(1) Problem 3.

10 from Flynn text

Answer the following questions about depreciation:

a) In your own words (one or two sentences), what is the purpose of putting
depreciation into an income statement?

Is the way to neutralize the value of an asset against the profits that it produce.

b) If an asset has a depreciation period of 12 years, an original value of $13.45

million, and an estimate salvage value of $250,000, what is its accumulated
depreciation (straight line) at the end of the fifth year?

13450000-250000 = 1100000 The result is 7950000

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c) An asset has an original purchase value of $12 million, a depreciation period

of 6 years, and an estimated salvage value of zero. What is the entry into "other
income if, after four years of operating the piece of equipment, it is sold for a
salvage value of $6 million?

12000000-6000000 = 2000000 The entry would be of 2000000

If the salvage value is $4 million?

12000000-4000000 =1333333.33*4= 5333333.33

12000000-5333333.33= 6666666.67 The entry would be of 6666666.67

If the salvage value is $2 million?

12000000-2000000 =1666666.67*4= 6666666.68 Entry for 5333333.32

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If the salvage value is zero?

12000000 = 2000000 12000000-8000000=4000000 The entry would be of 4000000

d) Assume an asset has an original value of $5 million, a depreciation period of

five years, and no salvage value. If it is sold after three years for $1 million, then
there is $ 1 million in non-depreciated value that must be reflected in the income
statement as "other income: true or false? If true, is the entry in other income a
negative number (a loss) or a positive number (a gain)? In hindsight, was the
operating income for the business understated or overstated for the three-year
period in which the piece of equipment was operated?

Yes, It has to reflected in the income since the company doesnt have the sells of
equipment as main activity. It has to be a entry (positive)

(2) Your colleague has calculated the depreciation schedule for a new computer using
four different methods, and has given them to you for your consideration (in the table
below). However, he forgot to tell you which depreciation methods he used to calculate
those schedules, and merely labelled them "A, "B, and "C. The values in the table
below are the annual depreciation charges for the computer using the various methods
he chose.

Identify the depreciation methods used to arrive at the schedules in columns A, B, and
C. Note that the estimated salvage value of the equipment at the end of its 6-year
useful life is $600. And remember, the values in the table are the depreciation charges
themselves, they are not the remaining book value.

Year A(Declining balance) B (SOYDE) C (Straight Line)

1 $2000.00 $1600.00 1233.00

 2 1500.00 2560.00 1233.00

3 1125.00 1536.00 1233.00

4 844.00 921.60 1233.00

5 633.00 552.96 1233.00

6 475.00 331.78 1233.00

(3) Your company purchased new excavation equipment as follows:

Purchases

01 July 2001 $42 000 (1)40250 (2)36050 (3)31850

01 Apr 2002 $24 000 (1)22400 (2)20000 (3)17600

01 Nov 2003 $30 000 (1)29750 (2)26750 (3)23750

(a) Using straight line depreciation with a 10 year depreciable lifetime, calculate the
total book value of your equipment at the end of 2001, 2002, and 2003.

01 July 2001 $42 000 (1)40250 (2)36050 (3)31850

01 Apr 2002 $24 000 (1)22400 (2)20000 (3)17600

01 Nov 2003 $30 000 (1)29750 (2)26750 (3)23750

(b) Using a CCA rate of 30%, calculate the undepreciated capital cost of your
equipment at the end of 2001, 2002, and 2003.

01 July 2001 $42 000 (1)525 (2)1785 (3)3045

01 Apr 2002 $24 000 (1)480 (2)1200 (3)1920

01 Nov 2003 $30 000 (1)75 (2)975 (3)1875