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Acquisition Cost and Double-declining Balance Depreciation

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Howard Company purchased factory equipment with an invoice price of \$90,000. Other costs incurred were freight costs, \$2,100; installation wiring and foundation, \$2,200; material and labor costs in testing equipment, \$700; oil lubricants and supplies to be used with equipment, \$500; fire insurance policy covering equipment, \$1,400. The equipment is estimated to have a \$5,000 salvage value at the end of its 8-year useful service life.

Instructions
(a) Compute the acquisition cost of the equipment. Clearly identify each element of cost.
(b) If the double-declining-balance method of depreciation was used, the constant percentage applied to a declining book value would be __________.

Solution Preview

(a) Compute the acquisition cost of the equipment. Clearly identify each element of cost.

Acquisition cost consists of Purchase price, Sales tax, Freight charges, Transit insurance
Assembly, Installation, Testing and Trial Runs.

Other ...

Solution Summary

Computes the acquisition cost of the equipment and the the constant percentage applied to a declining book value in the case of double-declining-balance method of depreciation.

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Similar Posting

Multiple choice questions on depreciation, inventory procedures, uncollectible account receivable

Choose the best answer for each of the following questions:

1. When should the loss on an uncollectible account receivable be recorded as an expense for accrual accounting purposes?
a. When it is determined that an account cannot be collected.
b. In the same period in which the sale on account occurs.
c. When the balance is past due for more than 3 months.
d. When a lawyer indicates that collection efforts would cost more than the account is worth.

2. When the sum-of-the-years'-digits method is used, depreciation expense for a given asset will
a. decline by a constant amount each year.
b. be the same each year.
c. decrease rapidly and then slowly over the life of the asset.
d. vary from year to year in relation to changes in output.

3. Purchased goodwill represents
a. excess of price paid over fair market value of net assets obtained in a combination.
b. excess of price paid over the book value of the net assets obtained in a combination.
c. the difference in the aggregate amount of the market prices of the stock of the combining companies.
d. a tangible asset.

Use the following data to answer questions 4 through 6:

Venus Company purchased a new piece of equipment on July 1, 2004 at a cost of \$600,000. The equipment has an estimated useful life of 5 years and an estimated salvage value of \$50,000. The current year end is 12/31/05. Venus records depreciation to the nearest month.

4. What is straight-line depreciation for 2005?
a. \$55,000.
b. \$60,000.
c. \$110,000.
d. \$120,000.

5. What is sum-of-the-years'-digits depreciation for 2005?
a. \$146,666.
b. \$165,000.
c. \$180,000.
d. \$183,333.

6. What is double-declining-balance depreciation for 2005?
a. \$144,000.
b. \$192,000.
c. \$220,000.
d. \$240,000.

7. As generally used in accounting, what is depreciation?
a. It is a process of asset valuation for balance sheet purposes.
b. It applies only to long-lived intangible assets.
c. It is used to indicate a decline in market value of a long-lived asset.
d. It is an accounting process which allocates long-lived asset cost to accounting periods.

In comparing and contrasting FIFO vs. LIFO inventory procedures, the following listing was developed. You are to complete the tabulation with an answer of "YES" or "NO" as demonstrated by the first item. Any combination of yes-no answers is possible in each situation.

FIFO LIFO

0. Usually matches the actual physical flow of goods. Yes No
1. Emphasizes the income statement in that it matches the more recent costs with revenue.

2. Defers tax payments in times of rising prices.

3. Possibility of liquidating the base may be a significant negative aspect.

4. Will probably not be adopted if prices are expected to decline.

5. Emphasizes the balance sheet in that the more recent costs
are contained in the inventory account.

6. Income figure more accurately reflects cash available for dividends, investments, etc.

7. Tends to smooth income in periods of fluctuating prices.

8. Income figure is more "real" in that it doesn't contain "paper
profits."

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