CHAPTER 33
Depreciation
Problem 33-1 (AICPA adapted)
On January 1, 2010 Lem Company bought machinery under a contract that required a down payment of P100, 000, plus 24 monthly payments of P50, 000 each, for tot
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CHAPTER 33
Depreciation
Problem 33-1 (AICPA adapted)
On January 1, 2010 Lem Company bought machinery under a contract that required a down payment of P100, 000, plus 24 monthly payments of P50, 000 each, for total cash payments of P1, 300,000. The cash equivalent price of the machinery was P1, 100,000. The machinery has an estimated useful life of 10 years and estimated residual value of P50, 000. Lem uses straight line depreciation. In its 2010 income statement, what amount should Lem report as depreciated for the machinery?
a. 105,000
b. 110,000
c. 125,000
d. 130,000
Solution 33 -1 Answer a
Cost of machinery equal to the cash price 1,100,000
Residual value ( 50,000)
Depreciable cost 1,050,000
Straight line depreciation (1, 050,000 / 10) 105,000
Problem 33-2 (AICPA Adapted)
On January 1, 2006, Lane Company acquired equipment for P1, 000,000 with an estimated 10-year
useful life. Lane estimated a P100, 000 residual values and used the straight line method of depreciation. During 2010, after its 2009 financial statements had been issued, Lane determined that, due to obsolescence, this equipment’s remaining useful life was only four more years and its residual value would be P40, 000.
In Lane’s December 31, 2010 statement of financial position, what is the carrying amount of the equipment?
a. 515,000
b. 490,000
c. 415,000
d. 390,000
Solution 33-2 Answer b
Cost – January 1, 2006 1,000,000
Accumulated depreciation, December 31, 2009
(900, 000 / 10 x 4) 360,000
Carrying amount, December 31, 2009 640,000
Depreciation for 2010 (640,000 – 40,000 / 4) 150,000
Carrying amount, December 31, 2010 490,000
Problem 33-3 (AICPA Adapted)
Weir Company uses straight line depreciation for its property, plant and equipment, which stated at cost, consisted of the following:
2010 2009
Land 250,000 250,000
Building 1,950,000 1,950,000
Machinery and Equipment 6,950,000 6,500,000
Total 9,150,000 8,700,000
Less: Accumulated depreciation 4,000,000 3,700,000
Weir’s depreciation expense for 2010 and 2009 was P550, 000 and P500, 000 respectively.
What amount was debited to accumulated depreciation during 2010 because of property, plant and equipments?
a. 400,000
b. 250,000
c. 200,000
d. 100,000
Solution 33-3 Answer b
Accumulated depreciation, December 31, 2009 3,700,000
Add: Depreciation for 2010 550,000
Total 4,250,000
Less: Accumulated depreciation on Property
retirement (squeeze)
250,000
Accumulated depreciation, December 31, 2010 4,000,000
Problem 33-4 (AICPA Adapted)
Poe Company’s depreciation policy on machinery is as follows:
• A full year’s depreciation is taken in the year of an asset’s acquisition.
• No depreciation is taken in the 5 year of an asset’s disposition.
• The estimated useful life is 5 years.
• The straight line method is used.
On June 30, 2010, Poe sold for P2, 300,000 a machine acquired in 2007 for P4, 200,000. The estimated residual value was P600, 000.
How much gain on the disposal should Poe record in 2010?
a. 140,000
b. 260,000
c. 620,000
d. 980,000
Solution 33-4 Answer b
Sales price
Carrying amount of machine: Cost
4,200,000 2,300,000
Accumulated depreciation – 12/31/2009
(4,200,000 – 600,000 / 5 x 3)
2,160,000
2,040,000
Gain on disposal 260,000
No depreciation is recognized from January 1 to June 30, 2010 because the depreciation policy is that no depreciation is taken in the year of an asset’s disposition.
Problem 33-5 (IFRS)
Lalaine Company acquired an aeroplane in 2007. At the time of acquisition, the cost of the jet frame was P46, 000,000 and the additional cost of the engine was P6, 000,000.
In 2010, the engine was replaced with a new one costing P12, 000,000. At the time of replacement, the accumulated depreciation to date on the jet frame was P17, 500,000 and on the engine was P4, 000,000.
What amount should be derecognized at the date of replacement?
a. 4,000,000
b. 2,000,000
c. 6,000,000
d. 0
Solution 33-5 Answer b
Cost of old engine 6,000,000
Accumulated depreciation 4,000,000
Carrying amount 2,000,000
PAS 16 paragraph 67, provides that the “carrying amount” of an item of property, plant and equipment shall be derecognized on disposal.
Problem – 33-6 (IFRS)
Marian Company purchased a noncurrent asset with a useful life of 10 years on January 1, 2010 for P6, 500,000. On December 31, 2010, the amount the entity would receive from the disposal of the asset if it was already of the age and in the condition expected at the end of its useful life was estimated at P700,
00. Inclusive of inflation, the actual amount expected to be received on disposal was estimated at P900, 000.
What should be the depreciation charge for the year ended December 31, 2010?
a. 580,000
b. 650,000
c. 560,000
d. 0
Solution 33-6 Answer a
Acquisition cost 6,500,000
Residual value (700,000)
Depreciable amount 5,800,000
Depreciation (5, 800,000 / 10) 580,000
Problem 33-7 (PHILCPA Adapted)
Apex Company purchased a tooling machine in 2000 for P3, 000,000. The machine was depreciated on the straight line method over an estimated useful life of twenty years with no residual value. At the beginning of 2010, when the machine had been in use for 10 years, the entity paid P600, 000 to overhaul the machine. As a result of this improvement, the entity estimated that the useful life of the machine would extend an additional 5 years.
What should be the depreciation expense for the machine in 2010? a. 150,000
b. 140,000
c. 210,000
d. 340,000
Solution 33-7 Answer b
Original cost 3,000,000
Accumulated depreciation (3,000,000 /20 x 10) 1,500,000
Carrying amount – January 1, 2010 1,500,000
Improvement 600,000
Adjusted carrying amount 2,100,000
Depreciation for 2010 (2, 100,000 / 15) 140,000
Problem 33-8 (PHILCPA Adapted)
Carmet Company provided the following information with respect to its building.
• The building was acquired January 1, 2005 at a cost of P7, 800,000 with an estimated useful life of 40 years and residual value of P200, 000. Yearly depreciation was computed on the straight line method.
• The building was renovated on January 1, 2007 at a cost of P760, 000. This was considered as improvement. Residual value did not change.
• On January 1, 2010, the management decided to change the total life of the building to 30 years.
What is the depreciation of the building for 2010?
a. 292,400
b. 266,000
c. 334,400
d. 294,000
Solution 33-8 Answer d
Original cost – January 1, 2005 7, 800,000
Improvement – January 1, 2007 760,000
Total cost
Accumulated depreciation – December 31, 2009
7,800,000 – 200,000 / 40 x 5
950,000 8,560,000
760, 000 / 38 x 3 60,000 1,010,000
Carrying amount – January 1, 2010 7,550,000
Depreciation for 2010
(7, 550,000 – 200,000 / 25 )
294,000
The revised total life is 30 year. 5 years already expired from January 1, 2005 to January 1, 2010. Thus, the remaining revised life is 25 years.
Problem 33-9 (IFRS)
Daisy Company acquired a drilling machine on October 1, 2008 at a cost of P2, 500,000 and depreciated it at 25% per annum on a straight line basis. On October 1, 2010, the entity spent P500, 000 on upgrade to the machine in order to improve its efficiency and increase the inflow of economic benefits over the machine’s remaining life. What depreciation expense should be recognized for the year ended September 30, 2011?
a. 1,125,000
b. 625,000
c. 850,000
d. 875,000
Solution 33-9 Answer d
Original life (100% / 25%) 4 years
Years expired on October 1, 2010 2
Remaining life 2
Depreciation on original cost (2,500,000 x 25%) 625, 000
Depreciation on improvement (500, 000/2) 250, 000
Total depreciation 875, 000
Problem 33-10 (AICPA Adapted)
Lester Company provided the following:
Total cost Residual value Estimated life
Machine A 5,500,000 500,000 20
Machine B 2,000,000 200,000 15
Machine C 400,000 5
Lester Computes depreciation on the straight line method. What is the composite life of the assets? a. 13.3
b. 16.0
c. 18.0
d. 19.8
Solution 33-10 Answer b
Cost Residual
Value Depreciable
amount Life Annual
depreciation
A. 5,500,000 500,000 5,000,000 20 250,000
B. 2,000,000 200,000 1,800,000 15 120,000
C. 400,000 400,000 5 80,000
7,900,000 7,200,000 450,000
Composite life = 7,200,000 / 450,000
Composite rate = total annual depreciation / total cost
= 5.7%
Problem 33-11 (IAA)
The following information is taken from the statement of financial position of Hamilton Company on December 31, 2010 and December 31, 2009.
2010 2009
Building-cost 25,000,000 25,000,000
Accumulated depreciation-buildings 5,000,000 3,875,000
Hamilton did not acquire or dispose of any building during 2010. Hamilton uses the straight line method of depreciation.
If residual value is assumed to be 10% of assed cost, what is the average useful life of the buildings?
a. 20.00
b. 22.22
c. 5.00
d. 6.45
Solution 33-11 Answer a
Cost 25,000,000
Residual value 2,500,000
Depreciable amount 22,500,000
Accumulated depreciation – 2010 5,000,000
Accumulated depreciation – 2009 3,875,000
Annual depreciation 1,125,000
Average life (22, 500,000/ 1,125,000)
Problem 33-12 (IAA) 20
Norraine Company uses the composite method of depreciation based on a composite rate of 25%. At the beginning of 2010, the total cost of equipment was P5, 000,000 with a total residual value of P600,
000. The accumulated depreciation was P3, 000 at that time.
In January 2010, Norraine purchased equipment for P2, 500,000 with no residual value. At the end of 2010, Norraine sold equipment with an original cost of 1, 000,000 and a residual value of P200, 000 for P350, 000. This asset was acquired on January 1, 2008.
1. What is the depreciation for 2010? a. 1,625,000
b. 1,875,000
c. 1,125,000
d. 975,000
2. What is the gain or loss from the derecognition of the asset on December 31, 2010? a. 100,000 gain
b. 150,000 loss
c. 50,000 loss
d. 0
Problem 33-13 (IFRS)
Tania Company purchased a boring machine on January 1, 2010 for P 8, 100,000. The useful life of the machine is estimated at 3 years with a residual value at the end of this period of P 600,000.
During its useful life, the expected units of production from the machine are;
2010 12,000 units
2011 7,000 units
2012 5,000 units
What should be the depreciation expense for the year ended December 31, 2011, using the most appropriate depreciation method?
a.) 2,700,000
b.) 2,187,500
c.) 3,750,000
d.) 2,500,000
Solution 33-13 answer B.
Acquisition cost 8,100,000
residual value ( 600,000)
Depreciable amount 7,500,000
rate per unit (7,500,000/24,000) 312.50
depreciation for 2011 (7,000 x 312.50) 2,187.50
Problem 33-14 (IAA)
Leonard Company acquired a machine in the first week of July 2010 and paid the following bills;
Invoice price 5,000,000
Freight in 50,000
Installation cost 150,000
Cost of removing the old
machine preparatory to the
installation of the new machine 100,000
The estimated life of the machine is 8 years or a total of P 100,000 working hours with no residual value. The operating hours of the machine totaled 5,000 hours in 2010 and 12,000 hours in 2011. The entity follows the working hours method of depreciation.
On December 31, 2011, what is the carrying amount of the machine?
a.) 3,900,000
b.) 4,299,000
c.) 4,940,000
d.) 4,316,000
Solution 33-14 answer d.
5,200,000
Accumulated depreciation – December 31, 2011
( 17,000 hours x 52) 884,000
Carrying amount – Dec. 31, 2011 4,316,000
Rate per hour (5,200,000/100,000) 52
Problem 33-15 (AICPA Adapted)
Frey Company purchased a machine for P 4,500,000 on January 1, 2010. The machine has an estimated useful life of four years and a residual value of P 500,000. The machine is being depreciated using the sum of the years digits method.
What is the carrying amount of the asset on December 31, 2011?
a.) 2,900,000
b.) 2,700,000
c.) 1,700,000
d.) 1,350,000
Solution 33-15 answer c.
SYD=1+2+3+4
10
Acquisition cost
less; accumulated depreciation 4,500,000
2010 (4/10 x 4,000,000) 1,600,000
2011 (3/10 x 4,000,000) 1,200,000 2,800,000
Carrying amount, Dec. 31, 2011 1,700,000
Problem 33-16 (AICPA Adapted)
On April 1, 2010, Kew Company purchased new machinery for 3,000,000. The machinery has ad estimated useful life of five years and depreciation is computed by the SYD.
What is the accumulated depreciation of the machinery on December 31,2011?
a.) 1,600,000
b.) 1,800,000
c.) 1,200,000
d.) 1,000,000
Solution 33-16 answer a.
SYD – 1+2+3+4+5 = 15
April 1, 2010 to March 31, 2011 (5/15 x 3,000,000)
1,000,000
April 1, 2011 to March 31, 2012 (4/15 x 3,000,000) 800,000
accumulated depreciation, March 31, 2012 1,800,000
April 1, 2010 – December 31, 2010 (1,000,000 x 9/12) 750,000
January 1, 20100 – March 31, 2011 (1,000,000 x 3/12) 250,000
April 1, 2011 – December 31, 2011 (800,000 x 9/12) 600,000
Total depreciation – December 31, 2011 850,000
Accumulated Depreciation – Dec. 31, 2011
(750,000 + 850,000)
1,600,000
Problem 33-17 AAICPA Adapted)
On January 1, 2008, Mogul Company acquired equipment to be used in its manufacturing operations. The equipment has an estimated useful life of 10 years and an estimated residual value of P 50,000. The depreciation applicable to this equipment was P 240,000 for 2010 computed under the SYD method.
What was the acquisition cost of the equipment? a. 1,650,000
b. 1,700,000
c. 2,400,000
d. 2,450,000
Solution 33-17 answer b.
SYD = 1+2+3+4+5+6+7+8+9 +10 = 55
The first three fractions are:
2008 10/55
2009 9/55
2010 8/55
Thus, the 2010 depreciation of P 240,000 is equal to 8/55
Depreciable amount (240,000/ 8/55) 1,650,000
Residual value 50,000
acquisition cost 1,700,000
Problem 33-18 (AICPA Adapted)
Rago Company takes a full year’s depreciation expense in the year of an asset’s acquisition and no depreciation expense in the years of disposition.
Data relating to one of Rago’s depreciable assets on December 31, 2009 are as follows;
Acquisition year 2007
cost 1,100,000
residual value 200,000
accumulated depreciation 720,000
estimated useful life 5 years
Using the same depreciation method in 2007, 2008 and 2009, how much depreciation expense should Rago record in 2010 for the asset?
a.) 120,000
b.) 180,000
c.) 220,000
d.) 240,000
Solution 33-18 Answer a.
The accumulated depreciation on Dec. 31, 2009 is recomputed following a certain method. The same is arrived at following the SYD as follows;
SYD= 1+2+3+4+5 = 15
2007 (5/15 x 900,000) 300,000
2008 (4/15 x 900,000) 240,000
2009 (3/15 x 900,000) 180,000
Accumulated Depreciation – Dec. 31, 2009 720,000
Accordingly, the SYD is followed for 2010.
2010 depreciation (2/15 x 900,000) 120,000
Problem 33-19 (AICPA Adapted)
Bergen Company purchased factory equipment which was installed and put into service January 1, 2010 at a total cost of P 1,280,000. Residual value was estimated at P 80,000. The equipment is being depreciated over eight years by the double declining balance method.
How much depreciation expense should Bergen on the equipment for 2011?
A.) 225,000
B.) 240,000
C.) 300,000
D.) 320,000
Solution 33-19 Answer b.
Straight line rate (100% / 8 years) 12.5%
fixed rate (12.5 x 2) 25%
2010 Depreciation (1,280,000 x 25%) 320,000
2011 Depreciation (1,280,000 – 320,000 x 25%) 240,000
Under double declining balance, the residual value is ignored in the meanwhile.
Problem 33-20 (AICPA Adapted)
On July 1, 2010, Mundo Corporation purchased factory equipment for P 5,000,000. Residual value was estimated at P 200,000. The equipment is depreciated over ten years using the double declining balance method.
What is the depreciation expense for 2011?
a.) 1,000,000
b.) 900,000
c.) 768,000
d.) 960,000
Solution 33-20 Answer b
Straight line rate (100%/10 years) 10%
Fixed rate (10 x 2) 20%
2010 depreciation ( 5,000,000 x 20% x ½) 500,000
2011 depreciation (5,000,000 – 500,000 x 20%) 900,000
Problem 33-21 (AICPA Adapted)
Rapp Company purchased a machine on July 1, 2010 for P 6,000,000. The machine has an estimated useful life of five years and a residual value of P 800,000. The machine is being depreciated from the date of acquisition by the 150% declining balance method.
For the year ended December 31, 2011, what amount should Rapp record as depreciation expense on the machine?
a.) 1,530,000
b.) 1,326,000
c.) 1,040,000
d.) 1,800,000
Solution 33-21 Answer a
Straight line rate (100%/5) 20%
Fixed rate (20% x 150%) 30%
Depreciation from July 1 to December 31, 2010
(6,000,000 x 30% x 6/12)
900,000
Deprecation for 2011 (6,000,000 – 900,000 x 30%) 1,530,000
Problem 33-22 (AICPA Adapted)
Turtle Company purchased equipment on January 1, 2008 for P 5,000,000. The equipment had an estimated 5-year-service life. Turtle’s policy for 5-year assets is to use the 200% double declining balance method for the first two years of the assets life and then switch to the straight line depreciation method.
In its December 31, 2010 statement of financial position, what amount should turtle report as accumulated depreciation for the equipment?
a.) 3,000,000
b.) 3,800,000
c.) 3,920,000
d.) 4,200,000
e.)
Solution 33-22 Answer b
Straight line rate (100%/5 years) 20%
Fixed rate (20% x 2) 40%
2008 depreciation (5,000,000 x 40%) 2,000,000
2009 depreciation (3,000,000 x 40%) 1,200,000
accumulated dep., Dec. 31, 2009 3,200,000
Dep. For 2010 – straight line (5,000,000 – 3,200,000)/3 600,000
Accum Dep., December 31, 2010 3,800,000
Problem 33-23 (IAA)
Arreza Company acquired a machine on January 1, 2008 for P 10,000,000. The machine has an 8 year useful life and a P 1,000,000 residual value and was depreciated using the SYD method. Arreza
recorded a full year’s dep. On the asset in 2008 and 2009. In January 2010, Arreza estimated that the asset’s useful life from the date of acquisition should have been 6 years and its residual value P 400,000. What is the accumulated dep. On December 31, 2010?
a.) 5,212,500
b.) 6,090,000
c.) 4,400,360
d.) 6,250,000
Solution 33-23 answer b
SYD (1+2+3+4+5+6+7+8) 36
Cost – Jan. 1, 2008 Accumulated Dep. – 1/1/10
2008 (8/36 x 9,000,000) 10,000,000
(2,000,000)
2009 (7/36 x 9,000,000) (1,750,000)
carrying amount – Jan. 1, 2010 6,250,000
Accum. Dep. – 1/1/10 3,750,000
Dep. For 2010 (4/10 x 6,250,000 – 400,000) 2,340,000
Accum. Dep. – 12/31/10 6,090,000
Remaining life (6 years – 2) 4 years
SYD (1+2+3+4) 10
Problem 33-24 (IAA)
Spiderman Company owns a machine that was bought on Jan. 1, 2007 for P 3,760,000. The machine was estimated to have a useful life of five years and a residual value of P 240,000. Spiderman uses the SYD method of dep. At the beginning of 2010, Spiderman determined that the total useful life if the machine should have been four years and the residual value is P 352,000.
What amount should Spiderman record as dep. Expense on the machine for 2010?
a.) 192,000
b.) 444,000
c.) 592,000
d.) 704,000
Solution 33-24 Answer c SYD – 1+2+3+4+5=15
Accumulated fractions for 2007, 2008 and 2009
(5/15 + 4/15 +3/15) 12/15
Cost – Jan. 1, 2007 3,760,000
Accum. Dep. – December 31, 2009
(3,760,000 – 240,000 x 12/15) 2,816,000
carrying amount – Jan. 1, 2010 944,000
Residual value 352,000
Remaining depreciable amount 592,000
Since the revised total useful life is 4 years and three years already expired, the remaining useful life is only one year. Accordingly, the remaining depreciable amount is charged to dep. Exp. For 2010.
Problem 33-25 (ACP)
ABC Company acquired an equipment on Jan. 1 ,2010. The asset has an estimated life of 4 years. An employee has prepared a depreciation schedule for this equipment using two methods, straight line and double declining balance as follows;
Straight line double declining
2010 1,500,000 3,250,000
2011 1,500,000 1,625,000
2012 1,500,000 812,500
2013 1,500,000 312,500
6,000,000 6,000,000
What was the acquisition cost of the equipment?
a.) 6,000,000
b.) 6,500,000
c.) 8,125,000
d.) 7,000,000
Solution 33-25 Answer b
Straight line (100% / 4) 25%
Fixed rate (25% x 2) 50%
Acquisition cost ( 3,250,000/50%) 6,500,000
Problem 33-26 (PHILCPA)
In Ja. 2010, Naval Co. purchased equipment at a cost of P 6,000,000 to be used in its manufacturing operations. The equipment was estimated to have a useful life of eight years with residual value estimated at P 600,000. Naval considered various methods of dep. And selected the SYD method. On Dec. 31, 2011, what is the accum. Dep.?
a.) P 750,000 less than under the straight line method.
b.) P 750,000 less than under the double declining balance method c.) P 900,000 greater than under the straight line method.
d.) P 900,000 greater than under the double declining balance method
Solution 33-26 Answer c
SYD = 1+2+3+4+5+6+7+8=36
2010 dep. ( 5,400,000 x 8/36) 1,200,000
2011 dep. ( 5,400,000 x 7/36 ) 1,050,000
Accum.Dep. – 12/31/11 (SYD) 2,250,000
Accum Dep. – 12/31/11 (SL) 1,350,000
SYD greater than straight line 900,000
Problem 33-27 (IAA)
ON Jan. 1, 2009, London Company purchased a large quantity of personal computers. The cost of these computers was P 6,000,000. On the date of purchase, the management estimated that the computers would last approximately 4 years and would have a residual value at that time of P 600,000. The entity used the double declining balance method. During Jan. 2010, the management realized that technological advancements had made the computers virtually obsolete and that they would have to be replaced. Management proposed changing the remaining useful life of the computers to 2 years.
What is the depreciation expense for 2010?
a.) 3,000,000
b.) 2,400,000
c.) 1,500,000
d.) 1,200,000
Solution 33-27 Answer b
Fixed rate (100%/4 x 2) 50%
Cost 6,000,000
Dep. For 2009 (50% x 6,000,000 ) 3,000,000
Carrying amount – Jan. 1, 2010 3,000,000
Residual value ( 600,000)
maximum dep. In 2010 2,400,000
Fixed rate in 2010 (100%/2 x 2 ) 100%
This means that the computers should be fully depreciated in 2010. Since there is a residual value of P 600,000, the maximum dep. For 2010 is equal to the carrying amount of P 3,000,000 minus the residual value of P 600,000 or P 2,400,000.
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