Exercise 11-1

1. Straight-line:

$22,000 - 2,000

= $4,000 per year

5 years

2. Sum-of-the-years’ digits:

Year / Depreciable
Base / X / Depreciation
Rate per Year / = / Depreciation
2000 / $20,000 / $6,667
2001 / 20,000 / 5,333
2002 / 20,000 / 4,000
2003 / 20,000 / 2,667
2004 / 20,000 / 1,333
Total / $20,000
Exercise 11-1 (concluded)

3. Double-declining balance:

Straight-line rate of 20% (1 ÷ 5 years) x 2 = 40% DDB rate.

Year / Book Value Beginning
of Year X / Depreciation
Rate per
Year = / Depreciation / Book Value
End of Year
2000 / $22,000 / 40% / $ 8,800 / $13,200
2001 / 13,200 / 40% / 5,280 / 7,920
2002 / 7,920 / 40% / 3,168 / 4,752
2003 / 4,752 / 40% / 1,901 / 2,851
2004 / 2,851 / * / 851 * / 2,000
Total / $20,000
* Amount necessary to reduce book value to residual value

4. Units-of-production:

$22,000 - 2,000

= $.20 per mile depreciation rate

100,000 miles

Year / Actual
Miles
Driven X / Depreciation
Rate per
Mile = / Depreciation / Book Value
End of
Year
2000 / 22,000 / $.20 / $4,400 / $17,600
2001 / 24,000 / .20 / 4,800 / 12,800
2002 / 15,000 / .20 / 3,000 / 9,800
2003 / 20,000 / .20 / 4,000 / 5,800
2004 / 21,000 / * / 3,800 * / 2,000
Totals / 102,000 / $20,000
* Amount necessary to reduce book value to residual value

Exercise 11-2

1. Straight-line:

$115,000 - 5,000

= $11,000 per year

10 years

2. Sum-of-the-years’ digits:

Sum-of-the-digits is {[10 (10 + 1)]÷2} = 55

2000$110,000 x 10/55= $20,000

2001$110,000 x 9/55= 18,000

3. Double-declining balance:

Straight-line rate is 10% (1 ÷ 10 years) x 2= 20% DDB rate

2000$115,000 x 20% = $23,000

2001($115,000 - 23,000) x 20% = $18,400

4. One hundred fifty percent declining balance:

Straight-line rate is 10% (1 ÷ 10 years) x 1.5= 15% rate

2000 $115,000 x 15% = $17,250

2001($115,000 - 17,250) x 15% = $14,663

5. Units-of-production:

$115,000 - 5,000

= $.50 per unit depreciation rate

220,000 units

200030,000 units x $.50 = $15,000

200125,000 units x $.50 = $12,500

Exercise 11-8

Requirement 1

Cost of the equipment:

Purchase price $135,000

Freight charges 1,000

Installation charges 4,000

$140,000

Straight-line rate of 12.5% (1 ÷ 8 years) x 2 = 25% DDB rate.

Year / Book Value Beginning of Year / X / Depreciation
Rate per Year / = / Depreciation / Book Value
End of Year
2000 / $140,000 / 25% / $ 35,000 / $105,000
2001 / 105,000 / 25% / 26,250 / 78,750
2002 / 78,750 / 25% / 19,688 / 59,062
2003 / 59,062 / 25% / 14,766 / 44,296
2004 / 44,296 / * / 3,574 / 40,722
2005 / 40,722 / * / 3,574 / 37,148
2006 / 37,148 / * / 3,574 / 33,574
2007 / 33,574 / * / 3,574 / 30,000
Total / $110,000
* Switch to straight-line in 2004:
Straight-line depreciation:
$44,296 - 30,000
= $3,574 per year
4 years

Requirement 2

For plant and equipment used in the manufacture of a product, depreciation is a product cost and is included in the cost of inventory. Eventually, when the product is sold, depreciation will be included in cost of goods sold.

Exercise 11-11

Requirement 1

a. To record the purchase of a patent.

January 1, 1998

Patent 600,000

Cash 600,000

To record amortization on the patent.

December 31, 1998 and 1999

Amortization expense ($600,000 ÷ 10 years) 60,000

Patent 60,000

b. To record the purchase of a franchise.

2000

Franchise 500,000

Cash 500,000

c. To record research and development expenses.

2000

Research and development expense 380,000

Cash 380,000

Exercise 11-11 (concluded)

Year-end adjusting entries

Patent: To record amortization on the patent.

December 31, 2000

Amortization expense (determined below) 96,000

Patent 96,000

Calculation of annual amortization after the estimate change:

($ in thousands)

$600 Cost
$60 Old annual amortization ($600 ÷ 10 years)
x 2 years 120Amortization to date (1998-1999)
480Unamortized cost (balance in the patent account)

÷ 5Estimated remaining life
$ 96New annual amortization

Franchise: To record amortization of franchise.

December 31, 2000

Amortization expense($500,000 ÷ 10 years) 50,000

Franchise 50,000

Requirement 2

Intangible assets:

Patent $384,000 [1]

Franchise 450,000 [2]

Total intangibles $834,000

[1] $480,000 - 96,000

[2] $500,000 - 50,000

Exercise 11-16

Requirement 1

($ in 000s)

Accumulated depreciation (cumulative effect given) 450
Cumulative effect of accounting change 450

Requirement 2

The cumulative income effect (net of the tax effect) is reported as a separate item of income between extraordinary items and net income. The 1999 financial statements are notrestated in their entirety under the current approach. However, the effect of the change on certain key income numbers should be disclosed for the current period and on a pro forma (as if) basis for the financial statements of all prior periods that are included for comparison with the current financial statements. So, the 2000 comparative income statements should include pro forma restatement of 1999’s (a) income before extraordinary items, (b) net income, and (c) earnings per share for both income amounts. These specific items are calculated as if the straight-line method had been in effect before the change and are reported as supplemental information. Also, the nature of and justification for the change should be described in the disclosure notes.

Exercise 11-19

Requirement 1

Cash 6,000

Accumulated depreciation - tractor (balance) 22,000

Loss on sale of tractor (difference) 2,000

Tractor(balance) 30,000

Requirement 2

Cash 10,000

Accumulated depreciation - tractor (balance) 22,000

Tractor (balance) 30,000

Gain on sale of tractor (difference) 2,000

Problem 11-4

1. Depreciation for 1998 and 1999.

December 31, 1998

Depreciation expense ($48,000 ÷ 8 years x 9/12) 4,500

Accumulated depreciation - equipment 4,500

December 31, 1999

Depreciation expense ($48,000 ÷ 8 years) 6,000

Accumulated depreciation - equipment 6,000

2. The year 2000 expenditure.

January 4, 2000

Repair and maintenance expense 2,000

Equipment 10,350

Cash 12,350

3. Depreciation for the year 2000.

December 31, 2000

Depreciation expense (determined below) 5,800

Accumulated depreciation - equipment 5,800

Calculation of annual depreciation after the estimate change:

$ 48,000 Cost

10,500Depreciation to date ($4,500 + $6,000)
37,500Book value

10,350Asset addition

47,850New depreciable base

÷ 8 1/4 Estimated remaining life(10 years - 1 3/4 years)

$ 5,800New annual depreciation

Problem 11-10

a. This is a change in estimate.

No entry is needed to record the change.

2000 adjusting entry:

Depreciation expense (determined below) 37,500
Accumulated depreciation 37,500

Calculation of annual depreciation after the estimate change:

$1,000,000 Cost
$25,000 Old depreciation ($1,000,000 ÷ 40 years)
x 3 yrs (75,000)Depreciation to date (1997-1999)
925,000Undepreciated cost
(700,000)New estimated salvage value
225,000To be depreciated

÷ 6Estimated remaining life(6 years: 2000-2005)
$ 37,500New annual depreciation

A disclosure note should describe the effect of a change in estimate on income before extraordinary items, net income, and related per-share amounts for the current period.

Problem 11-10 (concluded)

b. This is a change in accounting principle.

To record the change:

Accumulated depreciation (determined below) 72,000
Cumulative effect of accounting change * 72,000

*Cumulative effect of the change:($ in 000s)

SYDStraight-line

1996 depreciation $60 ($330 x 10/55) $33 ($330 ÷ 10)
1997 depreciation 54 ($330 x 9/55) 33 ($330 ÷ 10)
1998 depreciation 48 ($330 x 8/55) 33 ($330 ÷ 10)
1999 depreciation 42 ($330 x 7/55) 33 ($330 ÷ 10)
Accumulated depreciation and

1996-99 reduction in income $204  $132

difference

$72

2000 adjusting entry:

Depreciation expense ($330,000 ÷ 10 years) 33,000
Accumulated depreciation 33,000

The cumulative income effect, net of income taxes, is reported as a separate item of income between extraordinary items and net income. The effect of the change on certain key income numbers should be disclosed for the current period and on a pro forma basis for the financial statements of all prior periods that are included for comparison with the current financial statements. Also, the nature of and justification for the change should be described in the disclosure notes.

c. This is a change in accounting principle.

Because the change will be effective only for assets placed in service after the date of change, there would be no cumulative effect on prior years’ earnings because the change doesn’t affect assets depreciated in prior periods.

The nature of and justification for the change should be described in the disclosure notes. Also, the effect of the change on the current period’s income before extraordinary items, net income, and related per-share amounts should be disclosed.