1)
1). Depreciation Methods The Winsey Company purchased equipment on January 2, 2010, for $700,000the equipment has the following characteristics: Estimated service life 20 years Estimated residual value $50,000 100,000 hours 950,000 units of output During 2010 and 2011, the company used the machine for 4,500 and 5,500 hours, respectively, and produced 40,000 and 60,000 units, respectively. Required: Compute the depreciation for 2010 and 2011 under each of the following methods: 1.Straight-line 2.Hours worked 3.Units of output 4.Sum-of-years’-digits 5.Double-declining-balance 6.150%-declining-balance puter the company’s return on assets (net income divided by average total assets, as discussed in Chapter 6) for each method for 2010 and 2011, assuming that income before depreciation is $100,000. For simplicity, use ending assets, and ignore interest, income taxes, and other assets.
1. Straight-line:
[pic]
Depreciation: 2010 2011
$32,500 $32,500
2. Hours worked:
[pic]
Depreciation: 2010 = $6.50 x 4,500 hours = $29,250
2011 = $6.50 x 5,500 hours = $35,750
3. Units of output:
[pic]
Depreciation: 2010 = $0.68 x 40,000 units = $27,200
2011 = $0.68 x 60,000 units = $40,800
4. Sum-of-the-years'-digits:
SYD for 20 years = [pic]
Depreciation: 2010 = 20/210 x ($700,000 - $50,000) = $61,905
2011 = 19/210 x ($700,000 - $50,000) = $58,810
5. Double-declining balance:
Straight-line rate = 1/20 = 5%
Depreciation: 2010 = $700,000 x (2 x 5%) = $70,000
2011 = ($700,000 - $70,000) x (2 x 5%) = $63,000
6. 150% declining balance:
Straight-line rate = 1/20 = 5%
Depreciation: 2010 = $700,000 x (1.5 x 5%) = $52,500
2011 = ($700,000 - $52,500) x (1.5 x 5%) = $48,563
7. Straight-line:
Return on total assets, 2010 = Net income ÷ Total assets
= [pic]
= 10.1%
Return on total assets, 2011 = Net income ÷ Total assets
= [pic]
= 10.6%
Hours worked:
Return on total assets, 2010 = Net income ÷ Total assets
= [pic]
= 10.6%
Return on total assets, 2011 = Net income ÷ Total assets
= [pic]
= 10.1%
Units of output:
Return on total assets, 2010 = Net income ÷ Total assets
= [pic]
= 10.8%
Return on total assets, 2011 = Net income ÷ Total assets
= [pic]
= 9.4%
Sum-of-the-years' digits
Return on total assets, 2010 = Net income ÷ Total assets
= [pic]
= 6.0%
Return on total assets, 2011 = Net income ÷ Total assets
= [pic]
= 7.1%
Double-declining balance:
Return on total assets, 2010 = Net income ÷ Total assets
= [pic]
= 4.8%
Return on total assets, 2011 = Net income ÷ Total assets
= [pic]
= 6.5%
150%-declining balance:
Return on total assets, 2010 = Net income ÷ Total assets
= [pic]
= 7.3%
Return on total assets, 2011 = Net income ÷ Total assets
= [pic]
= 8.6%
2). Depreciation for Financial Statements and Income Tax Purpose The Hunter Company purchased a light truck on January 2,2010 for $18,000. The truck, which will be used for deliveries, has the following characteristic: Estimate life: 5 years Estimated residual value: $3,000 Depreciation for financial statements: straight-line Depreciation for income tax purposes: MACRS (three-year-life) From 2010 through 2014, each year, the company had sales of $100,000 cost of goods sold of $60,000, and operating expenses (excluding depreciation) of $15,000. The truck was disposed of on December 31, 2014 for $2,000. Required: 1.Prepare an income statement for financial reporting trough pretax accounting income for each of the five years, 2010 through 2014. 2.Prepare, instead, an income statement for income tax purposes through taxable income for each of the five years, 2010 through 2014. pare the total income for all five years under Requirement I and Requirement 2.
|1. | 2010 | 2011 | 2012 | 2013 | 2014 |
|Sales |$100,000 |$100,000 |$100,000 |$100,000 |$100,000 |
|Cost of goods sold | (60,000) | (60,000) | (60,000) | (60,000) | (60,000) |
|Gross profit |$ 40,000 |$ 40,000 |$ 40,000 |$ 40,000 |$ 40,000 |
|Operating expenses | (15,000) | (15,000) | (15,000) | (15,000) | (15,000) |
|Depreciation expense | (3,000)a | (3,000) | (3,000) | (3,000) | (3,000) |
|Loss on disposal | -0- | -0- | -0- | -0- | (1,000)b |
|Pretax accounting |
|income |$ 22,000 |$ 22,000 |$ 22,000 |$ 22,000 |$ 21,000 |
[pic]
b$2,000 - ($18,000 - $15,000)
|2. | 2010 | 2011 | 2012 | 2013 | 2014 |
|Sales |$100,000 |$100,000 |$100,000 |$100,000 |$100,000 |
|Cost of goods sold | (60,000) | (60,000) | (60,000) | (60,000) | (60,000) |
|Gross profit |$ 40,000 |$ 40,000 |$ 40,000 |$ 40,000 |$ 40,000 |
|Operating expenses | (15,000) | (15,000) | (15,000) | (15,000) | (15,000) |
|Depreciation expense | (5,999)a | (8,001)b | (2,666)c | (1,334)d | (3,000) |
|Gain on disposal | -0- | -0- | -0- | -0- | 2,000 |
|Taxable income |$ 19,001 |$ 16,999 |$ 22,334 |$ 23,666 |$ 27,000 |
a$18,000 x 33.33%
b$18,000 x 44.45%
c$18,000 x 14.81%
d$18,000 x 7.41%
3. Total pretax accounting income = $109,000 ($22,000 + $22,000 + $22,000 +
$22,000 + $21,000)
Total taxable income = $109,000 ($19,001 + $16,999 + $22,334 + $23,666 +
$27,000)
3). Changes and Corrections of Depreciation During 2010, the controller of the Ryel Company asked you to prepare correction journal entries for the following three situations: 1.Machine A was purchased for $50,000 on January 1, 2005. Straight-line depreciation has been recorded for five years, and the Accumulated Depreciation account has a balance of $25,000. The estimated residual value remains at $5,000, but the service life is now estimated to be one year longer than estimated originally. 2.Machine B was purchased for $40,000 on January 1, 2008. It had an estimated residual value of $5,000 and an estimated service life of 10 years. It has been depreciated under the double-declining-balance method for two years. Now, at the beginning of the third year, Ryel has decided to change to the straight-line method. 3.Machine C was purchased for $20,000 on January 1, 2009. Double-declining-balance depreciation has been recorded for one year. The estimated residual value of the machine is $2,000 and the estimated service life is five years. The computation of the depreciation erroneously included the estimated residual value. Required: Prepare any necessary correction journal entries for each situation. Also prepare the journal entry necessary for reach situation to record the depreciation for 2010. (Assume that the debit is to Depreciation Expense.)
1. Change in estimate—accounted for prospectively:
Original Life = [pic] = [pic] = 9 years
*$25,000 ( 5
Remaining life = (9-5) years + 1 year = 5 years
Depreciation = [pic]
Depreciation Expense 4,000
Accumulated Depreciation: Machine A 4,000
To record depreciation for 2010.
2. Change in depreciation method—accounted for prospectively:
Previous depreciation amount
2008 $40,000 x (2 x 10%) $ 8,000
2009 ($40,000 - $8,000) x (2 x 10%) = 6,400
$14,400
Book value = $40,000 - $14,400 = $25,600
Depreciation = [pic] = $2,575 per year
Depreciation Expense 2,575
Accumulated Depreciation: Machine B 2,575
To record depreciation for 2010.
3. Error—accounted for as a prior period adjustment:
Previous depreciation - erroneously calculated ($20,000 - $2,000) x
(2 x 20%) = $7,200
Correct depreciation ($20,000) x (2 x 20%) = $8,000
2010 correct depreciation ($20,000 - $8,000) x (2 x 20%) = $4,800
Retained Earnings 800
Accumulated Depreciation: Machine C 800
Prior period adjustment for error
($8,000 - $7,200).
Depreciation Expense 4,800
Accumulated Depreciation: Machine C 4,800
To record depreciation for 2010.
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