# Calculation Declining Balance Amortization by wos14039

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```									                               Chapter 11 - Page 108
Chapter 11 - Questions

1)

2)

3)

4)

5)

6)

7)

Chapter 11 - Page 109
8)

9)

10)

11)

12)

13)

14)
Chapter 11 - Page 110
Chapter 11 - Exercises

Dr                                      Cr
1. (a)
Maintenance expense
Cash
To record payment for the fumigation of the hotel
(b)

To record payment for painting the hotel
(c)

(d)

Cash

(e)

(f)
Building
Cash
To record payment for improving the insulation of the hotel

2. (a)                                                                               Dr                                      Cr
Cash                                                                  8,000,000

To record sale of an airplane that cost \$30 million and had \$20 million of accumulated depreciation
for \$8 million.
(b)

To record scrapping of a fully depreciated oven with no salvage value
(c)
Loss on disposal of refrigerator
Equipment                                                                                             15,000
To record scrapping of a refrigerator that cost \$15,000 and had \$13,000 of accumulated depreciation
(d)

Gain on sale of building                                                                              10,000
To record the sale of a building that cost \$250,000, and had \$50,000 of accumulated depreciation
for the amount of \$210,000.
(e)

To record the sale of a generator that cost \$20,000, and had \$17,000 of accumulated depreciation
for \$2,000.
Chapter 11 - Page 111
3.                                                                                                  Lower                 Higher
Tax                        Book                          Taxable                Taxable
Year                  reporting                    income                     Income Amount          Income Amount
1
2
3
36,000                       36,000

Cost =
Salvage =
Depreciable value =          \$36,000

Useful life = 3 years
Straight-line depreciation method
Straight line rate =
Annual
Year                                                Depreciation
1                 x       36,000          =
2                 x       36,000          =
3                x       36,000         =
Total accumulated depreciation              36,000

Double-declining balance depreciation method

Double-declining balance rate =
Annual           Annual
Depreciation    Depreciation            Correct
Using DDB          Taking             Accumulated
in Year 3       Remaining            Depreciation
Year                                                                          Balance in Yr 3
1
2                  x (40,000 - 26,666)

3                                                                                                      36,000
Total accumulated depreciation                38,519           36,000

In this case during the last year of the asset's life using the value generated by the
double-declining balance method would OVER-DEPRECIATE the broiler.
Therefore, the difference between the depreciable value of \$36,000 and the accumulated
depreciation already taken is used to depreciate the asset in its final year.

NOTE: Even when using this accelerated method of depreciation you should never depreciate an
asset below its depreciable value.

Chapter 11 - Page 112
4.                          Cost =
Salvage value =                                   Useful life = 10 years
Depreciable value =         27,000

Sum-of-years digits = N ( N + 1)             =                             =                           =
2

Annual           Net
Year                                                           Depreciatio     Book Value
1                        x                            =

2                        x                            =

3                        x                            =

4                        x                            =

5                        x                            =

6                        x                            =

7                        x                            =

8                        x                            =

9                        x                            =

10                        x                            =
Total depreciation                       27,000

5.                                                                                   Dr                                      Cr
25,000
Equipment (Sales Tax)

Equipment (Site preparation cost)

Cash
To record purchase of central air conditioning unit

6. (a) China, glassware, silver & linen
Accounts payable
To record the purchase of china ware on account.
(b)

To record the consumption of \$4,000 worth of china
NOTE: The \$4,000 amount is the difference between the original inventory on April 1 and the value
of the china counted on May 1.

Chapter 11 - Page 113
7. (a) (1)

(2)

(b) Number             Date         FIFO                      Number           Date            LIFO
of bottles     bought        Cost                      of bottles      bought           Cost
25       January 1                                     25       January 15
25       January 15                                    25       January 30
FIFO Cost of sales ……….                               LIFO Cost of sales ……….

(c)

NOTE: This is only true in an inflationary environment in which unit costs are increasing.
The opposite would be true if costs were decreasing.
(d)

NOTE: This is only true in an inflationary environment in which unit costs are increasing.
The opposite would be true if costs were decreasing.

8. (a)

(b)

(c)

(d)

(e)

9. (a) The cost of sales for each year can be calculated using any amounts for "goods available for sale" (+ beginning
inventory + purchases) and for ending inventory to obtain the cost of food and beverage sold. We will use
a hypothetical amount of \$200,000 for beginning inventory in the year 2007 and a hypothetical amount of
\$200,000 for purchases during each year and then we will adjust the ending inventory to obtain the cost of
sales in the original (erroneous) income statements as follows:
Original (Erroneous) Hypothetical Cost of Sales Calculation
Years >>>>>>>             2007           2008            2009
Beginning inventory
Purchases
Available for sale
Ending inventory
Cost of food and beverages sold                                                                       With incorrect
2007 ending
Income Statements                                                             inventory
Years >>>>>>>         2007                2008           2009
Sales
Cost of food & beverage sold
Gross profit
Expenses
Net income

Now let us correct the ending inventory for the year 2007 by reducing the ending inventory by \$10,000
to \$160,000. The new cost of sales calculations would be as follows:
Chapter 11 - Page 114
New (correct) Hypothetical Cost of Sales Calculation
Years >>>>>>>                2007           2008          2009
Beginning inventory                                                                                   With correct
Purchases                                                                                             2007 ending
Available for sale                                                                                    inventory
Ending inventory
Cost of food and beverages sold
Income Statements
Years >>>>>>>         2007                2008           2009
Sales                                                                                                 With correct
Cost of food & beverage sold                                                                          2007 ending
Gross profit                                                                                          inventory
Expenses
Net income
(b)

10. (a) To answer these questions it is best to recreate a hypothetical cost of sales calculation for the month
of November. It does not matter what amounts are used in the calculation as long as the ending inventory
is \$100,000. This hypothetical calculation is shown below:
Wrong inventory            Correct Inventory
Nov. 30, 2007               Nov. 30, 2007      Difference is
Beginning inventory                                                              Increase in 2007
Purchases                                                                         cost of sales by       Effect of error
Available for sale                                                                 \$21,000 if no           on ending
Ending inventory                                                                correction is made        inventory at
Cost of sales                                                                              21,000           11/30/07

(1)

(\$15,000)
(2)

(6,000)
(3)
#   No correction
needed
#
#
Corrected inventory valuation as of Nov. 30, 2007                                               \$79,000

(b)

(c)
Chapter 11 - Page 115
Chapter 11 - Short Problems

Amount of annual
1. (a)     Calendar                   Depreciation      depreciation per
Year        Months          year             calendar year
2006      Oct-Nov-Dec         1
2007      Jan. to Sept.       1                                                    Cost =
Oct-Nov-Dec         2                                                 Salvage =
2008      Jan. to Sept.       2                                       Depreciable value =
Oct-Nov-Dec         3
2009      Jan. to Sept.       3                                                      Life =    4 years
Oct-Nov-Dec         4
2010      Jan. to Sept.       4
Total depreciation ……..                         \$3,000
Sum of years' digits = __ + __ +__ + __ ...
Depreciation                               OR >>             N (N + 1)         =                        =
year                                                           2
1                                              1/4 is taken in Oct-Dec of 2006 - and 3/4 in Jan-Sept 2007
2                                              1/4 is taken in Oct-Dec of 2007 - and 3/4 in Jan-Sept 2008
3                                              1/4 is taken in Oct-Dec of 2008 - and 3/4 in Jan-Sept 2009
4                                              1/4 is taken in Oct-Dec of 2009 - and 3/4 in Jan-Sept 2010
Total depreciation ……..         \$3,000

2. (1)

(2)

(3)

(4)

3. (a)                                                                               Dr                      Cr
Vehicles (cost of truck)
Vehicles (repair truck)

Vehicles (transportation cost - pay driver)
Cash
To record purchase of pick-up truck
(b)                   Cost =                                                   Year                Depreciation
Salvage value =                                                     2007
Depreciable value =       13,950                                        2008
Useful life = 7 years                                                    2009
2010       1/2 year
Straight-line rate = _____________                                   Total depreciation
Annual depreciation = _________________________                        taken prior to sale     6,975.01
Dr                       Cr
Cash
Accumulated depreciation
Loss on sale of vehicle
Vehicles
To record sale of pick-up truck on June 30, 2010

Chapter 11 - Page 116

4. (a)                                                                               Dr                      Cr

Franchise rights

To record purchase of Bumble Burger franchise rights
(b) Life of franchise rights = 10 years
Annual amortization of franchise rights = _________________________________

Amortization expense

To record annual amortization of Bumble Burger franchise rights
(c)

(d) Other Assets

NOTE: Amortization expense is deducted directly from its related intangible asset account.
Normally, an accumulated amortization account is not used for amortization.

5.         To answer these questions it is best to create a hypothetical cost of sales calculation based on a
hypothetical beginning inventory of \$200,000 in the year 2006, as follows:

Cost of Sales Based on FIFO Inventory Valuation
2006        2007                 2008
Beginning inventory
Purchases
Available for sale
Ending inventory (FIFO)
Cost of sales                     200,000     (103,000)       82,000

Cost of Sales Based on LIFO Inventory Valuation
2006        2007                 2008
Beginning inventory
Purchases
Available for sale
Ending inventory (LIFO)
Cost of sales

(1)

(2)
Chapter 11 - Page 117
Chapter 11 - Long Problems

1. (a)                                                                                        Dr                                 Cr
Equipment (cost of oven)

Equipment (sales tax)
Equipment (transportation insurance)

Equipment (testing cost)
Cash

Accounts payable
To record purchase of oven

Accounts payable
To record cost of painting room where oven will be located
NOTE: The cost of painting the room where the oven would be located is not an acquisition cost
because it has been painted regularly every year.
(b)                Cost =                           sum of years' digits = __ + __ + __ + __ + …
Salvage value =                                                                     OR
Depreciable value =              9,100                        N (N = 1)            =                                  =
Useful life = 5 years                                              2
Year                       Sum-of-years' digits depreciation
1        5 / 15 x                              =
2        _____ x                               =
3        3 / 15 x                              =
4        _____ x                          =
5        _____ x                          =
Total depreciation ..               9,100
(c)      Year                       Straight-line depreciation
1                             X        ________=                            Straight-line rate = __________________
2                             X        ________=
3                             X        ________=
4                             X        ________=
5                           X     ________=
Total depreciation                       9,100
(d) Depreciation

3,000          \$3,033

2,000
Straight-Line = \$1,820/year

1,000

\$

1                               3                              5
2                                 4                                    Year
(e)

(f)

(g)

Chapter 11 - Page 118

2. (a)                                                                                        Dr                                 Cr

Equipment (sales tax)
Equipment (transport insurance)

Notes payable
Accounts payable
To record the purchase of a refrigerator

Accounts payable
To repair cables leading to refrigeration room
NOTE: These cables would have had to be repaired anyway so this expense is not related to
the purchase of the refrigerator
(b) One-and-one-half times declining balance depreciation method
Cost =                                       straight-line rate = ____________________
Salvage value =
Depreciable value =                                           One-and-one-half times rate = _____________________
1 1/2 times     Straight           Remaining
Deprec.          Line    Accumul.   net book
Year                                                                    expense        Deprec.    Deprec.    v alue
1                        (13,150 - 0)
2
3
4
5                        (13,150-3,945-2,762-1,933-1,353)
Total depreciation
NOTE:
The straight-line depreciation amounts are calculated by div iding the remaining
net book v alue by the remaining years in the asset's useful life.
NOTE:
You sw itch to the straight-line method w hen it giv es a higher depreciation for the
remaining net book v alue than the declining balance method.
Therefore: The total depreciation is calculated by adding the following amounts:
Year 1                        1 1/2 times declining balance

Year 2                        1 1/2 times declining balance
Year 3                        1 1/2 times declining balance
Year 4                        Straight-line
Year 5                        Straight-line
13,150
(c) Straight-line depreciation
Year
1                             X                     =                       Straight-line rate = __________________
2                             X                     =
3                             X                     =
4                             X                     =
5                           X                       =
Total depreciation                      13,150

Chapter 11 - Page 119

(d) Depreciation
4,000
\$

3,000
Straight-Line = \$2,630/year

2,000                                                                                       \$2,255

1,000

1                               3                              5
2                                 4                                    Year
(e)

(f)

(g)

3. (a) Cost of tour bus
Purchase price                                                                     Cost =
Cost of overhaul                                                         Salvage =
Total cost                      20,000                           Depreciable value =               15,000
Deprec.       Annual
Units-of-output method                                                           Year              Miles         per mile      Deprec.
1
________________________________________                                           2
3
4
Total depreciation                 15,000
Straight-line depreciation                                                                           S/L         Deprec.       Annual
Year               rate          v alue       Deprec.
______________________________________                                             1
2
3
4
Total depreciation                 15,000
Sum-of-years'-digits depreciation                                                                                Deprec.       Annual
Year             Fraction        v alue       Deprec.
Sum-of-years' digits = __ + __ + __ + __ +…                    OR                  1
2
N (N = 1)          =                               =                               3
2                                                                             4
Total depreciation                 15,000

Chapter 11 - Page 120

Double declining balance depreciation
2 x Straight-Line rate =                                                       Annual                        Accumulated        Book
Expense                       Depreciation       Value
Year 1     _____ x ( 20,000 - 0 ) =                                                                                     10,000      10,000
Year 2
Year 3                                               Salvage value reached-Yr. 2
Year 4
Total depreciation expense taken over the life of the tour bus =

There is an alternate method of depreciation that can be used
to extend the remaining value to years 2, 3 and 4             Annual                                         Accumulated        Book
Expense                                         Depreciation       Value
Year 1     .50 ( 20,000 - 0 ) =                                                     10,000                              10,000      10,000
Year 2
Year 3
Year 4
Total depreciation expense taken over the life of the tour bus =
(b)

(c)

(d)

(e)

(b)

(c)

(d)

(e)

4. (a)

(b)

(c)

(d)                                                  Construction                                       Salaries       Interest
in-progress       Building      Equipment           & wages        expense
__________ _________              _________          __________ _________
Cost of reinstalling ducts in                 __________ _________              _________          __________ _________
original hotel                              __________ _________              _________          __________ _________
__________ _________              _________          __________ _________
Supervisor's salary                           __________ _________              _________          __________ _________

########                            2,500
(e)                                                                                      Dr                                 Cr
Construction-in-progress

Equipment
Salaries & wages

To correct mis-postings in various accounts
Chapter 11 - Page 121

5.                                                                                            Dr                                 Cr

(1) 6/10/08
Accounts payable
To record purchase of 20 ducks at \$10 each - 2/10,net 30 credit terms
(2) 6/15/08

To record sale of 25 ducks
(3) 6/19/08

To record purchase of 30 ducks for \$9 each on credit - no prompt payment discount
(4) 6/20/08

Purchase discounts
To record payment for 20 ducks purchased on June 10, 2008
(5) 6/24/08

To record sale of 15 ducks
(6) 6/30/08

To record purchase of 10 ducks for \$8 each - no prompt payment discount
Inventory purchases
Date          Units         Unit cost      Total cost      Beginning inventory                 Dollars           Ducks
Beginning                                                     Purchases
6/10                                                       Available for sale

6/19                                                       Ending inventory
6/30                                                       Cost of sales
70                              \$650                                                                  \$40
Ducks sold
Date        Units           Unit cost      Total cost
6/15

6/24

40                              \$390

Ending inventory value
Date      Units     Unit cost              Total cost
6/19
6/30
30                              \$260
Dr                                 Cr

Inventory
To record cost of sales
Chapter 11 - Page 122
6.                        Units             Unit            Total
purchased           cost            cost
1/10/07                                                                      Av erage cost = ____________________
1/15/07
1/26/07
31                            \$63.10
Cost of sales based on v arious
flow -through assumptions
Sales          Units                 FIFO                            LIFO                   Weighted Av erage
Dates          sold          Unit cost Total cost            Unit cost      Total cost      Unit cost        Total cost
1/13
1/18

17                                                            \$35.10
Weighted
FIFO                            LIFO                           Av erage
Sales
Cost of sales
Gross profit                                                       \$66.90

7.                        Units             Unit            Total
purchased           cost            cost
2/10                                                                       Av erage cost =                  / 14 =
2/28
14                            \$30.45
Cost of sales based on v arious
flow -through assumptions
Sales          Units               FIFO                            LIFO               Weighted Av erage
Dates          sold          Unit cost Total cost           Unit cost Total cost      Unit cost Total cost
2/20
2/28
11                            \$23.85
Weighted
FIFO                            LIFO                           Av erage
Sales
Cost of sales
Gross profit                                                       \$42.00

8.                        Units             Unit            Total
purchased           cost            cost
3/10                                                                       Av erage cost = \$                  / 19 =
3/17
3/23
19                            \$41.95
Sales          Units               FIFO                                                                            Cost of sales
Dates          sold          Unit cost Total cost                             Sales              Units            Weighted Av erage
3/13                                                                         Dates              sold          Unit cost Total cost
3/19                                                                           3/13
3/19
3/27                                                                           3/27
3/30                                                                           3/30
16                                                                                                            \$35.33
Chapter 11 - Page 123
Sales          Units                LIFO
Dates          sold          Unit cost Total cost
3/13
3/19

3/27

3/30
16                            \$35.05                                                          Weighted
FIFO                            LIFO                           Av erage
Sales
Cost of sales
Gross profit                                                      \$60.95
9. (a)                                                                         2008
Ending Inventory                    Cost of Sales                    Gross Profit
Mistake
(1)
(2)
(3)
(4)
(5)
(12,300)                  12,300
Totals
Effects of Mistakes on Inventory and Gross Profit in 2008 and 2009

2009
Ending Inventory                    Cost of Sales                    Gross Profit
Mistake
(1)
(2)
(3)
(4)
(5)
(12,300)                            12,300
Totals
(b) Assuming that the 2008 closing entries have already been made, to correct the above mistakes
the following journal entry must be made at the end of 2008:
Dr                                 CR

Inventory
This entry reduces the ending inventory for 2008 and reduces the gross profit that was
closed out to retained earnings in 2008.

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