PolyU Hong Kong Community College Depreciation Expense Questions

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Question 4  
Sun Company (“Sun”) is engaged in manufacturing and selling of kettle and its financial year- end date is 31 December. On 1 June 2021, Sun purchased a machine for manufacturing of kettle for $600,000 cash. The machine was expected to be used for 5 years. The residual value was expected to be $50,000. The machine is expected to operate for 11,000 hours in its useful life. The machine operated for 1000 hours in 2021 and 2500 hours in 2022. 
Required: 
Calculate the annual depreciation expense of the above machine for the financial year 2021 and 2022 respectively using the following methods: 
(i) straight-line method (with half-year convention)
(ii) double- declining balance method (with half-year convention) (iii) units of output methodProperty, Plant, and Equipment, Intangible
Assets, and Natural Resources
BHMH 1041
Chapter 9
Copyright © 2015 McGraw-Hill Education (Asia).
All rights reserved.
(1) Property, Plant and Equipment (PPE)
Represent tangible assets that are held for:
 Use in the production or supply of
goods or services
 Rental to others, or
 Administrative purposes
Expected to be used in multiple periods
Examples:
Land, Buildings and Office Equipment
9-2
Accountable Events in the
Lives of PPE Assets
Acquisition.
Allocation of the acquisition
cost to expense over the
asset’s useful life (depreciation).
Sale or disposal.
9-3
Acquisition of PPE Assets
Cost
=
Asset
price
+
Reasonable and
necessary costs . . .
. . . for getting
the asset to the
desired location.
. . . for getting
the asset ready
for use.
9-4
Special Considerations
Land
Land
Improvements
Cost includes real estate
commissions, escrow
fees, legal fees, clearing
and grading the property.
Improvements to land
such as driveways,
fences, and landscaping
are recorded separately.
9-5
Special Considerations
Buildings
Repairs made prior to the
building being put in use
are considered part of the
building’s cost.
Equipment
Related interest,
insurance, and property
taxes are treated as
expenses of the current
period.
9-6
Capital Expenditures and
Revenue Expenditures
Capital
Expenditure
Revenue
Expenditure
Any material expenditure
that will benefit several
accounting periods.
Expenditure for
ordinary repairs
and maintenance.
To capitalize an expenditure
means to charge it to an
asset account.
To expense an expenditure
means to charge it to an
expense account.
9-7
Repairs, Maintenance and Additions
Type of
Expenditure
Capital
or
Revenue
Identifying Characteristics
Ordinary
repairs and
maintenance
Revenue
1. Maintains normal operating conditions
2. Does not increase productivity
3. Does not extend life beyond original
estimate
Extraordinary
repairs
Capital
1. Major overhauls or partial replacements
2. Extends life beyond original estimate
Additions
Capital
1. Increases productivity
2. May extend useful life
3. Improvements or expansions
9-8
Measurement after Acquisition
*Cost
Model
Fair Value
(Not covered)
Book value
= Cost
– Accumulated depreciation
– Accumulated impairment losses
Book value
= Revalued amount
– Subsequent accumulated
depreciation
– Subsequent accumulated
impairment losses
9-9
Depreciation
The allocation of the cost of a PPE asset to expense in
the periods in which services are received from the asset.
statement of financial position
Cost of
PPE
assets
Assets:
Property, plant
and equipment
Income Statement
as the services are
received
Revenues:
Expenses:
Depreciation
9-10
Depreciation
Accumulated Depreciation
 Contra-asset
 Represents the portion of an asset’s cost that
has already been allocated to expense.
Causes of Depreciation
 Physical deterioration
 Obsolescence
9-11
(1) Straight-Line Depreciation
Depreciation
=
Expense per Year
Cost – Residual Value
Years of Useful Life
9-12
Straight-Line Method (Cost Model)
On 2 January, S&G Wholesale Supermarket buys a
new delivery truck. The truck cost $340,000, has
an estimated residual value of $40,000, and an
estimated useful life of 5 years.
Compute annual depreciation using the straight-line
method.
Cost – Residual Value
$ 340,000 – $ 40,000
=
Years of Useful Life
5
= $
60,000 per year
9-13
Straight-Line Method (Cost Model)
S&G will record $60,000 depreciation each year for
five years. Total depreciation over the estimated
useful life of the equipment is:
Year
First
Second
Third
Fourth
Fifth
Depreciation
Expense
(debit)
Accumulated
Depreciation
(credit)
Accumulated
Depreciation
Balance
$
$
$
$
60,000
60,000
60,000
60,000
60,000
300,000
$
60,000
60,000
60,000
60,000
60,000
300,000
60,000
120,000
180,000
240,000
300,000
Undepreciated
Balance
(book value)
$
340,000
280,000
220,000
160,000
100,000
40,000
Salvage Value
9-14
Depreciation for Fractional Periods
When an asset is acquired during the year,
depreciation in the year of acquisition must
be prorated. i.e. to round calculation to the
nearest whole month
Half-Year Convention
In the year of
acquisition, record six
months of depreciation.
½
9-15
Half-Year Convention
Using the half-year convention, calculate the straightline depreciation on 31 December, 2013, for
equipment purchased in 2013. The equipment cost
$75,000, has a useful life of 10 years and an
estimated residual value of $5,000.
Depreciation =
=
($75,000 – $5,000) ÷ 10
$7,000 for a full year
Depreciation =
$7,000 × 1/2 = $3,500
9-16
(2) Declining-Balance Method
Depreciation in the early years of an asset’s
estimated useful life is higher than in later years.
Accelerated
Depreciation
Remaining
=
× Depreciation
Expense
Book Value
Rate
The double-declining balance depreciation
rate is 200% of the straight-line depreciation
rate of (1÷Useful Life).
9-17
Declining-Balance Method
(Cost Model)
On 2 January, S&G buys a new delivery truck
paying $340,000 cash. The truck has an
estimated residual value of $40,000 and an
estimated useful life of 5 years.
Compute depreciation for the first year using
the double-declining balance method.
First Year
Expense
Remaining
×
Book Value
= $
340,000 ×
= $
340,000 ×
= $
136,000
=
Accelerated
Depreciation Rate
2 × 1/ 5
40%
9-18
Declining-Balance Method
(Cost Model)
Total depreciation over the estimated useful life of an
Compute depreciation for the rest of the
asset is the same using either the straight-line
estimated usefulmethod.
life.
methodtruck’s
or the declining-balance
Year
Computation
First
$ 340,000 × 40%
Second
204,000 × 40%
Third
122,400 × 40%
Fourth
73,440 × 40%
Plug year # 5
Fifth
Total Depreciation
Depr.
Accumulated
Expense Depreciation Book Value
$ 136,000 $ 136,000 $ 204,000
81,600
217,600
122,400
48,960
266,560
73,440
29,376
295,936
44,064
4,064
300,000
40,000
$ 300,000
9-19
(3) Units-of-Production Method
Step 1:
Depreciation =
Rate
Cost – Residual Value
Life in Units of Production
Step 2:
Number of
Depreciation
Depreciation
× Units Produced
=
Expense
Rate
for the Year
At the beginning of the year, Southwest purchased
ground equipment for $62,500 cash. The equipment has
a 100,000 mile useful life and an estimated residual value
of $2,500.
If the equipment is used 30,000 miles in the first year,
what is the amount of depreciation expense?
9-20
Units-of-Production Method
Step 1:
Depreciation
Rate
$62,500 – $2,500
=
= $.60 per mile
100,000 miles
Step 2:
Depreciation
Expense
= $.60 per mile × 30,000 miles = $18,000
Year
Miles
1
2
3
30,000
50,000
20,000
100,000
Depreciation
Expense
$
$
18,000
30,000
12,000
60,000
Accumulated
Depreciation
Balance
$
18,000
48,000
60,000
Undepreciated
Balance
(book value)
$
62,500
44,500
14,500
2,500
Residual Value
9 – 21
Financial Statement Disclosures
Estimates of Useful Life and Residual Value
• May differ from company to
company.
• The reasonableness of management’s
estimates is evaluated by external
auditors.
Principle of Consistency
• Companies should avoid switching
depreciation methods from period to
period.
9-22
Revising Depreciation Rates
Predicted
salvage value
Predicted
useful life
So depreciation
is an estimate.
Over the life of an asset, new information may
come to light that indicates the original
estimates need to be revised.
9-23
Revising Depreciation Rates
On 1 January, 2010, equipment was purchased that cost
$30,000, has a useful life of 10 years and no salvage value.
During 2013, the useful life was revised to 8 years total (5
years remaining).
Calculate depreciation expense for the year ended
31December, 2013, using the straight-line method.
9-24
Revising Depreciation Rates
When our estimates change,
depreciation is:
Book value at
date of change

Salvage value at
date of change
Remaining useful life at date of change
Asset cost
Accumulated depreciation, 31/12/2012
($3,000 per year × 3 years)
Remaining book value
Divide by remaining life
Revised annual depreciation
$ 30,000
9,000
$ 21,000
÷5
$ 4,200
9-25
Disposal of PPE Assets (Cost Model)
1. Half-year
convention
2. Monthly
basis
Update depreciation
to the date of disposal.
Journalize disposal by:
Recording cash
received (debit).
Removing accumulated
depreciation (debit).
Removing accumulated
impairment loss (debit).
Recording a
gain (credit)
or loss (debit).
Removing the
asset cost (credit).
9-26
Disposal of PPE Assets (Cost Model)
If Cash > BV, record a gain (credit).
If Cash < BV, record a loss (debit). If Cash = BV, no gain or loss. Recording cash received (debit). Removing accumulated depreciation (debit). Removing accumulated impairment loss (debit). Recording a gain (credit) or loss (debit). Removing the asset cost (credit). 9-27 Disposal of PPE Assets (example 1) Assume that a machine costing $10,000, had accumulated depreciation of $8,000 and book value of $2,000 (10,000 - $8,000) at the time it was sold for $3,000 cash. Determine the gain or loss on sale of this machine. Cost of machine Accumulated depreciation Book value at time of sale Cash received Gain on sale of machine $ 10,000 (8,000) 2,000 3,000 $ 1,000 9-28 Disposal of PPE Assets (example 1) Assume that a machine costing $10,000, had accumulated depreciation of $8,000 and book value of $2,000 (10,000 - $8,000) at the time it was sold for $3,000 cash. Determine the gain or loss on sale of this machine. Description Cash Accumulated Depreciation: Machinery Gain on Disposal of PPE Assets Machinery Debit 3,000 8,000 Credit 1,000 10,000 9-29 Disposal of PPE Assets (example 2) Assume that a machine costing $10,000, had accumulated depreciation of $8,000 and book value of $2,000 (10,000 - $8,000) at the time it was sold for $1,000 cash. Determine the gain or loss on sale of this machine. Cost of machine Accumulated depreciation Book value at time of sale Cash received Loss on sale of machine $ 10,000 (8,000) 2,000 1,000 $ (1,000) 9-30 Disposal of PPE Assets (example 2) Assume that a machine costing $10,000, had accumulated depreciation of $8,000 and book value of $2,000 (10,000 - $8,000) at the time it was sold for $1,000 cash. Determine the gain or loss on sale of this machine. Description Cash Accumulated Depreciation: Machinery Loss on Disposal of PPE Assets Machinery Debit 1,000 8,000 1,000 Credit 10,000 9-31 (II) Intangible Assets Identifiable non-monetary assets without physical substance  that is controlled by the entity and  has future economic benefits Examples: Patents, Copyrights, Trademarks, Franchises and Goodwill 9-32 Amortization • Amortization is the systematic write-off to expense of the cost of intangible assets over their useful life or legal life, whichever is shorter. • Use the straight-line method to amortize most intangible assets. Date Description Amortization Expense Intangible Asset Debit Credit $$$$$ $$$$$ 9-33 (III) Natural Resources Total cost, including exploration and development, is charged to depletion expense over periods benefited. Extracted from the natural environment and reported at cost less accumulated depletion. Examples: oil, coal, gold 9-34 Depletion of Natural Resources Depletion is calculated using the units-of-production method. Unit depletion rate is calculated as follows: Cost – Residual Value Total Units of Natural Resource 9-35 End of Chapter 9 Tutorial Ex P9.3A (a, d) and P9.7A (a) 9-36 Purchase answer to see full attachment

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