TUTORIAL 8 Answers

Question 1

Jack’s, a popular pizza hang-out, has a thriving delivery business. Jack’s has a fleet of
three delivery automobiles. Prior to making the entry for this year's depreciation
expense, the subsidiary ledger for the fleet is as follows:
Accumulated
Estimated Depr.—
Beg. Miles Operated
Car Cost Salvage Value Life in Miles of the Year During
Year
1 $21,000 $3,000 75,000 $2,520 20,000
2 18,000 2,400 60,000 2,340 22,000
3 23,500 2,500 70,000 2,000 19,000
Instructions
(a) Determine the depreciation rates per mile for each car.
(b) Determine the depreciation expense for each car for the current year.
(c) Make one compound journal entry to record the annual depreciation expense for
the fleet.

Answer

($21,000 – $3,000)
(a) Car 1 = = $0.24 per mile
75,000 miles

($18,000 – $2,400)
Car 2 = = $0.26 per mile
60,000 miles

($23,500 – $2,500)
Car 3 = = $0.30 per mile
70,000 miles

(b) Car 1 — 20,000 miles × $0.24 = $4,800

Car 2 — 22,000 miles × $0.26 = $5,720
Car 3 — 19,000 miles × $0.30 = $5,700

(c) Depreciation Expense................................................................... 16,220

Accumulated Depreciation—Car 1.................................... 4,800
Accumulated Depreciation—Car 2.................................... 5,720
Accumulated Depreciation—Car 3.................................... 5,700

Question 2
South Airlines purchased a 747 aircraft on January 1, 2015, at a cost of $35,000,000.
The estimated useful life of the aircraft is 20 years, with an estimated salvage value of

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$5,000,000. On January 1, 2018 the airline revises the total estimated useful life to 15
years with a revised salvage value of $3,500,000.

Instructions
(a) Compute the depreciation and book value at December 31, 2017 using the
straight-line method and the double-declining-balance method.
(b) Assuming the straight-line method is used, compute the depreciation expense for
the year ended December 31, 2018.

Answer
(a) Straight-line

Depreciable Depreciation Annual Accumulated Book

Year Cost × Rate = Depreciation Depreciation
value
2015 $30,000,000 5% $1,500,000 $1,500,000 $33,500,000
2016 30,000,000 5% 1,500,000 3,000,000 32,000,000
2017 30,000,000 5% 1,500,000
4,500,000
30,500,000

Double-declining-balance
Book Value Depreciation Annual Accumulated
Year Beginning Year× Rate = Depreciation Depreciation Book
Value
2015 $35,000,000 10% $3,500,000 $ 3,500,000 $31,500,000
2016 31,500,000 10% 3,150,000 6,650,000 28,350,000
2017 28,350,000 10% 2,835,000 9,485,000 25,515,000

(b) Book value, January 1, 2018 $30,500,000

Less: Revised salvage value 3,500,000
Depreciable cost $27,000,000
Remaining useful life 12 yrs.
Revised annual depreciation $2,250,000

Question 3

Hayden Company purchased a machine on January 1, 2017, at a cost of $90,000. It is

expected to have an estimated salvage value of $5,000 at the end of its 5-year life. The
company capitalized the machine and depreciated it in 2017 using the double-declining-
balance method of depreciation. The company has a policy of using the straight-line
method to depreciate equipment but the company accountant neglected to follow
company policy when he used the double-declining-balance method. Net income for the

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year ended December 31, 2017 was $55,000 as the result of depreciating the machine
incorrectly.

Instructions
Using the method of depreciation which the company normally follows, prepare the
correcting entry and determine the corrected net income. (Show computations.)

Answer
Depreciation taken: ($90,000 – 0) × .40 = $36,000
Correct depreciation: (Straight line method)
($90,000 – $5,000) ÷ 5 yrs. = 17,000
Overstatement of depreciation = $19,000

Accumulated Depreciation.............................................................. 19,000

Depreciation Expense............................................................. 19,000

Correct net income:

Net income as reported $55,000
Add: Overstatement of depreciation expense 19,000
Correct net income $74,000

Question 4
Vicky’s Machinery account and provision for depreciation on Machinery account for
the year ended 30 April 2018 were as follows:
Machinery account
RM’000 RM’000
2017 2017
May 1 Balance b/d 6,000 July 5 Disposal 900
2018
June 3 Bank 1,440 Apr 30 Balance c/d 6,540
7,440 7,440
2018
May 1 Balance b/d 6,540

Accumulated Depreciation/Provision for depreciation on Machinery account

RM’000 RM’000
2017 2017
July 5 Disposal 690 May 1 Balance b/d 1,890

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 2018 2018 Depreciation
Apr 30 Balance c/d 2,181 Apr 30 15%(6540X15%) 981
2,871 2,871
2018
May 1 Balance b/d 2,181
During the year ended 30 April 2019 the following transactions took
place:
 On 1 June 2018 new Machinery was purchased for RM1,080,000.
 On 3 December 2018, another new Machinery was purchased for
RM160,000.
 On 3 September 2018, Machinery which had been purchased on 31
March 2017 for RM600,000 was sold for RM264,000.
Other information:
1. A full year’s depreciation is provided for on Machinery in use at the end
of the financial year but none (no depreciation) is provided for in the year
of disposal of a Machinery.
2. The rate of depreciation applied is 15% on cost for the year ended 30
April 2019.
REQUIRED:
Prepare the following accounts for the year ended 30 April 2019:
(a) Machinery
(b) Provision for depreciation on Machinery

Answer

Machinery a/c
RM’000 RM’000
2018 2018
May 1 Balance b/d 6,540 Sept 3 Disposal 600
2019
June 1 Bank 1,080 Apr 30 Balance c/d 7,180
Dec 3 Bank 160
7,780 7,780

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2019
May 1 Balance b/d 7180

Provision for Depreciation on Machinery account

RM’000 RM’000
2018 2018
Sept 3 Disposal (15% x 180 May Balance b/d 2,181
RM600,000 x 2 1
years)
2019 2019
Apr 30 Balance c/d 3,078 April Depreciation (15% 1,077
30
x RM7,180)
3,258 3,258
2019
May Balance b/d 3,078
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