciation
using double-declining balance method.b 59. Calculate depreciation using activity
method.c 60. Calculate depreciation using double-declining balance method.b 61.
Calculate depreciation using double-declining balance.b 62. Calculate depreciation
using double-declining balance.b 63. Calculate depreciation using double-declining
balance.b 64. Calculate depreciation using double-declining balance.c 65. Sum-of-the-
years'-digits method.b 66. Sum-of-the-years'-digits method.a 67. Calculate depreciation
using sum-of-the-years'-digits.c 68. Calculate depreciation using sum-of-the-years'-
digits.c 69. Determine acquisition cost from sum-of-the-years'-digits.b 70. Determine
acquisition cost from sum-of-the-years'-digits.c 71. Calculate gain on sale of
machinery.a 72. Determine depreciation expense from change in Accumulated
Depreciationaccount.c 73. Determine depreciation expense from change in
Accumulated Depreciationaccount.a 74. Determine composite rate of depreciation.
Depreciation, Impairments, and Depletion
11 - 3
MULTIPLE CHOICE
Computational
(cont.)

a 75. Determine composite life of a group of assets.d 76. Depreciation and partial
periods.c 77. Change in estimated useful life.d 78. Depreciation and partial periods.c
79. Change in estimated useful life.a 80. Recognizing loss on impairment.c 81.
Recognizing loss on impairment.b 82. Change in estimated life of equipment.a 83.
Determine depreciation expense after major overhaul.b 84. Determine depreciation
expense after major overhaul.c 85. Record permanent impairment in value of fixed
asset.c 86. Calculate units-of-production depletion expense.c 87. Calculate units-of-
production depletion expense.b 88. Calculate units-of-production depletion expense.d
89. Calculate units-of-production depletion expense.b 90. Capitalization of exploration
costs and discovery values.d 91. Calculate asset turnover ratio.c 92. Calculate return on
total assets.c 93. Calculate asset turnover rate.c 94. Calculate asset turnover rate.a *95.
Calculate MACRS depreciation for the year.d *96. Calculate MACRS depreciation using
optional straight-line method.
MULTIPLE CHOICE
CPA Adapted
c 97. Calculate depreciation using 150% declining balance.b 98. Double-declining
balance method.b 99. Determine accumulated depreciation balance using sum-of-the-
years'-digits.a 100. Calculate depreciation expense using sum-of-the-years'-digits.d
101. Effect of salvage value on accumulated depreciation.b 102. Effect of including
salvage value in depreciation base.b 103. Effect of decreasing charge methods on sale
of asset.b 104. Units-of-production depletion expense.c 105. Calculate depletion
expense for the year.
EXERCISES
Item Description

E11-106 Definitions.E11-107 Depreciation methods.E11-108 True or False.E11-109
Calculate depreciation.E11-110 Calculate depreciation.E11-111 Asset depreciation and
disposition.E11-112 Composite depreciation.E11-113 Depletion allowance.
PROBLEMS
Item Description

P11-114 Depreciation methods.P11-115 Adjustment of depreciable base.
CHAPTER LEARNING OBJECTIVES
1. Explain the concept of depreciation.2. Identify the factors involved in the depreciation
process.3. Compare activity, straight-line, and decreasing charge methods of
depreciation.4. Explain special depreciation methods.5. Explain the accounting issues
related to asset impairment.6. Explain the accounting procedures for depletion of
natural resources.7. Explain how to report and analyze property, plant, and equipment
and natural resources.*8. Describe income tax methods of depreciation..
TRUE-FALSE
Conceptual
1. Depreciation is a means of cost allocation, not a matter of valuation.2. Depreciation is
based on the decline in the fair market value of the asset.3. Depreciation, depletion, and
amortization all involve the allocation of the cost of a long-lived asset to expense.4. The
cost of an asset less its salvage value is its depreciation base.5. The three factors
involved in the depreciation process are the depreciation base, theuseful life, and the
risk of obsolescence.6. Inadequacy is the replacement of one asset with another more
efficient and economicalasset.7. The major objection to the straight-line method is that it
assumes the assets economicusefulness and repair expense is the same each year.8.
The units-of-production approach to depreciation is appropriate when depreciation is
afunction of time instead of activity.9. An accelerated depreciation method is
appropriate when the assets economic usefulnessis the same each year.10. The
declining-balance method does not deduct the salvage value in computing
thedepreciation base.11. Gains or losses on disposals of assets do not distort periodic
income when the group orcomposite method is used to compute depreciation.12.
Companies frequently use the composite approach when the assets are similar in
natureand have approximately the same useful lives.13. Changes in estimates are
handled prospectively by dividing the assets book value lessany salvage value by the
remaining estimated life.14. An impairment loss is the amount by which the carrying
amount of the asset exceeds thesum of the expected future net cash flows from the use
of that asset.15. The first step in determining whether an impairment has occurred is to
estimate the futurenet cash flows expected from the use of that asset and its eventual
disposition.16. Impaired assets held for disposal should be reported at the lower of cost
or net realizablevalue.17. Normally, companies compute depletion on a straight-line
basis.18. Intangible development costs and restoration costs are part of the depletion
base.
11 - 7
19. The asset turnover ratio is computed by dividing net sales by ending total assets.20.
The profit margin on sales ratio is a measure for analyzing the use of property, plant,
andequipment.
True-False Answers
Conceptual

I t e m A n s . I t e m A n s . I t e mA n s . I t e m A n s .
1. T 6. F 11. T 16. T2. F 7. T 12. F 17. F3. T 8. F 13. T 18. T4. T 9. F 14. F 19. F5. F 10.
T 15. T 20. T
MULTIPLE CHOICE
Conceptual
21. The following is true of depreciation accounting.a. It is not a matter of valuation.b. It
is part of the matching of revenues and expenses.c. It retains funds by reducing income
taxes and dividends.d. All of these.22. Which of the following principles best describes
the conceptual rationale for the methodsof matching depreciation expense with
revenues?a. Associating cause and effectb. Systematic and rational allocationc.
Immediate recognitiond. Partial recognition23. Depreciation accountinga. provides
funds.b. funds replacements.c. retains funds.d. all of these.
S
24. Which of the following most accurately reflects the concept of depreciation as used
inaccounting?a. The process of charging the decline in value of an economic resource
to income in theperiod in which the benefit occurred.b. The process of allocating the
cost of tangible assets to expense in a systematic andrational manner to those periods
expected to benefit from the use of the asset.c. A method of allocating asset cost to an
expense account in a manner which closelymatches the physical deterioration of the
tangible asset involved.d. An accounting concept that allocates the portion of an asset
used up during the yearto the contra asset account for the purpose of properly recording
the fair market valueof tangible assets.
S
25. The major difference between the service life of an asset and its physical life is
thata. service life refers to the time an asset will be used by a company and physical
liferefers to how long the asset will last.b. physical life is the life of an asset without
consideration of salvage value and servicelife requires the use of salvage value.c.
physical life is always longer than service life.d. service life refers to the length of time
an asset is of use to its original owner, whilephysical life refers to how long the asset will
be used by all owners.
P
26. The term "depreciable cost," or "depreciable base," as it is used in accounting,
refers toa. the total amount to be charged (debited) to expense over an asset's useful
life.b. the cost of the asset less the related depreciation recorded to date.c. the
estimated market value of the asset at the end of its useful life.d. the acquisition cost of
the asset.27. Economic factors that shorten the service life of an asset includea.
obsolescence.b. supersession.c. inadequacy.d. all of these.28. The activity method of
depreciationa. is a variable charge approach.b. assumes that depreciation is a function
of the passage of time.c. conceptually associates cost in terms of input measures.d. all
of these.29. For income statement purposes, depreciation is a variable expense if the
depreciationmethod used isa. units-of-production.b. straight-line.c. sum-of-the-years'-
digits.d. declining-balance.30. If an industrial firm uses the units-of-production method
for computing depreciation on itsonly plant asset, factory machinery, the credit to
accumulated depreciation from period toperiod during the life of the firm willa. be
constant.b. vary with unit sales.c. vary with sales revenue.d. vary with production.31.
Use of the double-declining balance methoda. results in a decreasing charge to
depreciation expense.b. means salvage value is not deducted in computing the
depreciation base.c. means the book value should not be reduced below salvage
value.d. all of these.32. Use of the sum-of-the-years'-digits methoda. results in salvage
value being ignored.b. means the denominator is the years remaining at the beginning
of the year.c. means the book value should not be reduced below salvage value.d. all of
these.
11 - 9
33. A graph is set up with "yearly depreciation expense" on the vertical axis and "time"
on thehorizontal axis. Assuming linear relationships, how would the graphs for straight-
line andsum-of-the-years'-digits depreciation, respectively, be drawn?a. Vertically and
sloping down to the rightb. Vertically and sloping up to the rightc. Horizontally and
sloping down to the rightd. Horizontally and sloping up to the right34. A principal
objection to the straight-line method of depreciation is that ita. provides for the declining
productivity of an aging asset.b. ignores variations in the rate of asset use.c. tends to
result in a constant rate of return on a diminishing investment base.d. gives smaller
periodic write-offs than decreasing charge methods.35. Each year a company has been
investing an increasingly greater amount in machinery.Since there is a large number of
small items with relatively similar useful lives, thecompany has been applying straight-
line depreciation at a uniform rate to the machineryas a group. The ratio of this group's
total accumulated depreciation to the total cost of themachinery has been steadily
increasing and now stands at .75 to 1.00. The most likelyexplanation for this increasing
ratio is thea. company should have been using one of the accelerated methods of
depreciation.b. estimated average life of the machinery is less than the actual average
useful life.c. estimated average life of the machinery is greater than the actual average
useful life.d. company has been retiring fully depreciated machinery that should have
remained inservice.36. For the composite method, the compositea. rate is the total cost
divided by the total annual depreciation.b. rate is the total annual depreciation divided
by the total depreciable cost.c. life is the total cost divided by the total annual
depreciation.d. life is the total depreciable cost divided by the total annual depreciation.
P
37. Roberts Truck Rental uses the group depreciation method for its fleet of trucks.
When itretires one of its trucks and receives cash from a salvage company, the carrying
value ofproperty, plant, and equipment will be decreased by thea. original cost of the
truck.b. original cost of the truck less the cash proceeds.c. cash proceeds received.d.
cash proceeds received and original cost of the truck.
S
38. Composite or group depreciation is a depreciation system wherebya. the years of
useful life of the various assets in the group are added together and thetotal divided by
the number of items.b. the cost of individual units within an asset group is charged to
expense in the year aunit is retired from service.c. a straight-line rate is computed by
dividing the total of the annual depreciationexpense for all assets in the group by the
total cost of the assets.d. the original cost of all items in a given group or class of assets
is retained in the assetaccount and the cost of replacements is charged to expense
when they are acquired.
39. Depreciation is normally computed on the basis of the nearesta. full month and to
the nearest cent.b. full month and to the nearest dollar.c. day and to the nearest cent.d.
day and to the nearest dollar.40. Quayle Company acquired machinery on January 1,
2002 which it depreciated under thestraight-line method with an estimated life of fifteen
years and no salvage value. OnJanuary 1, 2007, Quayle estimated that the remaining
life of this machinery was six yearswith no salvage value. How should this change be
accounted for by Quayle?a. As a prior period adjustmentb. As the cumulative effect of a
change in accounting principle in 2007c. By setting future annual depreciation equal to
one-sixth of the book value on January1, 2007d. By continuing to depreciate the
machinery over the original fifteen year life41. A change in estimate shoulda. result in
restatement of prior period statements.b. be handled in current and future periods.c. be
handled in future periods only.d. be handled retroactively.42. White Printing Company
determines that a printing press used in its operations hassuffered a permanent
impairment in value because of technological changes. An entry torecord the
impairment shoulda. recognize an extraordinary loss for the period.b. include a credit to
the equipment accumulated depreciation account.c. include a credit to the equipment
account.d. not be made if the equipment is still being used.43. Dividends representing a
return of capital to stockholders are not uncommon amongcompanies whicha. use
accelerated depreciation methods.b. use straight-line depreciation methods.c. recognize
both functional and physical factors in depreciation.d. none of these.44. Depletion
expensea. is usually part of cost of goods sold.b. includes tangible equipment costs in
the depletion base.c. excludes intangible development costs from the depletion base.d.
excludes restoration costs from the depletion base.45. The most common method of
recording depletion for accounting purposes is thea. percentage depletion method.b.
decreasing charge method.c. straight-line method.d. units-of-production method.
11 - 11
46. Reserve recognition accountinga. is presently the generally accepted accounting
method for financial reporting of oil andgas reserves.b. is a historical cost method
similar to the full cost approach and the successful effortsapproach.c. is used for
reporting of oil and gas reserves for federal income tax purposes.d. requires estimates
of future production costs, the appropriate discount rate, and theexpected selling price
of oil and gas reserves.
S
47. Of the following costs related to the development of natural resources, which one is
not apart of depletion cost?a. Acquisition cost of the natural resource depositb.
Exploration costsc. Tangible equipment costs associated with machinery used to extract
the naturalresourced. Intangible development costs such as drilling costs, tunnels, and
shafts
S
48. Which of the following disclosures is not required in the financial statements
regardingdepreciation?a. Accumulated depreciation, either by major classes of
depreciable assets or in total.b. Details demonstrating how depreciation was
calculated.c. Depreciation expense for the period.d. Balances of major classes of
depreciable assets, by nature and function.
P
49. The book value of a plant asset isa. the fair market value of the asset at a balance
sheet date.b. the asset's acquisition cost less the total related depreciation recorded to
date.c. equal to the balance of the related accumulated depreciation account.d. the
assessed value of the asset for property tax purposes.50. A general description of the
depreciation methods applicable to major classes ofdepreciable assetsa. is not a
current practice in financial reporting.b. is not essential to a fair presentation of financial
position.c. is needed in financial reporting when company policy differs from income tax
policy.d. should be included in corporate financial statements or notes thereto.51. The
asset turnover ratio is computed by dividinga. net income by ending total assets.b. net
income by average total assets.c. net sales by ending total assets.d. net sales by
average total assets.*52. A major objective of MACRS for tax depreciation is toa.
reduce the amount of depreciation deduction on business firms' tax returns.b. assure
that the amount of depreciation for tax and book purposes will be the same.c. help
companies achieve a faster write-off of their capital assets.d. require companies to use
the actual economic lives of assets in calculating taxdepreciation.
*53. Under MACRS, which one of the following is
not
considered in determining depreciationfor tax purposes?a. Cost of assetb. Property
recovery classc. Half-year conventiond. Salvage value*54. If income tax effects are
ignored, accelerated depreciation methodsa. provide funds for the earlier replacement
of fixed assets.b. increase funds provided by operations.c. tend to offset the effect of
steadily increasing repair and maintenance costs on theincome statement.d. tend to
decrease the fixed asset turnover ratio.
Multiple Choice Answers
Conceptual

I t e m A n s . I t e m A n s . I t e m A n s . I t e m A n s . I t e m A n s . I t e m
A n s . I t e m A n s .
2 1 . d 2 6 . a 3 1 . d 3 6 . d 4 1 . b
4 6 . d 5 1 . d 2 2 . b 2 7 . d 3 2 . c
3 7 . c 4 2 . b 4 7 . c 5 2 . c 2 3 . c
2 8 . a 3 3 . c 3 8 . c 4 3 . d 4 8 . b
* 5 3 . d 2 4 . b 2 9 . a 3 4 . b 3 9 . b
4 4 . a 4 9 . b * 5 4 . c 2 5 . a 3 0 . d 3 5 .
b 4 0 . c 4 5 . d 5 0 . d Solutions to those Multiple Choice
questions for which the answer is none of these.43. do not expect to purchase
additional property after depleting existing property.
MULTIPLE CHOICE
Computational
55. Harrison Company purchased a depreciable asset for $100,000. The estimated
salvagevalue is $10,000, and the estimated useful life is 10 years. The straight-line
method will beused for depreciation. What is the depreciation base of this asset?a.
$9,000b. $10,000c. $90,000d. $100,00056. Prentice Company purchased a depreciable
asset for $200,000. The estimated salvagevalue is $20,000, and the estimated useful
life is 10 years. The straight-line method will beused for depreciation. What is the
depreciation base of this asset?a. $18,000b. $20,000c. $180,000d. $200,00057.
Lennon Company purchased a depreciable asset for $200,000. The estimated
salvagevalue is $10,000, and the estimated useful life is 10,000 hours. Lennon used the
asset for1,100 hours in the current year. The activity method will be used for
depreciation. What isthe depreciation expense on this asset?
11 - 13
a. $19,000b. $20,900c. $22,000d. $190,00058. Starr Company purchased a
depreciable asset for $150,000. The estimated salvage valueis $10,000, and the
estimated useful life is 8 years. The double-declining balance methodwill be used for
depreciation. What is the depreciation expense for the second year on thisasset?a.
$17,500b. $26,250c. $28,125d. $37,50059. Bigbie Company purchased a depreciable
asset for $600,000. The estimated salvagevalue is $30,000, and the estimated useful
life is 10,000 hours. Bigbie used the asset for1,100 hours in the current year. The
activity method will be used for depreciation. What isthe depreciation expense on this
asset?a. $57,000b. $62,700c. $66,000d. $570,00060. Pine Company purchased a
depreciable asset for $360,000. The estimated salvage valueis $24,000, and the
estimated useful life is 8 years. The double-declining balance methodwill be used for
depreciation. What is the depreciation expense for the second year on thisasset?a.
$42,000b. $63,000c. $67,500d. $90,00061. On July 1, 2006, Rodriguez Corporation purchased
factory equipment for $150,000.Salvage value was estimated to be $4,000. The equipment will be
depreciated over tenyears using the double-declining balance method. Counting the year of
acquisition as one-half year, Gonzalez should record depreciation expense for 2007 on this equipment
ofa. $30,000.b. $27,000.c. $26,280.d. $24,000.62. Norris Corporation purchased factory
equipment that was installed and put into serviceJanuary 2, 2006, at a total cost of $60,000. Salvage
value was estimated at $4,000. Theequipment is being depreciated over four years using the double-
declining balance method.For the year 2007, Norris should record depreciation expense on this
equipment ofa. $14,000.b. $15,000.c. $28,000.d. $30,000.
63. On April 13, 2006, Foley Co. purchased machinery for $120,000. Salvage value
wasestimated to be $5,000. The machinery will be depreciated over ten years using
thedouble-declining balance method. If depreciation is computed on the basis of the
nearestfull month, Foley should record depreciation expense for 2007 on this machinery
ofa. $20,800.b. $20,400.c. $20,550.d. $20,933.64. Vinson Co. purchased machinery
that was installed and ready for use on January 3, 2006,at a total cost of $69,000.
Salvage value was estimated at $9,000. The machinery will bedepreciated over five
years using the double-declining balance method. For the year2007, Vinson should
record depreciation expense on this machinery ofa. $14,400.b. $16,560.c. $18,000.d.
$27,600.65. A plant asset has a cost of $24,000 and a salvage value of $6,000. The
asset has a three-year life. If depreciation in the third year amounted to $3,000, which
depreciation methodwas used?a. Straight-lineb. Declining-balancec. Sum-of-the-years'-
digitsd. Cannot tell from information given66. On January 1, 2006, Carson Company
purchased a new machine for $2,100,000. Thenew machine has an estimated useful life
of nine years and the salvage value wasestimated to be $75,000. Depreciation was
computed on the sum-of-the-years'-digitsmethod. What amount should be shown in
Carson's balance sheet at December 31, 2007,net of accumulated depreciation, for this
machine?a. $1,695,000b. $1,335,000c. $1,306,666d. $1,244,25067. On January 1,
2000, Barnes Company purchased equipment at a cost of $50,000. Theequipment was
estimated to have a salvage value of $5,000 and it is being depreciatedover eight years
under the sum-of-the-years'-digits method. What should be the charge fordepreciation
of this equipment for the year ended December 31, 2007?a. $1,250b. $1,389c. $2,500d.
$5,62568. On September 19, 2006, Rosen Co. purchased machinery for $190,000. Salvage value
wasestimated to be $10,000. The machinery will be depreciated over eight years using the sum-of-
the-years'-digits method. If depreciation is computed on the basis of the nearest fullmonth, Rosen
should record depreciation expense for 2007 on this machinery of
11 - 15
a. $40,903.b. $38,845.c. $38,750.d. $35,000.69. On January 3, 2006, Lopez Co.
purchased machinery. The machinery has an estimateduseful life of eight years and an
estimated salvage value of $30,000. The depreciationapplicable to this machinery was
$65,000 for 2008, computed by the sum-of-the-years'-digits method. The acquisition
cost of the machinery wasa. $360,000.b. $390,000.c. $420,000.d. $468,000.70. On
January 2, 2005, Payne Company acquired equipment to be used in its
manufacturingoperations. The equipment has an estimated useful life of 10 years and
an estimatedsalvage value of $15,000. The depreciation applicable to this equipment
was $70,000 for2008, computed under the sum-of-the-years'-digits method. What was
the acquisition costof the equipment?a. $535,000b. $565,000c. $550,000d. $541,66771.
Sears Corporation, which has a calendar year accounting period, purchased a
newmachine for $40,000 on April 1, 2002. At that time Sears expected to use the
machine fornine years and then sell it for $4,000. The machine was sold for $22,000 on
Sept. 30,2007. Assuming straight-line depreciation, no depreciation in the year of
acquisition, and afull year of depreciation in the year of retirement, the gain to be
recognized at the time ofsale would bea. $4,000.b. $3,000.c. $2,000.d. $0.72. On
January 1, 2007, the Accumulated DepreciationMachinery account of a
particularcompany showed a balance of $370,000. At the end of 2007, after the
adjusting entrieswere posted, it showed a balance of $395,000. During 2007, one of the
machines whichcost $125,000 was sold for $60,500 cash. This resulted in a loss of
$4,000. Assuming thatno other assets were disposed of during the year, how much was
depreciation expensefor 2007?a. $85,500b. $93,500c. $25,000d. $60,50073. During
2007, Geiger Co. sold equipment that had cost $98,000 for $58,800. This resultedin a
gain of $4,300. The balance in Accumulated DepreciationEquipment was $325,000on
January 1, 2007, and $310,000 on December 31. No other equipment was disposed
ofduring 2007. Depreciation expense for 2007 was
a. $15,000.b. $19,300.c. $28,500.d. $58,500.Use the following information for questions
74 and 75:A schedule of machinery owned by Dougan Co. is presented
below:Estimated EstimatedTotal Cost Salvage Value Life in YearsMachine A $320,000
$20,000 12Machine C 390,000 30,000 10Machine M 225,000 15,000 6Dougan
computes depreciation by the composite method.74. The composite rate of depreciation
(in percent) for these assets isa. 10.27.b. 10.72.c. 11.03.d. 11.67.75. The composite life
(in years) for these assets isa. 9.1.b. 9.3.c. 9.7.d. 10.0.76. McCartney Company
purchased a depreciable asset for $250,000 on April 1, 2005. Theestimated salvage
value is $25,000, and the estimated useful life is 5 years. The straight-line method is
used for depreciation. What is the balance in accumulated depreciation onMay 1, 2008
when the asset is sold?a. $90,000b. $105,000c. $123,750d. $138,75077. George Martin
Corporation purchased a depreciable asset for $300,000 on January 1,2005. The
estimated salvage value is $30,000, and the estimated useful life is 9 years.The
straight-line method is used for depreciation. In 2008, George Martin changed
itsestimates to a total useful life of 5 years with a salvage value of $50,000. What is
2008depreciation expense?a. $30,000b. $50,000c. $80,000d. $90,00078. Windsor
Company purchased a depreciable asset for $300,000 on April 1, 2005. Theestimated
salvage value is $30,000, and the estimated total useful life is 5 years. Thestraight-line
method is used for depreciation. What is the balance in accumulateddepreciation on
May 1, 2008 when the asset is sold?
11 - 17
a. $118,000b. $126,000c. $148,500d. $166,50079. Garrison Corporation purchased a
depreciable asset for $420,000 on January 1, 2005.The estimated salvage value is
$42,000, and the estimated total useful life is 9 years. Thestraight-line method is used
for depreciation. In 2008, Garrison changed its estimates to auseful life of 5 years with a
salvage value of $70,000. What is 2008 depreciation expense?a. $42,000b. $70,000c.
$112,000d. $126,00080. Peppers Corporation owns machinery with a book value of
$190,000. It is estimated thatthe machinery will generate future cash flows of $200,000.
The machinery has a fair valueof $140,000. Peppers should recognize a loss on
impairment ofa. $ -0-.b. $10,000.c. $50,000.d. $60,000.81. Dillman Corporation owns
machinery with a book value of $190,000. It is estimated thatthe machinery will
generate future cash flows of $175,000. The machinery has a fair valueof $140,000.
Dillman should recognize a loss on impairment ofa. $ -0-.b. $15,000.c. $50,000.d.
$35,000.82. Jantz Corporation purchased a machine on July 1, 2004, for $750,000. The
machine wasestimated to have a useful life of 10 years with an estimated salvage value
of $42,000.During 2007, it became apparent that the machine would become
uneconomical afterDecember 31, 2011, and that the machine would have no scrap
value. Accumulateddepreciation on this machine as of December 31, 2006, was
$177,000. What should bethe charge for depreciation in 2007 under generally accepted
accounting principles?a. $106,200b. $114,600c. $123,000d. $143,25083. Weston
Company purchased a tooling machine on January 3, 2000 for $500,000. Themachine
was being depreciated on the straight-line method over an estimated useful lifeof 10
years, with no salvage value. At the beginning of 2007, the company paid $125,000to
overhaul the machine. As a result of this improvement, the company estimated that
theuseful life of the machine would be extended an additional 5 years (15 years total).
Whatshould be the depreciation expense recorded for the machine in 2007?a.
$34,375b. $41,667c. $50,000d. $55,000
84. Klein Co. purchased machinery on January 2, 2001, for $440,000. The straight-
linemethod is used and useful life is estimated to be 10 years, with a $40,000 salvage
value.At the beginning of 2007 Klein spent $96,000 to overhaul the machinery. After
theoverhaul, Klein estimated that the useful life would be extended 4 years (14 years
total),and the salvage value would be $20,000. The depreciation expense for 2007
should bea. $28,250.b. $34,500.c. $40,000.d. $37,000.85. Sloane, Inc. purchased
equipment in 2005 at a cost of $600,000. Two years later itbecame apparent to Sloane,
Inc. that this equipment had suffered an impairment of value.In early 2007, the book
value of the asset is $360,000 and it is estimated that the fairvalue is now only
$240,000. The entry to record the impairment isa. No entry is necessary as a write-off
violates the historical cost principle.b. Retained
Earnings.......................................................... 120,000Accumulated Depreciation
Equipment............. 120,000c. Loss on Impairment of Equipment..................................
120,000Accumulated DepreciationEquipment............. 120,000d. Retained
Earnings.......................................................... 120,000Reserve for Loss on Impairment
of Equipment... 120,00086. Tolan Resources Company acquired a tract of land
containing an extractable naturalresource. Tolan is required by its purchase contract to
restore the land to a conditionsuitable for recreational use after it has extracted the
natural resource. Geological surveysestimate that the recoverable reserves will be
2,000,000 tons, and that the land will have avalue of $1,200,000 after restoration.
Relevant cost information follows:Land $9,000,000Estimated restoration costs
1,800,000If Tolan maintains no inventories of extracted material, what should be the
charge todepletion expense per ton of extracted material?a. $3.90b. $4.50c. $4.80d.
$5.4087. In January, 2007, Miley Corporation purchased a mineral mine for $3,400,000
withremovable ore estimated by geological surveys at 2,000,000 tons. The property has
anestimated value of $200,000 after the ore has been extracted. The company
incurred$1,000,000 of development costs preparing the mine for production. During
2007, 500,000tons were removed and 400,000 tons were sold. What is the amount of
depletion thatMiley should
expense
for 2007?a. $640,000b. $800,000c. $840,000d. $1,120,000
11 - 19
88. During 2007, Bolton Corporation acquired a mineral mine for $1,500,000 of
which$200,000 was ascribed to land value after the mineral has been removed.
Geologicalsurveys have indicated that 10 million units of the mineral could be extracted.
During2007, 1,500,000 units were extracted and 1,200,000 units were sold. What is the
amountof depletion
expensed
for 2007?a. $130,000.b. $156,000.c. $180,000.d. $195,000.89. In March, 2007, Tylor
Mines Co. purchased a coal mine for $6,000,000. Removable coalis estimated at
1,500,000 tons. Tylor is required to restore the land at an estimated cost of$720,000,
and the land should have a value of $630,000. The company incurred$1,500,000 of
development costs preparing the mine for production. During 2007, 450,000tons were
removed and 300,000 tons were sold. The total amount of depletion that Tylorshould
record for 2007 isa. $1,374,000.b. $1,518,000.c. $2,061,000.d. $2,277,000.90. In 1999,
Morton Company purchased a tract of land as a possible future plant site. InJanuary,
2007, valuable sulphur deposits were discovered on adjoining property andMorton
Company immediately began explorations on its property. In December, 2007,after
incurring $400,000 in exploration costs, which were accumulated in an expenseaccount,
Morton discovered sulphur deposits appraised at $2,250,000 more than thevalue of the
land. To record the discovery of the deposits, Morton shoulda. make no entry.b. debit
$400,000 to an asset account.c. debit $2,250,000 to an asset account.d. debit
$2,650,000 to an asset account.Use the following information for questions 91 and
92:For 2007, Colaw Company reports beginning of the year total assets of $900,000,
end of the yeartotal assets of $1,100,000, net sales of $1,250,000, and net income of
$250,000.91. Colaws 2007 asset turnover ratio isa. .23 times.b. .25 times.c. 1.14
times.d. 1.25 times.92. The rate of return on assets for Colaw in 2007 isa. 20.0%.b.
22.7%.c. 25.0%.d. 27.8%.
93. Rubber Soul Company reported the following data:2007 2008Sales $2,000,000
$2,600,000Net Income 300,000 400,000Assets at year end 1,800,000
2,500,000Liabilities at year end 1,100,000 1,500,000What is Rubber Souls asset
turnover for 2008?a. 1.04b. 1.07c. 1.21d. 1.4494. Covington Company reported the
following data:2007 2008Sales $2,000,000 $2,800,000Net Income 300,000
400,000Assets at year end 1,800,000 2,500,000Liabilities at year end 1,100,000
1,500,000What is Rubber Souls asset turnover for 2008?a. 1.12b. 1.15c. 1.30d.
1.56Use the following information for questions 95 and 96:On January 1, 2007, Newton
Company purchased a machine costing $150,000. The machine isin the MACRS 5-year
recovery class for tax purposes and has an estimated $30,000 salvagevalue at the end
of its economic life.*95. Assuming the company uses the general MACRS approach, the
amount of MACRSdeduction for tax purposes for the year 2007 isa. $30,000.b.
$60,000.c. $48,000.d. $24,000.*96. Assuming the company uses the optional straight-
line method, the amount of MACRSdeduction for tax purposes for the year 2007 isa.
$24,000.b. $30,000.c. $12,000.d. $15,000.
11 - 21
Computational

I t e m A n s . I t e m A n s . I t e m A n s . I t e m A n s . I t e m A n s . I t e m
A n s . I t e m A n s .
5 5 . c 6 1 . b 6 7 . a 7 3 . c 7 9 . c
8 5 . c 9 1 . d 5 6 . c 6 2 . b 6 8 . c
7 4 . a 8 0 . a 8 6 . c 9 2 . c 5 7 . b
6 3 . b 6 9 . c 7 5 . a 8 1 . c 8 7 . c
9 3 . c 5 8 . c 6 4 . b 7 0 . b 7 6 . d
8 2 . b 8 8 . b 9 4 . c 5 9 . b 6 5 . c
7 1 . c 7 7 . c 8 3 . a 8 9 . d
* 9 5 . a 6 0 . c 6 6 . b 7 2 . a 7 8 . d
8 4 . b 9 0 . b * 9 6 . d
MULTIPLE CHOICE
CPA Adapted
97. Gant Co. purchased a machine on July 1, 2007, for $400,000. The machine has
anestimated useful life of five years and a salvage value of $80,000. The machine is
beingdepreciated from the date of acquisition by the 150% declining-balance method.
For theyear ended December 31, 2007, Gant should record depreciation expense on
thismachine ofa. $120,000.b. $80,000.c. $60,000.d. $48,000.98. A machine with a five-
year estimated useful life and an estimated 10% salvage value wasacquired on January
1, 2005. The depreciation expense for 2007 using the double-declining balance method
would be original cost multiplied bya. 90% 40% 40%.b. 60% 60% 40%.c. 90%
60% 40%.d. 40% 40%.99. On April 1, 2005, Reiley Co. purchased new machinery
for $240,000. The machinery hasan estimated useful life of five years, and depreciation
is computed by the sum-of-the-years'-digits method. The accumulated depreciation on
this machinery at March 31, 2007,should bea. $160,000.b. $144,000.c. $96,000.d.
$80,000.100. Mack Co. takes a full year's depreciation expense in the year of an asset's
acquisition andno depreciation expense in the year of disposition. Data relating to one
of Mack'sdepreciable assets at December 31, 2007 are as follows:Acquisition year
2005Cost $140,000Residual value 20,000Accumulated depreciation 96,000Estimated
useful life 5 years
Using the same depreciation method as used in 2005, 2006, and 2007, how
muchdepreciation expense should Mack record in 2008 for this asset?a. $16,000b.
$24,000c. $28,000d. $32,000101. A depreciable asset has an estimated 15% salvage
value. At the end of its estimateduseful life, the accumulated depreciation would equal
the original cost of the asset underwhich of the following depreciation methods?Straight-
line Productive Outputa. Yes Nob. Yes Yesc. No Yesd. No No102. Net income is
understated if, in the first year, estimated salvage value is excluded fromthe
depreciation computation when using theStraight-line Production orMethod Use
Methoda. Yes Nob. Yes Yesc. No Nod. No Yes103. A plant asset with a five-year
estimated useful life and no residual value is sold at the endof the second year of its
useful life. How would using the sum-of-the-years'-digits methodof depreciation instead
of the double-declining balance method of depreciation affect again or loss on the sale
of the plant asset?Gain Lossa. Decrease Decreaseb. Decrease Increasec. Increase
Decreased. Increase Increase104. Nolan Company acquired a tract of land containing
an extractable natural resource. Nolanis required by the purchase contract to restore
the land to a condition suitable forrecreational use after it has extracted the natural
resource. Geological surveys estimatethat the recoverable reserves will be 5,000,000
tons, and that the land will have a value of$1,000,000 after restoration. Relevant cost
information follows:Land $7,000,000Estimated restoration costs 1,500,000If Nolan
maintains no inventories of extracted material, what should be the charge todepletion
expense per ton of extracted material?a. $1.70b. $1.50c. $1.40d. $1.20
11 - 23
105. In January 2007, Jenn Mining Corporation purchased a mineral mine for
$4,200,000 withremovable ore estimated by geological surveys at 2,500,000 tons. The
property has anestimated value of $400,000 after the ore has been extracted. Jenn
incurred $1,150,000of development costs preparing the property for the extraction of
ore. During 2007,340,000 tons were removed and 300,000 tons were sold. For the year
ended December31, 2007, Jenn should include what amount of depletion in its cost of
goods sold?a. $516,800b. $456,000c. $594,000d. $673,200
CPA Adapted

I t e m A n s . I t e m A n s . I t e m A n s . I t e m A n s . I t e m A n s .
9 7 . c 9 9 . b 1 0 1 . d 1 0 3 . b 1 0 5 . c 9 8 .
b 1 0 0 . a 1 0 2 . b 1 0 4 . b
DERIVATIONS

Computational

No. Answer Derivation
55. c $100,000 $10,000 = $90,000.56. c $200,000 $20,000 = $180,000.57. b
[$200,000 $10,000) 10,000] 1,100 = $20,900.58. c $150,000 [(1 8) 2] =
$37,500($150,000 $37,500) [(1 8) 2] = $28,125.59. b [($600,000 $30,000)
10,000] 1,100 = $62,700.60. c $360,000 [(1 8) 2] = $90,000($360,000
$90,000) [(1 8) 2] = $67,500.61. b [$150,000 ($150,000 0.1)] 0.2 =
$27,000.62. b [$60,000 (1 0.5)] 0.5 = $15,000.63. b [$120,000 ($120,000 0.2
0.75)] 0.2 = $20,400.64. b [$69,000 ($69,000 0.4)] 0.4 = $16,560.65. c ($24,000
$6,000) 1/6 = $3,000.66. b $2,100,000 [($2,100,000 $75,000) (9/45 + 8/45)] =
$1,335,000.67. a ($50,000 $5,000) 1/36 = $1,250.68. c ($180,000 8/36 9/12) +
($180,000 7/36 3/12) = $38,750.
DERIVATIONS

Computational (cont.)

69. c (AC $30,000) 6/36 = $65,000AC = $420,000.70. b (AC $15,000) 7/55 =
$70,000AC = $565,000.71. c $40,000 [($40,000 $4,000) 9 5] = $20,000
(BV)$22,000 $20,000 = $2,000 (gain).72. a ($395,000 $370,000) + [$125,000
($60,500 + $4,000)] = $85,500.73. c $310,000 {$325,000 [$98,000 ($58,800
$4,300)]} = $28,500.74. a ($320,000 $20,000) 12 = $25,000($390,000 $30,000)
10 = 36,000($225,000 $15,000) 6 = 35,000$935,000 $96,000$96,000 =
10.27$935,00075. a ($300,000 + $360,000 + $210,000) $96,000 = 9.1.76. d
[($250,000 $25,000) 5] 3 1/12 = $138,750.77. c $300,000 [($300,000 $30,000)
3/9] = $210,000($210,000 $50,000) (5 3) = $80,000.78. d [($300,000 $30,000)
5] 3 1/12 = $166,500.79. c $420,000 [$420,000 $42,000) 3/9] =
$294,000($294,000 $70,000) (5 3) = $112,000.80. a $200,000 > $190,000; No
loss recognized.81. c $175,000 < $190,000; $140,000 $190,000 = ($50,000).82. b
($750,000 $177,000) 5 = $114,600.83. a [($500,000 10) 7] $125,000 =
$225,000 new (AD)$500,000 $225,000 = $275,000; $275,000 8 = $34,375 per
year.84. b [($400,000

10) 6] $96,000 = $144,000 new (AD)$440,000 $144,000 = $296,000
(BV)($296,000 $20,000) 8 = $34,500 per year.85. c $360,000 $240,000 =
$120,000.86. c ($9,000,000 + $1,800,000 $1,200,000) 2,000,000 = $4.80.
11 - 25
DERIVATIONS

Computational (cont.)

87. c [($3,400,000 $200,000 + $1,000,000) 2,000,000] 400,000 = $840,000.88. b
[($1,500,000 $200,000) 10,000,000] 1,200,000 = $156,000.89. d [($6,000,000 +
$720,000 $630,000 + $1,500,000) 1,500,000] 450,000= $2,277,000.90. b
Discovery value is generally not recognized.91. d $1,250,000 [($900,000 +
$1,100,000) 2] = 1.2592. c $250,000 [($900,000 + $1,100,000) 2] = 25%93. c
$2,600,000 [($1,800,000 $2,500,000) 2] = 1.2194. c $2,800,000 [($1,800,000 +
$2,500,000) 2] = 1.30.*95. a $150,000 20% = $30,000.*96. d $150,000 5 2 =
$15,000.
DERIVATIONS

CPA Adapted

97. c $400,000 0.3 0.5 = $60,000.98. b Conceptual.99. b $240,000 (5/15 + 4/15) =
$144,000.100. a 2/15 ($140,000 $20,000) = $16,000.101. d Conceptual.102. b
Conceptual.103. b Conceptual.104. b ($7,000,000 + $1,500,000 $1,000,000)
5,000,000 = $1.50.105. c [($4,200,000 $400,000 + $1,150,000) 2,500,000]
300,000 = $594,000.
EXERCISES
Ex. 11-106
Definitions.Provide clear, concise answers for the following.1. Define depreciation.2.
Define depreciation accounting.3. Does depreciation accounting provide funds? If not,
what does provide funds? What doesdepreciation accounting do related to funds?
Solution 11-106
1. Depreciation is the decline in service potentials or in future benefits of a plant asset
due tophysical or economic factors.2. Depreciation accounting is the systematic and
rational allocation of the cost of plant assets tothe periods benefited from the use of the
assets.3. Depreciation accounting does not provide funds. Revenues provide funds.
Depreciationaccounting retains funds by reducing income taxes and dividends.
Ex. 11-107
True or False.Place T or F in front of each of the following statements. ____ 1. The
straight-line method of depreciation is based on the assumption that
depreciationexpense can be regarded as a constant function of time. ____ 2. Plant
assets should be written down (below cost) when their market value hasdeclined
temporarily. ____ 3. The accounting profession has developed specifically
recommended procedures forrecording appraisal increases with respect to plant
assets. ____ 4. An asset's cost minus its accumulated depreciation equals its book
value. ____ 5. The sum-of-the-years'-digits method of depreciation ignores salvage
value in thecomputation of an asset's depreciable base. ____ 6. When using the
double-declining balance method of determining depreciation, adeclining percentage is
applied to a constant book value. ____ 7. The book value of plant assets declines more
rapidly under decreasing-chargemethods than under the straight-line method. ____ 8.
Accounting depreciation is computed by determining the change in the market value ofa
company's plant assets during the period under review.
11 - 27Ex. 11-107
(cont.) ____ 9. The methods of depreciation based upon output assume that
obsolescence will notsignificantly affect the usefulness of the asset. ____ 10. The
correction of prior periods' depreciation estimates would be disclosed on theretained
earnings statement.
Solution 11-107
1. T 3. F 5. F 7. T 9. T2. F 4. T 6. F 8. F 10. F
Ex. 11-108
Depreciation methods.Each of the statements appearing below is descriptive of one
or more of the followingdepreciation methods. In the spaces below, place the letter(s)
belonging to the method(s) towhich the statement best applies.a. Declining-balance e.
Sum-of-the-years'-digitsb. Group f. Units of outputc. Composite g. Working hoursd.
Straight-line ____ 1. The depreciation charged by this method decreases by
the same amount each year. ____ 2. These methods are used for
depreciating multipl e-asset accounts. ____ 3. These methods allocate larger
shares of the cost of a plant asset to expense duringthe years in which the
greatest use is made of the asset. ____ 4. These methods always allocate larger
shares of the cost of a plant asset to expenseduring the earlier years of its
life. ____ 5. Once the depreciable base, scrap value, and l ife of a plant asset
are determined, theannual charges to operations under this method will be the same.
Solution 11-108
1. e 4. a, e2. b, c 5. d3. f, g
Test Bank for Intermediate Accounting, Twelfth Edition11 - 28Ex. 11-109
Calculate depreciation.A machine which cost $200,000 is acquired on October 1,
2006. Its estimated salvage value is$20,000 and its expected life is eight years.
Instructions
Calculate depreciation expense for 2006 and 2007 by each of the following methods,
showing thefigures used.(a) Double-declining balance(b) Sum-of-the-years'-digits
Solution 11-109
(a) 2006: 25% $200,000 = $12,5002007: 25% $187,500 = $46,875(b) 2006:
8/36 $180,000 = $10,0002007: 8/36 $180,000 = $30,0007/36 $180,000
= 8,750$38,750
Ex. 11-110
Calculate depreciation.A machine cost $500,000 on April 1, 2006. Its estimated
salvage value is $50,000 and itsexpected life is eight years.
Instructions
Calculate the depreciation expense (to the nearest dollar) by each of the following
methods,showing the figures used.(a) Straight-line for 2006(b) Double-declining balance
for 2007(c) Sum-of-the-years'-digits for 2007
Solution 11-110
(a) 1/8 $450,000 = $42,188(b) 2007: 25% $406,250 = $101,563(c) 8/36
$450,000 = $25,0007/36 $450,000 = 65,625$90,625

11 - 29Ex. 11-111
Asset depreciation and disposition.Answer each of the following questions.1. A plant
asset purchased for $150,000 has an estimated life of 10 years and a residual valueof
$12,000. Depreciation for the
second year of use
, determined by the declining-balancemethod at twice the straight-line rate is
$_____________.2. A plant asset purchased for $200,000 at the beginning of the year
has an estimated life of 5years and a residual value of $20,000. Depreciation for the
second year,
determined by thesum-of-the-years'-digits method is $______________.3. A plant asset
with a cost of $160,000 and accumulated depreciation of $45,000, is giventogether with
cash of $60,000 in exchange for a similar asset worth $165,000. The gain orloss
recognized on the disposal (indicate by "G" or "L") is $______________.4. A plant asset
with a cost of $216,000, estimated life of 5 years, and residual value of $36,000,is
depreciated by the straight-line method. This asset is sold for $160,000 at the end of
thesecond year of use. The gain or loss on the disposal (indicate by "G" or "L") is
$___________.
Solution 11-111
1. $24,0002. $48,0003. $10,000 L4. $16,000 G
Ex. 11-112
Composite depreciation.Hale Co. uses the composite method to depreciate its
equipment. The following totals are for allof the equipment in the group:Initial Residual
Depreciable DepreciationCost Value Cost Per Year$700,000 $100,000 $600,000
$60,000
Instructions
(a) What is the composite rate of depreciation? (To nearest tenth of a percent.)(b) A
machine with a cost of $18,000 was sold for $11,000 at the end of the third year.
Whatentry should be made?
Solution 11-112
(a) $60,000 = 8.6%$700,000(b)
Cash......................................................................................... 11,000Accumulated
Depreciation........................................................
7,000Equipment...................................................................... 18,000

Test Bank for Intermediate Accounting, Twelfth Edition11 - 30Ex. 11-113
Depletion allowance.Oates Company purchased for $5,600,000 a mine estimated to
contain 2 million tons of ore.When the ore is completely extracted, it was expected that
the land would be worth $200,000. Abuilding and equipment costing $2,800,000 were
constructed on the mine site, and they will becompletely used up and have
no salvage value
when the ore is exhausted. During the first year,750,000 tons of ore were mined, and
$450,000 was spent for labor and other operating costs.
Instructions
Compute the total cost per ton of ore mined in the first year. (Show computations by
setting up aschedule giving cost per ton.)
Solution 11-113
Item Base Tons Per TonOre $5,400,000 2,000,000 $2.70Building and Equipment
2,800,000 2,000,000 1.40Labor and Operating Expenses 450,000 750,000 .60Total
Cost $4.70
PROBLEMS
Pr. 11-114
Depreciation methods.On July 1, 2006, Nyland Company purchased for $2,160,000
snow-making equipment having anestimated useful life of 5 years with an estimated
salvage value of $90,000. Depreciation is takenfor the portion of the year the asset is
used.
Instructions
(a) Complete the form below by determining the depreciation expense and year-end
book valuesfor 2006 and 2007 using the1. sum-of-the-years'-digits method.2. double-
declining balance method.Sum-of-the-Years'-Digits Method 2006 2007Equipment
$2,160,000 $2,160,000Less: Accumulated Depreciation ______ _______ Year-
End Book Value ______ _______ Depreciation Expense for the Year ______
_______ Double-Declining Balance MethodEquipment $2,160,000 $2,160,000Less:
Accumulated Depreciation ______ _______ Year-End Book Value ______
_______ Depreciati on Expense for the Year ______ _______ (b) Assume the
company had used straight-line depreciation during 2006 and 2007. During2008, the
company determined that the equipment would be useful to the company for onlyone
more year beyond 2008. Salvage value is estimated at $120,000. Compute the
amountof depreciation expense for the 2008 income statement.

11 - 31Solution 11-114
(a) Sum-of-the-Years'-Digits 2006 2007Accumulated Depreciation $ 345,000 $
966,000Book Value 1,815,000 1,194,000Depreciation Expense 345,000
621,000Double-Declining BalanceAccumulated Depreciation $ 432,000
$1,123,200Book Value 1,728,000 1,036,800Depreciation Expense 432,000 691,200(b)
Cost $2,160,000Depreciation (621,000)Salvage (120,000)$1,419,000 1/2 = $709,500,
2008 depreciation
Pr. 11-115
Adjustment of Depreciable Base.A truck was acquired on July 1, 2004, at a cost of
$216,000. The truck had a six-year useful lifeand an estimated salvage value of
$24,000. The straight-line method of depreciation was used.On January 1, 2007, the
truck was overhauled at a cost of $20,000, which extended the useful lifeof the truck for
an additional two years beyond that originally estimated (salvage value is stillestimated
at $24,000). In computing depreciation for annual adjustment purposes, expense
iscalculated for each month the asset is owned.
Instructions
Prepare the appropriate entries for January 1, 2007 and December 31, 2007.
Solution 11-115
Cost $216,000Less salvage value 24,000Depreciable base, July 1, 2004 192,000Less
depreciation to date [($192,000 6) 2 1/2] 80,000Depreciable base, Jan. 1, 2007
(unadjusted) 112,000Overhaul 20,000Depreciable base, Jan. 1, 2007 (adjusted)
$132,000January 1, 2007Accumulated
Depreciation...............................................................
20,000Cash..................................................................................... 20,000December 31,
2007Depreciation Expense......................................................................
24,000Accumulated Depreciation ($132,000 5.5 yrs).................. 24,000

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