depreciation and its impact on the finances of a business

26) Explain the concept of depreciation. Include in your discussion one common misconception regarding depreciation and its impact on the finances of a business.

27) For each of the independent situations below, determine the age of the asset in question. All assets were acquired at the beginning of the year.

a.The balance in the Buildings account is $400,000 while the balance sheet shows the book value of the buildings at $217,600. The notes to the financial statements indicate that straight-line depreciation is used for all property, plant, and equipment and that residual values are estimated at 5% of cost. The estimated life of the buildings is 25 years.

b.The book value of the delivery equipment is $51,520. The cost of the delivery equipment was $80,500. The company uses the straight-line method of depreciation for delivery equipment and estimates life at 5 years or 50,000 units. So far, 27,000 units have been produced. Residual value is 10% of cost.

c.The balance in the Accumulated Depreciation account for furniture is $21,875. The furniture has been amortized a total of 43.75% of its original cost. The company's notes to the financial statements indicate that double-declining-balance depreciation is used for all furniture. The company estimates useful life at 8 years and residual value at 20% of cost.

28) Carleton Corporation purchased machinery on October 1, 2013, at a total cost of $98,000. Estimated residual value is $8,000, estimated life of the machinery is 6 years or 50,000 hours. During 2013 and 2014, the machinery was used 1,400 and 8,760 hours, respectively.

Compute depreciation under straight-line, units-of-production, and double-declining-balance methods for 2013 and 2014.


Straight-line depreciation________________

Units-of-production depreciation________________



29) Seasons Limited paid $135,000 to purchase equipment at the beginning of 2012. Seasons Limited estimated the useful life of the equipment to be 4 years or 200,000 units. The equipment will be considered fully amortized when the balance in the Accumulated Depreciation account reaches $120,000. The equipment produced 52,000 units in 2015.


a.Determine the estimated residual value of the equipment.

b.What is the amortizable cost of the equipment?

c.Calculate depreciation expense for 2015 under each of the following methods:




30) Explain how a company should decide which depreciation method to use for financial reporting purposes.

31) Rainier Corporation purchased five automobiles at the beginning of 2012 for a total cost of $125,000. Rainier Corporation estimates the total residual value of the five automobiles to be $25,000 and their estimated useful life at 5 years. Use the double declining balance method to calculate the depreciation expense for 2012 and 2013.

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