Depreciation Problems With Sample Solutions

1. A refrigerator used by a meat processor has a cost of $93,750, an estimated residual value of $10,000 and an estimated useful life of 25 years. What is the amount of the annual depreciation computed by the straight-line method?
2. The Ministry of Finance published the FY2009 Tax Reform (Main Points) on December 19, 2008. Included in the Reform is the introduction of a 2-year measure allowing immediate depreciation for investment in energy-saving facilities and appliances. If this measure doubles the MACRS allowable depreciation for the first year, what depreciation expense would a new energy-efficient HVAC system costing $138,500 be for the first year (assume a 15-year life class)?
3. On April 29, 2013, Quality Appliances purchased equipment for $260,000. The estimated service life of the equipment is six years and the estimated residual value is $20,000. Quality’s fiscal year ends on December 31.Required: Calculate depreciation for 2013 and 2014 using each of the three methods listed. Quality calculates partial year depreciation based on the number of months the asset is in service. Round all computations to the nearest dollar.
   1. Straight-line.
   2. Sum-of-the-years’ digits.
   3. Double-declining balance.
4. On January 1, 2007, ABC Company purchased equipment for $145,000. The equipment was assigned a life of 12 years and a $13,000 residual value. On January 1, 2011, ABC Company overhauled the equipment. This capital expenditure caused ABC Company to change the life of the equipment from 12 years to 20 years with a residual value at the end of the 20 years equal to $8,000. Assume ABC Company employs the straight-line depreciation method. ABC Company reported accumulated depreciation related to this equipment of $72,500 at December 31, 2014. Calculate the amount ABC Company spent to overhaul the equipment.
5. Brainiac Company purchased a delivery truck for $30,000 on January 1, 2011. The truck has an expected salvage value of $2,000 and is expected to be driven 100,000 miles over its estimated useful life of 8 years. Actual miles driven were 15,000 in 2011 and 12,000 in 2012.(a) Compute depreciation expense for 2011 and 2012 using (1) the straight-line method, (2) the units-of-activity method, and (3) the double-declining balance method.(b) Assume that Brainiac uses the straight-line method.

   (1) Prepare the journal entry to record 2011 depreciation.

   (2) Show how the truck would be reported in the December 31, 2011, balance sheet.

6. On April 29, 2013, Quality Appliances purchased equipment for $260,000. The estimated service life of the equipment is six years and the estimated residual value is $20,000. Quality’s fiscal year ends on December 31.Required:
   Calculate depreciation for 2013 and 2014 using each of the three methods listed. Quality calculates partial year depreciation based on the number of months the asset is in service. Round all computations to the nearest dollar.1. Straight-line.

   2. Sum-of-the-years’ digits.

   3. Double-declining balance.

7. Fair Weather Friend Corporation has earnings before depreciation and taxes of $90,000; and depreciation of $40,000 and that it has a 30 percent tax bracket.
   • Compute its cash flow using the format below.
     • Earnings before depreciation and taxes
     • Depreciation
     • Earnings before taxes
     • Taxes @ 30%
     • Earnings after taxes
     • Depreciation
     • Cash flow
   • How much would cash flow be if there were only $10,000 in depreciation? All other factors are the same.How much cash flow is lost due to the reduced depreciation between a & b?
8. A trucking company sold its fleet of trucks for $55,000. The trucks had originally cost $1,410,000 and had accumulated depreciation of $1,269,000 through the date of disposal. What gain or loss did the trucking company record when it sold the fleet of trucks?
9. Deloise Company purchased a new machine on September 1, 2012, at a cost of $91,920. The company estimated that the machine has a salvage value of $8,040. The machine is expected to be used for 71,200 working hours during its 8-year life.Compute the depreciation expense under the straight-line method for 2012 and 2013, assuming a December 31 year-end.
10. The Nichols clinic purchased a new surgical laser for 96,000. The estimated salvage value is 6,000. The laser has a useful life of 5 years and the clinic expects to use it at 10,000 hours. It was used 1,600 hours in year 1. 2,200 hours in year 2. 2,4000 in year 3. 2,300 hours in year 4. 2,000 hours in year 5.Instructions:

    Compute the annual depreciation for each of the five years under each of the following methods. straight line (2) units of activity.

    (b) If you were the administrator of the clinic which method would you deem as most appropiate? Justify your answer.

    (c) Which method would result in the lowest reported income in the first year? Which method would result in the lowest total reported income over the 5 year period?

11. Assume a piece of equipment was purchased July 26, 2012, at a cost of $72,000. The estimated residual value is $5,400 with a useful life of 5 years. Assume a production life of 60,000 units. Compute the depreciation for years 2012 and 2013 using (a) straight-line and (b) units-of-production (in 2012, 5,000 units produced and in 2013, 18,000 units produced).
12. A piece of newly purchased industrial equipment costs $ 1,080,000 and is classified as seven-year property under MACRS (modified accelerated cost recovery system). Calculate the annual depreciation allowances and end of the year book values for this equipment.

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