Classic Irons, Inc. purchased Manufacturing Equipment with an expected useful life of five years of 5,000 hours of usage. The equipment was purchased on Jan. 1, 2008, for $460,000. It is expected to have a salvage value of $60,000 at the end of five years. During 2008, the equipment was used for 1,200 hours. Assume that usage for the next four years will be 1,100 hours, 900 hours, and 500 hours respectively.
a. What is the amount of depreciation expense for each of the five years using the straight- line method?
b. What is the amount of depreciation expense for each of the five years using the double declining balance method?
c. What is the amount of depreciation expense for each of the five years using the units of production method? (Hours are production units in this example.)
Smith Steakhouse is a restaurant catering to a variety of customers. They purchased a new high powered oven at a cost of 100,000 on Jan. 1, 2006. The oven has a useful expected life of four years and an estimated salvage value of $10,000. Smith Steakhouse uses the straight-line depreciation for all its depreciable assets.
On May 1, 2008 the owner of the restaurant was persuaded to purchase a new oven that operated more efficiently. The old oven was sold at the time for $15,000.
a. What is the amount of depreciation expense recorded on the old machine for each year of use? (Show your computations).
b. What is the amount of gain or loss on the disposal of the old machine? (Show your computations).
The problem is an accounting problem that deals with determining depreciation.
Depreciation Methods : Declining-Balance, Double-Declining, Straight-Line; Intangible Assets
E1-23 Hootie and the Blow Fish, Inc., organized in 2002, has the following transactions related to intangible assets.
1/2/02 Purchased patent (7-year life) $490,000
4/1/02 Goodwill purchased (indefinite life) 360,000
7/1/02 10-year franchise; expiration date 7/1/2012 420,000
9/1/02 Research and development costs 185,000
Prepare the necessary entries to record these intangibles. All costs incurred were for cash. Make
the entries as of December 31, 2002, recording any necessary amortization and reflecting all balances accurately as of that date.
P1-8B In recent years, Letterman Company purchased three machines. Because of heavy
turnover in the accounting department, a different accountant was in charge of selecting the depreciation method for each machine, and various methods were selected. Information concerning the machines is summarized below.
Machine Acquired Cost Salvage Value Useful Life Depreciation
In Years Method
1 1/1/99 96,000 6k 10 Straight-line
2 1/1/00 60,000 10k 8 Declining Balance
3 11/1/02 66,000 6k 6 Units of activity
For the declining-balance method, the company uses the double-declining rate. For the units of-activity method, total machine hours are expected to be 24,000. Actual hours of use in the first 3 years were: 2002, 1,000; 2003, 4,500; and 2004, 5,000.
(a) Compute the amount of accumulated depreciation on each machine at December 31, 2002.
(b) If machine 2 had been purchased on April 1 instead of January 1, what would be the depreciation expense for this machine in (1) 2000 and (2) 2001?