## Quiz 9 :

Long Term Assets: Fixed and Intangible

Answer:

Depreciation

It is the expense that creates charge on the cost of the asset over its estimated useful life. It is the value that indicates the reduction in the assets' usage ability with the passage of time. There are various methods to determine this value over different kinds of assets used by the business units.

1

In the present case, Equipment is purchased by D industry at $72,000; estimated useful life is 3 years or 18,000 hours with $4,500 as its residual value.

Calculation of depreciation expense for 3 years is given as under.

A

Straight-line method: This method provides the value of depreciation which remains constant over the useful life of the asset. The value of depreciation will be computed on the cost of the asset every year.

So, the depreciation value for the current year is calculated as below.

The depreciation amount by the straight-line method remains constant over its useful life unless the revision of its elements has done.

Hence, it is concluded that the annual depreciation for each of the year is $22,500

B

Unit of activity Method: This method indicates the value of depreciation charged over actual units involved in the activities on standard basis.

Calculation of depreciation for the equipment can be done by this method would followed by two steps as given below.

Firstly the depreciation per unit is calculated as under.

Now, the expense for the depreciation is computed as under.

For the first year

Therefore, depreciation for the first year by this method is $28,500.

For the second year

Therefore, depreciation for the second year by this method is $22,500.

For the third year

Therefore, depreciation for the third year by this method is $16,500.

C

Double-declining method: This method helps in the valuation of depreciation which declines over the useful life of the asset. This method is generally used where the consumption rate of the asset is rapid. It can be calculated by using the formula given under.

Firstly, the straight- line percentage is computed as under.

By putting the value of SLP in above formula of double-declining balance rate, it would be 66.6% i.e.

.

Therefore, the annual depreciation for the first year by this method would be computed by formula given under.

Therefore, depreciation for the first year by this method is $47,952.Now, the book value of equipment on Jan 1, would be

Therefore, depreciation for the second year by this method is $16,016.Now, the book value of equipment on Jan 1, would be

Therefore, depreciation for the third year by this method is $5,349.

The table as below mentioned shown the calculation of depreciation as per different methods

2

For first year, the highest expense of depreciation has been charged with amount of $47,952. As straight-line method stands $22,500 and unit-of-activity methods stands at $28,500, both shows the lower amount than double- declining method.

Therefore, it is concluded that double-declining method yields highest value of depreciation for the first year.

3

Over the useful life of the equipment, the double-declining method yields the highest value of depreciation with the amount of $69,317. While the straight-line method and unit-of-activity methods stand at total of $67,500 as depreciation expense, which is lower amount than double- declining method.Therefore, it is concluded that double-declining method yields highest value of depreciation over three years of life of equipment.

Answer:

Unit of activity method

This method is one of the methods that are used to calculate the depreciation expense for the asset. It evaluates the depreciation amount in the terms of activities-unit involved during usage of the asset by the business. If the tractor is taken as asset for an example, the activity-unit will be usage hours to compute depreciation.

In the present case, the cost of truck is $69,000; estimated residual value is $12,000. Being the miles in this case is taken as unit of activity for the truck; the estimated useful life is 300,000 miles. And the operating miles covered during the year is 77,000 miles.

A

Depreciable cost: It is the cost that represents the difference between the cost of the asset and its salvage value. The resultant amount will show the cost for which the depreciation expenses need to calculate.

So, the depreciable cost would be determined by using the formula as given below.

Hence, it is concluded that the depreciable cost is

B

Depreciation rate: The rate of depreciation which measures the operating speed of activity in terms of units defined for the asset. It is usually denoted in per unit value.

So, the rate by this method can be computed by putting the values in the formula as given under.

Hence it can be concluded that the depreciation rate is

C

Depreciation by the Unit of activity: It indicates the value of depreciation charged over actual units involved in the activities on standard basis.

Calculation of depreciation for the truck can be done by this method would followed by two steps as given below.

Firstly the depreciation per unit is calculated as under.

Now, the expense for the depreciation is computed as under.

Hence, it is concluded that the depreciation for the year is

.

Answer:

Straight-line depreciation

This depreciation is the value which assumes the constant wear-tear loss of assets over its useful life. It is the form of expense that is charged on the cost of asset by the business units. It provides the simplest way to match expenses with revenue earned from the asset used in the normal course of the business.

In the present case, the book-value of the building is $1,450,000; estimated useful life is 10 years with $300,000 as its residual value.

A

Depreciable cost: It is the cost that represents the difference between the cost of the asset and its salvage value. The resultant amount will show the cost for which the depreciation expenses that need to be calculate.

So, the depreciable cost would be determined by using the formula as given below.

Hence, it is concluded that the depreciable cost is

B

Straight-line rate: It shows the rate of depreciation which remains same for each of the accounting period. It represents the assumed speed of usage of an asset during the normal operations of the business unit. It is usually denoted in percentage value.

So, the rate by this method can be computed by putting the values in the formula as given under.

Hence, it is concluded that the rate of straight-line method is

C

Annual straight-line depreciation: This depreciation is the value which assumes the annual reduction in the value of assets equally throughout its useful life.

It can be determined by dividing the depreciable cost to estimated useful life of the asset which is shown as below.

Hence, it is concluded that the annual depreciation is