DEPRICIATION

METHODS
LESSON 10
Assignment
Question 1 (30 marks)
Computer question
You should work through Computer illustration 10-1 in the Lesson Notes before
attempting this question.
Vaught Company purchased a special machine at a cost of 91,000. It was estimated that
the machine would have a residual value of 7,000 at the end of its service life. Statistics
relating to the machine over its service life were as follows:
Estimated service life:
Years
Output, units

5
6,000

Actual operations:
Year

Units of
output

1
2
3
4
5

1,400
1,300
1,000
1,100
1,200

Required
Prepare three depreciation schedules to calculate the depreciation of the asset over its
service life under the straight-line, productive output, and double declining balance
methods.
This question consists of four parts. Parts A, B, and C are independent of each other,
except that they share common data. Part D is an extension of part C.

Financial Accounting: Assets

Assignment 10 1

The following three partially completed worksheets in the file FA2LXQ1 have been
provided that will assist you in computing depreciation using the straight-line, productive
output, and double declining balance methods:
LXQ1A
LXQ1B
LXQ1C
Note:
The worksheets developed in this question round all amounts to the nearest dollar. You may notice that
some columns of numbers do not seem to add up to the sums at the foot of the columns. However, the
sums are actually correct if you display the columns to two decimal places.

Procedure
Part a (10 marks)
Using the worksheet LXQ1A, finish the partially completed worksheet for the
straight-line method. Use the following steps to complete the worksheet:
1. Open the file FA2LXQ1 in your FA2\DATA directory. Click the sheet tab for
LXQ1A.
2. Examine the formulas in this worksheet. Notice that column B (Depreciation
Expense) and column D (Closing Carrying Amount) are both blank, with the
exception of cell D15. Also notice that cells D8 and D9 are blank.
3. In cells D8 and D9, enter the appropriate formulas.
4. Enter the appropriate formulas for cells B16 to B25 and cells D16 to D25. In order
for your worksheet to be general enough to compute depreciation schedules for
different assets, you should not enter numbers into these cells. Use absolute cell
references whenever necessary to enable copying of the formulas to other cells. A
good test for a properly constructed worksheet is to change the Cost of Asset in
cell D5 to see if the depreciation schedule is changed automatically.
Hint:
The cell formulas for depreciation expense in column B should check if the closing book value of the
previous period is greater than the assets residual value. If it is, a depreciation amount still applies for
the current period. Otherwise, the depreciation amount should be zero for this period because the asset
value has been fully depreciated.

5. After you have completed the worksheet, save a copy and print it. Do not submit the
printouts.
6. Report the following:
dollar amount to be depreciated (2 marks)
Financial Accounting: Assets

Assignment 10 2

 annual depreciation amount (2 marks)

the year the assets closing carrying amount equals its residual value (2 marks)
the formulas in cells D8, D9, B16, and D16 (4 marks)
Part b (10 marks)
Using the worksheet LXQ1B, finish the partially completed worksheet for the productive
output method. Use the following steps:
1. Click the LXQ1B sheet tab.
2. Examine the worksheet. Note that the formula in cell C15 is built in such a way that
depreciation expense would not be taken beyond the assets residual value.
3. Enter the appropriate data into cells D5, D6, and D7, and cells B15 to B24 inclusive.
You also need to copy the formulas in cells C15 and D15 to the rest of their
respective columns, as appropriate.
4. Enter the appropriate formulas in cells E15 to E24 and cells F15 to F24.
5. Save and print the worksheet.
6. Report the following:

cost of asset (2 marks)

total productive units (2 marks)
depreciation rate per unit (2 marks)
the formulas in cells C19, D19, E19, and F19 (4 marks)

Part c (10 marks)

Using the worksheet LXQ1C, finish the partially completed worksheet for the double
declining balance method. Use the following steps:
1. Click the LXQ1C sheet tab.
2. Examine the worksheet by moving the cell pointer around. Observe that the
worksheet calculates a depreciation schedule for a non-current asset over a maximum
10-year service life using the double declining balance method.
3. Enter the appropriate data in cells D5 and D6.
4. Enter the appropriate formulas in columns E and F.
5. Save and print the worksheet.
6. Report the following:
Annual rate of depreciation (2 marks)
Balance in accumulated depreciation at the end of years 1, 2, 3, and 4 (4 marks)
The formulas (if any) in cells E14, F14, E15, and F15 (4 marks)
Financial Accounting: Assets

Assignment 10 3

Question 2 (25 marks)

Multiple choice (1 mark each)
a. What is a primary theoretical objection to the straight-line method of depreciation?
1)
2)
3)
4)

It ignores variation in the rate of asset use among periods.

It tends to result in a constant rate of return on a diminishing investment base.
It gives a lower periodic expense than the accelerated methods over the life of
the asset.
It recognizes the declining productivity of the asset.

b. As generally used in accounting, which of the following best describes accumulated

depreciation?
1)
2)
3)
4)

An expense on the income statement

The amount of the cost of property, plant, or equipment written off as expense
since the asset acquisition date
Funds (or cash) set aside to replace the property, plant, or equipment being
depreciated
Earnings retained in the business that will be used to purchase replacement
property, plant, or equipment when the related asset becomes fully depreciated

c. Which depreciation method gives recognition to a pattern of decreasing economic

benefit with the passage of time?
1)
2)
3)
4)

Straight-line method
Productive output method
Declining balance method
Increasing charge method

d. Which depreciation method is particularly appropriate where (a) obsolescence is not

the primary factor, (b) actual use can be accounted for, and (c) the service life in units
of use can be estimated reliably?
1)
2)
3)
4)

Sum-of-the-years-digits method
Declining balance method
Productive output method
Straight-line method

e. When a machine with a five-year estimated useful life is sold during the second year
of its life, how would the use of the sum of the years digits method of depreciation,
instead of the straight-line method, affect the gain or loss on the sale?
1)
2)
3)
4)

Gain

Loss

Increase
Increase
Decrease
No effect

Decrease
Increase
Increase
No effect

Financial Accounting: Assets

Assignment 10 4

f. A secret reserve occurs if a companys real financial position is better than what is
presented in its financial statements. Which of the following would create a secret
reserve?
1)
2)
3)
4)

When a betterment is recorded as an expense

When inadequate depreciation is recorded
When liabilities are understated
When shareholders equity is overstated

g. Lamina Co. recently sold some equipment with a net book value of 150,000 for
100,000. What is one of the ways this transaction will be reported on the cash flow
statement?
1)
2)
3)
4)

As a 100,000 cash outflow in the investing activities section

As a 150,000 cash outflow in the investing activities section
As a 50,000 addition to net profit in the operating activities section
As a 50,000 reduction of net profit in the operating activities section

h. How are assets depreciated under the half-year approach to fractional-year

depreciation?
1)
2)
3)
4)

Assets are depreciated for a half-year in the year of purchase and no

depreciation is recorded in the year of disposal.
Assets are depreciated for a half-year in the year of disposal and no
depreciation is recorded in the year of purchase.
Assets are depreciated for a half-year in the year of purchase and depreciated
for a half-year in the year of disposal.
No depreciation is recorded in either the year of purchase or the year of
disposal.

i. Under the required treatment, at what value must non-current assets be reflected at on
the financial statements?
1)
2)
3)
4)

Fair value
Value in use
Historic cost less accumulated depreciation
Lower of carrying amount and fair value less selling cost

(2 marks each)
j. Burkina acquired a tract of land containing an extractable natural resource. Burkina is
required by the purchase contract to restore the land to a condition suitable for
recreational use after extraction of the natural resource. Geological surveys estimated
that the recoverable reserves will be 1,500,000 tons, and that the land will have a
value of 600,000 after restoration. Relevant cost information:
Land purchase cost.......................................................................
Restoration cost, estimated..........................................................
Cost of geological surveys completed.........................................

Financial Accounting: Assets

6,000,000
900,000
300,000

Assignment 10 5

Burkina will maintain no inventory of extracted material because it will be extracted

only as sold. What should be the depletion rate per ton (exclusive of current
extraction costs) of the resource as it is sold?
1)
2)
3)
4)

3.80
4.00
4.40
4.80

k. On January 1, 20X4, Decca spent 12,000 successfully defending one of its patent
infringement suits. The related patent was originally recorded at 68,000 on
January 1, 1999, at which time it had a legal life of 17 years. Since that date, Decca
has depreciated the patent using the straight-line method of depreciation. How much
should be recorded for patent depreciation expense for the year ended December 31,
20X4?
1)
2)
3)
4)

4,000
5,000
12,000
12,800

l. Lacroix Co. recently sold some equipment with a net book value of 150,000 for
100,000. What impact did this transaction have on shareholders equity and the
current ratio?
1)
2)
3)
4)

Shareholders equity

Current ratio

Increase
Increase
Decrease
Decrease

Increase
Decrease
Decrease
Increase

m. Electra Co. has recently discovered that the net recoverable amount of ore likely to be
extracted from its mine has a value of 1,500,000. This is 500,000 less than the net
book value of the natural resource and 1,000,000 less than the estimated net
recoverable amount of one year ago. As a result, the remaining life of the mine has
been reduced from four years to three years. How should the change in value be
accounted for?
1)
2)
3)
4)

Debit to retained earnings for 500,000

Debit to retained earnings for 1,000,000
Debit to loss for 500,000
The 500,000 loss should be charged to income over the three-year remaining
useful life of the mine.

Financial Accounting: Assets

Assignment 10 6

n. Corporations A and B purchased identical equipment having an estimated service life

of 10 years. Corporation A uses straight-line depreciation and B uses the double
declining balance method. Assuming that the companies are identical in all other
respects, which of the following statements is true?
1)
2)
3)
4)

Corporation B will record more depreciation on this asset over the entire
10 years than A.
At the end of the third year, the net book value of the asset will be lower for A
than for B.
Net profit will be lower for A in the ninth year than for B.
Depreciation expense will be higher the first year for A than for B.

o. PZE Inc. purchased a machine on January 1, 20X5, for 400,000. PZE estimated the
machine would have no salvage value and is depreciating it, using the straight-line
method, over its estimated useful life of eight years. At December 31, 20X8, after
recording the annual depreciation expense, PZE determines that the machine has
suffered an impairment loss. The machines recoverable amount was determined to be
120,000. What is the amount of depreciation expense that will be recorded on the
machine in 20X9?
1)
2)
3)
4)

50,000
80,000
30,000
70,000

p. RJ purchased a tooling machine for 30,000. The machine was being depreciated
using the straight-line method over an estimated useful life of 20 years, with no
residual value. At the beginning of the eleventh year, after the machine had been in
use for 10 years, the company paid 9,000 for a major overhaul of the machine. As a
result of this improvement, the company estimated that the useful life of the machine
would be extended an additional five years. What should be the depreciation expense
recorded for the above machine in the eleventh year?
1)
2)
3)
4)

1,000
1,333
1,500
1,600

q. At the end of the year, Wayne Company sold a building, receiving as consideration a
400,000 noninterest-bearing note due in three years. The building cost 380,000 and
the accumulated depreciation was 160,000 at the date of sale. The prevailing rate of
interest for a note of this type was 12%. What gain or loss should Wayne report on its
income statement in the year of the sale?
1)
2)
3)
4)

20,000 gain
64,720 gain
180,000 gain
220,000 loss

Financial Accounting: Assets

Assignment 10 7

Question 3 (18 marks)

Argyles Bistro is a very successful restaurant located in the theatre district of a large
urban centre. The company is five years old and is owned and operated by Arthur and
Anita Argyle. The restaurant has been so successful that the Argyles have not had to use
any bank financing. To date the company has been financed by the owners personal
investment, accumulated profits, and supplier credit.
Argyles serves gourmet fare and is able to charge a premium price for its food and wine.
In the last six months the restaurant has been written up in a favourable manner in several
publications including a high end travel magazine and the citys most popular newspaper.
Arthur feels that their concept can be successfully translated to a second location in the
citys business district and should provide access to a whole new market of diners.
Although the business has been very successful and has generated significant cash flows,
the couples accountant feels that bank financing will be required to support their
expansion plans. Both Anita and Arthur feel the time is right, given their current
popularity and positive press exposure, and plan to open a second restaurant within the
next month.
Argyles Bistro has a January 31 year end which corresponds to its slow season. This is
also the time of year when Arthur and Anita do strategic planning. Earlier this year during
their strategic planning session, Arthur and Anita decided to refurbish the kitchen
cooking and refrigeration units. The units were purchased at a cost of 80,000 in the
first week in February. The equipment was not, however, fully installed and operational
until the first week of May because of modifications which had to be made to the kitchen
layout and wiring at a cost of 18,000. Arthur feels that the cost of the equipment should
include 2,500 in interest, which they would have had to incur from February until May
if they had chosen to finance the purchase with a bank loan instead of paying cash.

Required
(3 marks for overview; 12 marks for analysis and recommendations; 3 marks for
writing skills)
As the Argyles accountant, what advice would you give with respect to the cost of the
equipment as well as the accounting policy(s) to be adopted to depreciate the equipment.

Question 4 (8 marks)
Q. Enterprises purchased a delivery vehicle for 32,000 on the first day of the fiscal year.
The vehicle is expected to have a useful life of five years and residual value of 2,000.

Required
a. (3 marks)
Calculate depreciation expense for the first year assuming the company uses
i. the straight-line method
ii. the declining balance method at 1.5 times the straight-line rate
iii. sum-of-the-years-digits method

Financial Accounting: Assets

Assignment 10 8

b. (3 marks)
What assumption does each of the methods in make about the economic benefit derived
from an asset?
c. (2 mark)
Which method would you recommend that Q. Enterprises uses? (You must explain the
reason for your recommendation to receive marks.)

Question 5 (19 marks)

On February 2, 20X5, Petry Enterprises paid 76,000 cash for a piece of equipment to be
used in its blast furnace facility. The equipment has an estimated useful life of
seven years and an estimated residual value of 6,000. The companys policy is to record
a full year of depreciation in the year of purchase and no depreciation in the year of
disposal. The equipment is expected to provide 33,600 hours of service over its useful
life with estimated service hours of 4,200 in 20X5, 4,300 in 20X6, and 4,600 in 20X7.
The companys accountant has looked at several methods of depreciation that could be
used for the equipment and has prepared the following schedule for the three most likely
alternatives:
Alternative 1 Alternative 2 Alternative 3
Estimated depreciation expense 20X5

179,500

8,750

10,000

After consideration of the alternatives, the company chose to use the straight-line method
of depreciation. In 20X6 an accident occurred which caused damage to the equipment.
The equipment was repaired in 20X6, at a cost of 5,000, but it was determined in early
20X7 that an impairment loss may have occurred. An analysis performed in early 20X7
concluded that the equipment had a value in use of 40,000, a net selling price of
36,000 and a remaining useful life of two years with no residual value.
a. (3 marks)
Identify the depreciation method being used in each of alternatives 1, 2, and 3.
b. (3 marks)
Prepare the journal entries to record depreciation expense and the 5,000 expenditure in
20X6.
c. (7 marks)
Prepare the journal entries to record the impairment loss and depreciation expense for
20X7.
d. (6 marks)
Assuming Petry Enterprises uses the indirect method of presenting cash flows from
operating activities, prepare the cash flow statement disclosures with respect to the
equipment for the years 20X5, 20X6, and 20X7.

100
Financial Accounting: Assets

Assignment 10 9