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    Task 17

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    Ton Vossen
    This document discusses depreciation methods for a printing company's new machine. It analyzes straight-line, double declining balance, and units of activity depreciation calculations over 10 years. The units of activity method best matches costs to revenues. A change in estimate to a 9 year life and higher residual value would lower 2020 depreciation expense. Selling the machine after 3 years would result in a loss under straight line, a gain under declining balance, and a small loss under units of activity based on the accumulated depreciation and net book value.

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    Task 17

    Uploaded by

    Ton Vossen
    44 views4 pages
    This document discusses depreciation methods for a printing company's new machine. It analyzes straight-line, double declining balance, and units of activity depreciation calculations over 10 years. The units of activity method best matches costs to revenues. A change in estimate to a 9 year life and higher residual value would lower 2020 depreciation expense. Selling the machine after 3 years would result in a loss under straight line, a gain under declining balance, and a small loss under units of activity based on the accumulated depreciation and net book value.

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    This document discusses depreciation methods for a printing company's new machine. It analyzes straight-line, double declining balance, and units of activity depreciation calculations over 10 years. The units of activity method best matches costs to revenues. A change in estimate to a 9 year life and higher residual value would lower 2020 depreciation expense. Selling the machine after 3 years would result in a loss under straight line, a gain under declining balance, and a small loss under units of activity based on the accumulated depreciation and net book value.

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    © All Rights Reserved
    Download as DOCX, PDF, TXT or read online from Scribd
    Download as docx, pdf, or txt
    44 views4 pages

    Task 17

    Uploaded by

    Ton Vossen
    This document discusses depreciation methods for a printing company's new machine. It analyzes straight-line, double declining balance, and units of activity depreciation calculations over 10 years. The units of activity method best matches costs to revenues. A change in estimate to a 9 year life and higher residual value would lower 2020 depreciation expense. Selling the machine after 3 years would result in a loss under straight line, a gain under declining balance, and a small loss under units of activity based on the accumulated depreciation and net book value.

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    Task 17

    1.
    A) capitalized, this investment is an asset because you will use the bikes to make a profit.
    B) Expensed, it won’t create additional revenue and it is a minor and frequent expense.
    C) Expensed, this investment is used to maintain the operating efficiency and productive life of the
    bike (ordinary repair).

    Why does it matter whether a cost item is expensed or capitalized? Explain.


    This decision impacts the financial statements. If you choose to expense a unit, you will impact the
    income statement and subtract the expense from your revenue. But if you choose to capitalize the
    unit you will see it as an asset and only report the depreciation on the balance sheet.

    Which option do you think that managers would prefer? Why?


    Capitalization, because it looks better on the income statement to have a higher net income. It also
    looks better on the balance sheet to have more assets.

    Assume that the bikes are estimated by the manufacturer (Trek and Specialized) to last for five
    years. Now suppose that LimeBike definitely plans at the time of purchase of the bikes to use
    them for three years only, as LimeBike assumes that customers will probably not handle the bikes
    with great care. Should LimeBike depreciate the bikes using a five-year estimated useful life or a
    three-year estimated useful life? Explain.
    The three-year estimate should be used. Limebike knows beforehand that the bikes will probably
    only last three years instead of five years. This makes it possible to use this estimate instead of first
    using the five year estimate and halfway through reevaluating the lifespan of the bikes.

    Task 18
    What is the definition of “depreciation” from an accounting standpoint? Does the term
    “depreciation” referred to by USA Today have the same meaning as the term “depreciation”
    used in accounting?
    The process of allocating to expense the cost of a plant asset over its useful life in a rational and
    systematic manner. The article’s definition differs somewhat from the accounting definition. In the
    article it is more about for how much they can sell their car after five years instead of depreciating
    your car every year.

    Would the accounting depreciation for a Ford Focus gas-engine automobile differ from a
    comparable Ford Focus Electric automobile? Why or why not?
    The residual value of the electric car is much lower than that of the gas-engine one. This results in a
    higher depreciation for the electric car. (cost-residual value)

    The story also refers to “residual value.” What is residual value? Does this “residual value”
    referred to by USA Today have the same meaning as the “residual value” used in accounting?
    Residual value is an estimate of what an assets is worth after it’s lifetime. In both cases they mean
    the same thing.

    Task 19
    1:
    Account Debit Credit
    Equipment € 2,045,000  
    Cash   € 2,045,000
    Has to decide which depreciation method the company will use for this machine. He works out
    the different scenarios (straight-line, Declining-balance, and units-of-activity) and makes the
    calculations.
    Straight line:

    Cost € 2,045,000
    Residual value € -100,000
    Depreciable cost € 1,945,000

    Depreciable cost € 1,945,000


    Useful life 10 years
    Annual depreciation
    expense € 194,500

    Double-declining:
    Book value Annual dep. Accum.
    Year beginning Dep. Rate Expense Dep. Book value
    2018 € 2,045,000 20% € 409,000 € 409,000 € 1,636,000
    2019 € 1,636,000 20% € 327,200 € 736,200 € 1,308,800
    2020 € 1,308,800 20% € 261,760 € 997,960 € 1,047,040
    2021 € 1,047,040 20% € 209,408 € 1,207,368 € 837,632
    2022 € 837,632 20% € 167,526 € 1,374,894 € 670,106
    2023 € 670,106 20% € 134,021 € 1,508,916 € 536,084
    2024 € 536,084 20% € 107,217 € 1,616,132 € 428,868
    2025 € 428,868 20% € 85,774 € 1,701,906 € 343,094
    2026 € 343,094 20% € 68,619 € 1,770,525 € 274,475
    2027 € 274,475 20% € 54,895 € 1,825,420 € 219,580
    2028 € 219,580 20% € 43,916 € 1,869,336 € 175,664
    2029 € 175,664 20% € 35,133 € 1,904,469 € 140,531
    2030 € 140,531 20% € 28,106 € 1,932,575 € 112,425
    2031 € 112,425 (capped) € 12,425 € 1,945,000 € 100,000

    Units of activity:

    Depreciable cost € 1,945,000


    Total units of acitvity 700000
    Depreciable cost per unit € 2.78

    Depreciation Annual dep.


    Year Units of activity cost/unit Exp. acc. Dep. book value
    2018 80000 € 2.78 € 222,285.71 € 222,285.71 € 1,822,714.29
    2019 80000 € 2.78 € 222,285.71 € 444,571.43 € 1,600,428.57
    2020 80000 € 2.78 € 222,285.71 € 666,857.14 € 1,378,142.86
    2021 80000 € 2.78 € 222,285.71 € 889,142.86 € 1,155,857.14
    2022 80000 € 2.78 € 222,285.71 € 1,111,428.57 € 933,571.43
    2023 60000 € 2.78 € 166,714.29 € 1,278,142.86 € 766,857.14
    2024 60000 € 2.78 € 166,714.29 € 1,444,857.14 € 600,142.86
    2025 60000 € 2.78 € 166,714.29 € 1,611,571.43 € 433,428.57
    2026 60000 € 2.78 € 166,714.29 € 1,778,285.71 € 266,714.29
    2027 60000 € 2.78 € 166,714.29 € 1,945,000.00 € 100,000.00

    In your opinion, which depreciation method should the company use?


    Units of activity. This method matches the costs of revenues best.

    Change of estimate: Assume that on January 1, 2020, Smeets Printing revised its estimate of the
    total useful life to nine years and changed its estimate of the residual value to €150,000. Assume
    that Smeets Printing uses straight-line depreciation. What effect would this have on the
    depreciation expense in 2020?
    Depreciation  
    2018 € 194,500
    2019 € 194,500 +
    Total € 389,000

    Book value begin €


    2020 1,656,000
    Residual value € 150,000 -
    €
    Depreciable cost 1,506,000

    €
    Depreciable cost 1,506,000
    Lifetime 7 years /
    €
    Depreciation/year 215,142.86

    Gain or loss on asset sale: Assume that on December 31, 2021, Smeets Printing sells the machine
    to another company for €1,100,000. At the disposal date, calculate the cumulative depreciation
    expense and the net book value of the machine for each of the depreciation methods. Prepare the
    necessary journal entries to record the sale under the different depreciation methods.
    Straight line Declining Units
    cumulative dep. Exp. € 778,000 € 1,207,368 € 889,142.86
    Net book value € 1,267,000 € 837,632 € 1,155,857.14

    Straight line:
    dec-31 Account Debit Credit
    Cash € 1,100,000
    acc. Dep. Exp. € 778,000
    Loss on disposal € 167,000
    Equipment € 2,045,000

    Declining:
    dec-31 Account Debit Credit
    Cash € 1,100,000
    acc. Dep. Exp. € 1,207,368
    Gain on disposal € 262,368
    Equipment € 2,045,000

    Units:
    dec-31 Account Debit Credit
    Cash € 1,100,000
    acc. Dep. Exp. € 889,142.86
    Loss on disposal € 55,857.14
    Equipment € 2,045,000

    Task 20
    €2,800,000/5=€560,000
    €560,000/€2,800,000=0.2

    0.2*2=0.4

    €2,800,000*0.4=€1,120,000
    €2,800,000-€1,120,000=€1,680,000
    €1,680,000*0.4=€672,000

    1. A
    2. B

    €180,000/10=€18,000/year
    7*€18,000=€126,000

    €200,000-€126,000=€74,000 (book value)


    €80,000-€74,000=€6,000 (gain)
    3. C

    €180,000/10=€18,000/year
    2*€18,000=€36,000 (acc. Dep. Exp.)
    €225,000-€36,000=€189,000
    €189,000-€7,500= €181,500
    €181,500/4=€45,375

    4. A

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