ciationDEPRECIATION.

Theory

1. Which of the following is true of depreciation accounting?

a. It is not a matter of valuation.
b. It is part of the matching of revenues and expenses.
c. It retains funds by reducing income taxes and dividends.
d. All these answer choices are correct.

2. Which of the following principles best describes the conceptual rationale

for the methods of matching depreciation expense with revenues?
a. Associating cause and effect
b. Systematic and rational allocation
c. Immediate recognition
d. Partial recognition

3. Which of the following most accurately reflects the concept of depreciation

as used in
accounting?

a. The process of charging the decline in value of an economic resource to

income in the
period in which the benefit occurred.
b. The process of allocating the cost of tangible assets to expense in
a systematic and
rational manner to those periods expected to benefit from the use
of the asset.
c. A method of allocating asset cost to an expense account in a manner
which closely
matches the physical deterioration of the tangible asset involved.
d. An accounting concept that allocates the portion of an asset used up
during the year
to the contra asset account for the purpose of properly recording the fair
market value
of tangible assets.

4. The major difference between the service life of an asset and its physical
life is that
a. service life refers to the time an asset will be used by a company
and physical life
refers to how long the asset will last.
b. physical life is the life of an asset without consideration of residual value
and service
Life requires the use of residual value.
c. physical life is always longer than service life.
d. service life refers to the length of time an asset is of use to its original
owner, while
physical life refers to how long the asset will be used by all owners.

5. The term "depreciable base," or "depreciation base," as it is used in

accounting, refers to
a. the total amount to be charged (debited) to expense over an
asset's useful life.
b. the cost of the asset less the related depreciation recorded to date.
c. the estimated fair value of the asset at the end of its useful life.
d. the acquisition cost of the asset.

6. Economic factors that shorten the service life of an asset include

a. obsolescence.
b. supersession.
c. inadequacy.
d. All these answer choices are correct

7. Which of the following is not one of the basic questions that must be
answered before the amount of depreciation charge can be computed?
a. What depreciable base is to be used for the asset?
b. What is the asset's useful life?
c. What method of cost apportionment is best for this asset?
d. What product or service is the asset related to?

8. Which of the following is a realistic assumption of the straight-line method

of depreciation?
a. The asset's economic usefulness is the same each year.
b. The repair and maintenance expense is essentially the same for each
period.
c. The rate of return analysis is enhanced using the straight-line method.
d. Depreciation is a function of time rather than a function of usage.

9. The activity method of depreciation

a. is a variable charge approach.
b. assumes that depreciation is a function of the passage of time.
c. conceptually associates cost in terms of input measures.
d. All these answer choices are correct.

10. For income statement purposes, depreciation is a variable expense if the

depreciation
method used is
a. units-of-production.
b. straight-line.
c. sum-of-the-years'-digits.
d. declining-balances

PROBLEM:
Component Depreciation
Presented below are the components related to an office building that
Lockard Company purchased for 10,000,000 in January of 2015.
Component Useful Life
Value
Building structure 60-year life 5,400,000
Building engineering 30-year life 2,400,000
Building external works 30-year life 900,000

Instructions
1. Compute depreciation expense for 2015, assuming that Lockard uses
component
depreciation and uses the straight-line method of depreciation.
2. Assume that the building engineering was replaced in 20 years at a cost
of 2,600,000.
Prepare the entry to record the replacement of the old component with the
new component.

Solution 1
(1) Component Depreciation
Expense
Building structure 5,400,000 ÷ 60 = 90,000
Building engineering 2,400,000 ÷ 30 = 80,000
Building external works 900,000 ÷ 30 = 30,000
 200,000
Solution 2
(2) Building Engineering........................................ 2,600,000
Accumulated Depreciation
(2,400,000 X 20/30) ……........................................ 1,600,000
Loss on Disposal of Plant Assets………........................ 800,000
Building Engineering.............................
2,400,000
Cash......................................................
2,600,000

PROBLEM #3
Rojas Company purchased for $5,600,000 a mine estimated to contain 2
million tons of ore.
When the ore is completely extracted, it was expected that the land would
be worth $200,000. A building and equipment costing $2,800,000 were
constructed on the mine site, and they will
be completely used up and have no residual value when the ore is
exhausted. During the first year, 750,000 tons of ore were mined, and
$450,000 was spent for labor and other operating costs.

Instructions
Compute the total cost per ton of ore mined in the first year. (Show
computations
by setting up a schedule giving cost per ton.)

Solution 3.
Item Base Tons
Per Ton
Ore $5,400,000 2,000,000
$2.70
Building and Equipment 2,800,000 2,000,000
1.40
Labor and Operating Expenses 450,000 750,000
.60
Total Cost
$4.70

PROBLEM #4-5
Depreciation methods.
On July 1, 2014, Sparks Company purchased for $2,160,000 snow-making
equipment having an
estimated useful life of 5 years with an estimated residual value of $90,000.
Depreciation is taken for the portion of the year the asset is used.

Instructions
(4) Complete the form below by determining the depreciation expense and
year-end book
values for 2014 and 2015 using the
a. sum-of-the-years'-digits method.
b. double-declining balance method.

Sum-of-the-Years'-Digits Method 2014

2015
Equipment $2,160,000 $2,160,000
Less: Accumulated Depreciation ______
_______
Year-End Book Value ______
_______
Depreciation Expense for the Year ______ _______

Double-Declining Balance Method

Equipment $2,160,000 $2,160,000
Less: Accumulated Depreciation ______ _______
Year-End Book Value ______
_______
Depreciation Expense for the Year ______
_______
(5) Assume the company had used straight-line depreciation during 2014
and 2015.
During 2016, the company determined that the equipment would be useful
to the company for only one more year beyond 2016. Residual value is
estimated at $120,000. Compute the amount of depreciation expense for the
2016 income statement.

Solution #4
(4) Sum-of-the-Years'-Digits 2014
2015
Accumulated Depreciation $ 345,000
$966,000
Book Value 1,815,000
1,194,000
Depreciation Expense 345,000
621,000
Double-Declining Balance
Accumulated Depreciation $ 432,000
$1,123,200
Book Value 1,728,000
1,036,800
Depreciation Expense 432,000
691,200

Solution #5
(5) Cost $2,160,000
Depreciation (621,000)
Residual (120,000)
$1,419,000 × 1/2 = $709,500, 2016
depreciation

PROBLEM#6
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 #6 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#7
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 #7 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# 8
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 equipment’s?
a. 400,000
b. 250,000
c. 200,000
d. 100,000

Solution#8 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 #9
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#9 Answer b
Sales price
2,300,000
Carrying amount of machine:
Cost 4,200,000
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#10
Lalaine Company acquired an aero plane 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 10. 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# 11 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 P700,000. 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 #11 Answer a

Acquisition cost 6,500,000
Residual value (700,000)
Depreciable amount 5,800,000
Depreciation (5, 800,000 / 10) 580,000

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
PROBLEM #12
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 #12Answer 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

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
Problem #13 (PHILCPA Adapted)
Cermet 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 13 Answer d
Original cost – January 1, 2005 7,800,000
Improvement – January 1, 2007 760,000
Total cost 8,560,000
Accumulated depreciation – December 31, 2009
(7,800,000 – 200,000 / 40 x 5) 950,000
(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 #14
Daisy Company acquired a drilling machine on October 1, 2008 at a cost of
P2, 500,000 and depreciate edit 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 14 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#15
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 15 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)
20

PROBLEM#16
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 P600,000. 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 16 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#17
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 year’s 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 #17 C.
SYD=1+2+3+4
10
Acquisition cost

less; accumulated depreciation

2010 (4/10 x 4,000,000)
2011 (3/10 x 4,000,000) 1,200,000
2,800,000
Carrying mount, Dec. 31, 2011
1,700 000

PROBLEM #18

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 18 A.

SYD - 1+2+3+4+5 = 15

April 1, 2010 to March 31, 2011 (5/15 x3,000,000)

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

250,000
January 1, 20100 - March 31, 2011 (1,000,000 x 3/12)
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 #19

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 #19 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)

Residual value
50,000
acquisition cost

PROBLEM #20

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# 20 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.