LONG – TERM ASSETS - PROBLEM

Exercise 1: On January 1, 2018, the company purchased factory equipment for $1,400,000. It is
estimated that the equipment will have a $140,000 residual value or salvage value at the end of
its estimated 5-year useful life. If the company uses the double-declining-balance method of
depreciation.
Required: Book value = Cost – Accumulated depreciation

1. Compute depreciation expense for year 2018 and 2019.

Straight-line percentage = (1 / No. year useful life) x 100 = (1 / 5) x 100 = 20%
Double percentage = Straight-line percentage x 2 = 20% x 2 = 40% of Book value
Dep 2018 = 40% x (1,400,000 – 0) = $560,000
Dep 2019 = 40% x (1,400,000 – 560,000) = 40% x 840,000 = $336,000

2. Compute carrying value or book value (BV) as of December 31, 2018 and 2019.
Book value = Cost – Accumulated depreciation
BV Dec 31, 18 = 1,400,000 – 560,000 = $840,000
BV Dec 31, 19 = 1,400,000 – (560,000 + 336,000) = 1,400,000 – 896,000 = $504,000

3. Assume the company purchased factory equipment on April 1, 2018, compute

depreciation expense for year 2018 and 2019. 2018 we use for = Apr 1 – Dec 31 = 9
months
Double percentage = 40% of Book value
Dep 2018 = 40% x (1,400,000 – 0) = 560,000 per year x 9/12 = $420,000
Dep 2019 = 40% x (1,400,000 – 420,000) = 40% x 980,000 = $392,000

4. Assume the company purchased factory equipment on April 1, 2018, compute carrying
value or book value (BV) as of December 31, 2018 and 2019.
Book value = Cost – Accumulated depreciation
BV Dec 31 18 = 1,400,000 – 420,000 = $980,000
BV Dec 31, 19 = 1,400,000 – (420,000 + 392,000) = 1,400,000 – 812,000 = $588,000
Exercise 2: On January 1, 2018, the company purchased factory equipment for $160,000. It is
estimated that the equipment will have a $20,000 residual value or salvage value at the end of its
10-year useful life. If the company uses the straight-line method of depreciation.
Required:
1. Compute depreciation expense for year 2018 and 2019.
Depreciation expense = (Cost – Salvage value) / No. year useful life
Dep. 2018 = (160,000 – 20,000) / 10 years = $14,000 per year
Dep. 2019 = (160,000 – 20,000) / 10 years = $14,000 per year

2. Compute carrying value or book value as of December 31, 2018 and 2019.
Carrying value or Book value (BV) = Cost – Accumulated depreciation
BV – Dec 31, 2018 = 160,000 – 14,000 = $146,000
BV – Dec 31, 2019 = 160,000 – (14,000 + 14,000) = 160,000 – 28,000 = $132,000

3. Assume the company purchased factory equipment on July 1, 2018, compute

depreciation expense for year 2018 and 2019.
Depreciation expense = (Cost – Salvage value) / No. year useful life
2018 = (160,000 – 20,000) / 10 years = $14,000 per year x 6/12 = $7,000
2019 = (160,000 – 20,000) / 10 years = $14,000 per year

4. Assume the company purchased factory equipment on July 1, 2018, compute carrying
value or book value (BV) as of December 31, 2018 and 2019.
Carrying value or Book value (BV) = Cost – Accumulated depreciation
BV – Dec 31, 2018 = 160,000 – 7,000 = $153,000
BV – Dec 31, 2019 = 160,000 – (7,000 + 14,000) = 160,000 – 21,000 = $139,000
Exercise 3: A company purchased office equipment for $50,000 and estimated a residual value
or salvage value of $10,000 at the end of its 5-year useful life.
Required:
1. Assume the company uses the straight-line method of depreciation:
1.1 If the company purchased office equipment on January 1, 2018, compute depreciation
expense for year 2018 and 2019 and compute carrying value or book value (BV) on
December 31, 2018 and 2019.
Depreciation expense = (Cost – Salvage value) / No. year useful life
Dep 2018 = (50,000 – 10,000) / 5 years = $8,000 per year
Dep 2019 = (50,000 – 10,000) / 5 years =- $8,000 per year
Book value (BV) = Cost – Accumulated depreciation
BV – Dec 31, 2018 = 50,000 – 8,000 = $42,000
BV – Dec 31, 2019 = 50,000 – (8,000 + 8,000) = 50,000 – 16,000 = $34,000

1.2 If the company purchased office equipment on October 1, 2018, compute depreciation
expense for year 2018 and 2019 and compute carrying value on December 31, 2018 and
2019.
Depreciation expense = (Cost – Salvage value) / No. year useful life
Dep 2018 = (50,000 – 10,000) / 5 year = $8,000 per year x 3/12 = $2,000
Dep 2019 = (50,000 – 10,000) / 5 year = $8,000 per year
Book value (BV) = Cost – Accumulated depreciation
BV – Dec 31, 2018 = 50,000 – 2,000 = $48,000
BV – Dec 31, 2019 = 50,000 – (2,000 + 8,000) = 50,000 – 10,000 = $40,000
2. Assume the company use the double-declining-balance method of depreciation:
2.1 If the company purchased office equipment on January 1, 2018, compute depreciation
expense for year 2018 and 2019 and compute carrying value or book value (BV) on
December 31, 2018 and 2019. Book value = Cost – Accumulated depreciation
Straight-line percentage = (1 / No. year useful life) x 100 = (1 / 5) x 100 = 20%
Double percentage = Stright-line percentage x 2 = 20% x 2 = 40% of Book value
Dep 2018 = 40% x (50,000 – 0) = $20,000 per year
BV Dec 31, 2018 = 50,000 – 20,000 = $30,000
Dep 2019 = 40% x 30,000 = $12,000 per year
BV Dec 31, 2019 = 50,000 – (20,000 + 12,000) = 50,000 – 32,000 = $18,000

2.2 If the company purchased office equipment on April 1, 2018, compute depreciation
expense for year 2018 and 2019 and compute carrying value on December 31, 2018 and
2019. For 2018 = Apr 1 – Dec 31 = 9 months
Double percentage = 40% of Book value
Dep 2018 = 40% x (50,000 – 0) = $20,000 per year x 9/12 = $15,000
Dep 2019 = 40% x (50,000 – 15,000) = 40% x 35,000 = $14,000
Exercise 4: A plant asset acquired on October 1, 2018, at a cost of $6,000,000 has an estimated
useful life of 10 years. The residual value or salvage value is estimated to be $600,000 at the end
of the asset's useful life.
Required:
1. Assume the company use straight-line method, calculate depreciation expense for year
2018 and 2019 and show the carrying amount as of December 31, 2018 and 2019.
Straight-line = (Cost – Salvage value) / No. year useful life
Dep 2018 = (6,000,000 – 600,000) / 10 years = $540,000 per year x 3/12 = $135,000
Dep 2019 = (6,000,000 – 600,000) / 10 years = $540,000

2. Assume the company use double-declining-balance method, calculate depreciation

expense for year 2018 and 2019 and show the carrying amount as of December 31, 2018
and 2019.
Straight-line percentage = (1 / No. year useful life) x 100 = (1 / 10) x 100 = 10%
Double percentage = Straight-line percentage x 2 = 10% x 2 = 20% of Book value
Dep 2018 = 20% x (6,000,000 – 0) = $1,200,000 per year x 3/12 = $300,000
Dep 2019 = 20% x (6,000,000 – 300,0000) = 20% x 5,700,000 = $1,140,000
Exercise 5: Northeast Airlines purchased an aircraft on January 1, 2018, at a cost of
$45,000,000. The estimated useful life of the aircraft is 20 years, with an estimated residual
value or salvage value of $5,000,000.
Required:
1. Assume the company use straight-line method, calculate depreciation expense for year
2018 and 2019 and show the carrying amount as of December 31, 2018 and 2019.
Straight-line = (Cost – Salvage value) / No. year useful life
Dep 2018 = (45,000,000 – 5,000,000) / 20 years = $2,000,000 per year
Dep 2019 = (45,000,000 – 5,000,000) / 20 years = $2,000,000 per year

2. Assume the company use double-declining-balance method, calculate depreciation

expense for year 2018 and 2019 and show the carrying amount as of December 31, 2018
and 2019. Book value = Cost – Accumulated depreciation
Straight-line percentage = (1 / No. of year useful life) x 100 = (1 / 20) x 100 = 5%
Double percentage = Straight-line percentage x 2 = 5% x 2 = 10% of Book value

Dep 2018 = 10% x (45,000,000 – 0) = $4,500,000 per year

Dep 2019 = 10% x (45,000,000 – 4,500,000) = 10% x 40,500,000 = $4,050,000