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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