Exercise For Chapter 2

I .On January 1, 2007, the Excel Delivery Company purchased a delivery van for $22,000. At the end of its
five-year useful life, it is estimated that the van will be worth $2,000. During the five-year period, the
company expects to drive the van 100,000 miles.
Required:
Calculate annual depreciation for the five-year life of the van using each of the following methods. Round all
computations to the nearest dollar.
1. Straight line.
2. Sum-of-the-years’ digits.
3. Double-declining balance.
4. Units of production using miles driven as a measure of output, and the following actual mileage:
Year Miles
2007 22,000
2008 24,000
2009 15,000
2010 20,000
2011 21,000

II.On January 1, 2007, the Alleghany Corporation purchased machinery for $115,000. The estimated useful
life of the machinery is 10 years and the estimated residual value is $5,000. The machine is expected to
produce 220,000 units during its useful life.
Required:
Calculate depreciation for 2007 and 2008 using each of the following methods. Round all computations to
the nearest dollar.
1. Straight line.
2. Sum-of-the-years’ digits.
3. Double-declining balance.
4. One hundred fifty percent declining balance.
5. Units of production (units produced in 1997, 30,000; units produced in 1998, 25,000).
[This is a variation of the previous exercise modified to focus on depreciation for partial years.]

III. On October 1, 2010, the Alleghany Corporation purchased machinery for $115,000. The estimated useful
life of the machinery is 10 years and the estimated residual value is $5,000. The machine is expected to
produce 220,000 units during its useful life.
Required:
Calculate depreciation for 2010 and 2011 using each of the following methods. Partial-year depreciation is
calculated 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. One hundred fifty percent declining balance.
5. Units of production (units produced in 2010, 10,000; units produced in 2011, 25,000).

IV. The Funseth Company purchased a five-story office building on January 1, 2010, at a cost of $4,400,000.
The building has a residual value of $200,000 and a 30-year useful life. The straight-line depreciation
method is used. On June 30, 2010, construction of a sixth floor was completed at a cost of $1,100,000.
Required:
Calculate the depreciation on the building and building addition for 2010 and 2011 assuming that the
addition did not change the useful life or residual value of the building.

V.For each of the following depreciable assets, determine the missing amount (?). Abbreviations for
depreciation methods are SL for straight line, SYD for sum-of-the-years’ digits, and DDB for double-
declining balance.

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 Residual Service Life Depreciation Depreciation
Asset Cost Value (years) Method (year 2)
A ? $20,000 5 DDB $24,000
B $ 40,000 ? 8 SYD 7,000
C 65,000 5,000 ? SL 6,000
D 230,000 10,000 10 ? 22,000
E 200,000 20,000 8 150%DB ?
VI.Highsmith Rental Company purchased an apartment building early in 2011. There are 20 apartments in
the building and each is furnished with major kitchen appliances. The company has decided to use the group
depreciation method for the appliances. The following data is available:
Residual Useful Life
Appliance Cost Value (in years)
Stoves $15,000 $3,000 6
Refrigerators 10,000 1,000 5
Dishwashers 8,000 500 4
In 2014, three new refrigerators costing $2,700 were purchased for cash. The old refrigerators, which
originally cost $1,500, were sold for $200.
Required:
1. Calculate the group depreciation rate, group life, and depreciation for 2011.
2. Prepare the journal entries to record the purchase of the new refrigerators and the sale of the old
refrigerators.

VII. On January 2, 2007, David Corporation purchased a patent for $500,000. The remaining legal life is 12
years, but the company estimated that the patent will be useful only for eight years. In January 2009, the
company incurred legal fees of $45,000 in successfully defending a patent infringement suit. The successful
defense did not change the company’s estimate of useful life.
Required:
Prepare journal entries related to the patent for 2007, 2008, and 2009.

VIII. Wardell Company purchased a minicomputer on January 1, 2010, at a cost of $40,000. The computer
was depreciated using the straight-line method over an estimated five-year useful life with an estimated
residual value of $4,000. On January 1, 2012, the estimate of useful life was changed to a total of 10 years,
and the estimate of residual value was changed to $900.
Required:
1. Prepare the appropriate adjusting entry for depreciation in 2012 to reflect the revised estimate.
2. Repeat requirement 1 assuming that the company uses the sum-of-the-years’-digits method instead
of the straight-line method.

IX. Clinton Poultry Farms has used the declining-balance method of depreciation for conveyor equipment
acquired at the beginning of 2009 for financial reporting. At the beginning of 2012, Clinton decides to
change to the straight-line method. There is no change in the method used for tax reporting. Clinton’s tax
rate is 40%.
The effect of this change on depreciation for each year is as follows:
($ in 000s)
Straight Declining
Year Line Balance Difference
2009 $ 400 $ 640 $240
2010 400 550 150
2011 400 460 60
$1,200 $1,650 $450
Required:
1. Prepare the journal entry to record the change in principle. (Ignore income tax effects.)
2. Briefly describe any other steps Clinton should take to report this accounting change in the
2010–2011 comparative financial statements.

X. The Belltone Company made the following expenditures related to its 10-year-old manufacturing facility:
1. The heating system was replaced at a cost of $300,000. The cost of the old system was not known. The
company accounts for improvements as reductions of accumulated depreciation.
2. A new wing was added at a cost of $750,000. The new wing substantially increases the productive
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 capacity of the plant.
3. Annual building maintenance was performed at a cost of $12,000.
4. All of the machinery on the assembly line in the plant was rearranged at a cost of $50,000. The
rearrangement clearly increases the productive capacity of the plant.
Required:
Prepare journal entries to record each of the above expenditures.