MBA 451 Depreciation Practice Problem fall 2020 PDF

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MBA 451 Depreciation Practice Problems

MBA 451 Depreciation Practice Problems Solutions E6-27. a. Straight line: ($75,000 - $5,000) / 5 years = $14,000 per year Income Statement

Balance Sheet Transaction COGS 14,000 AD 14,000

Cash Asset

+

Record $14,000 depreciation as part of COGS*

Noncash Assets

=

-14,000 Accumulated Depreciation

=

Liabilities

+

Contrib. + Capital

Earned Capital

Revenues

-14,000 Retained Earnings

–

Expenses

=

Net Income

–

+14,000 Cost of Goods Sold*

=

-14,000

* Because the equipment is used exclusively in the manufacturing process, the depreciation is more accurately recorded as part of cost of goods sold and not as depreciation expense.

b. Double-declining-balance: Twice straight-line rate = 2 × (100% / 5) = 40% Year 1 2 3 4 5

Book Value × Rate $75,000 × 0.40 = ($75,000 - $30,000) × 0.40 = ($75,000 - $48,000) × 0.40 = ($75,000 - $58,800) × 0.40 = Total

Depreciation Expense $30,000 18,000 10,800 6,480 4,720** $70,000

** The calculated depreciation expense of $3,888 [($75,000 - $65,280) × 0.40] is not enough to result in the $5,000 salvage value. Therefore, we adjust the depreciation in year 5 to $4,720 so that the total accumulated depreciation (the expense across all 5 years) is $70,000. This is called a “plug.” Income Statement

Balance Sheet Transaction

Cash Asset

+

Noncash Assets

=

Liabilities

+

Contrib. + Capital

Earned Capital

Revenues

–

Expenses

=

Net Income

–

+30,000 Cost of Goods Sold*

=

-30,000

COGS 30,000 AD 30,000 Record $30,000 depreciation as part of COGS*

-30,000 Accumulated Depreciation

=

-30,000 Retained Earnings

MBA 451 Depreciation Practice Problems

E6-28. a. 1. Cumulative depreciation expense to date of sale: [($1,280,000 - $160,000) / 10 years] × 7 years = $784,000 2. Net book value of the plane at date of sale: $1,280,000 - $784,000 = $496,000 b. 1. There is no gain or loss if the cash proceeds are equal to the plane’s net book value at the disposal date. 2. $211,000 loss on sale calculated as: $285,000 – $496,000 3. $204,000 gain on sale calculated as: $700,000 – $496,000...