140.Taco Hut purchased equipment on May 1, 2012, for $15,000. Residual value at the end of an estimated 8 year service life is expected to be $3,000. Calculate depreciation expense using the straight-line method for 2012 and 2013, assuming a December 31 year-end.
141.China Dragon purchased new restaurant equipment on September 1, 2012, for $8,000. Residual value at the end of an estimated 5 year service life is expected to be $2,000. Calculate depreciation expense using the straight-line method for 2012 and 2013, assuming a December 31 year-end.
142.Stephan's Resorts purchased equipment for $40,000. Residual value at the end of an estimated four-year service life is expected to be $8,000. The machine operated for 2,200 hours in the first year and the company expects the machine to operate for a total of 10,000 hours over its four year life. Calculate depreciation expense for the first year using each of the following depreciation methods: (1) straight-line, (2) double-declining-balance, and (3) activity-based.
143.Chubbyville purchases a delivery van for $23,500. Chubbyville estimates that at the end of its four-year service life, the van will be worth $2,500. During the four-year period, the company expects to drive the van 105,000 miles. Calculate annual depreciation for the four-year life of the van using each of the following methods. Round all amounts to the nearest dollar.
1. Straight line.
2. Double-declining-balance.
3. Activity-based.
Actual miles driven each year were 24,000 miles in Year 1; 26,000 miles in Year 2; 22,000 miles in Year 3; and 25,000 miles in Year 4. Note that actual total miles of 97,000 fall short of expectations by 8,000 miles.
The correct answer and explanation is:
Let’s break down the problems one by one.
140. Taco Hut (Straight-Line Depreciation)
Formula for Straight-Line Depreciation: Depreciation Expense=Cost of Equipment−Residual ValueUseful Life\text{Depreciation Expense} = \frac{\text{Cost of Equipment} – \text{Residual Value}}{\text{Useful Life}}
Given:
- Cost of Equipment = $15,000
- Residual Value = $3,000
- Useful Life = 8 years
- Year-end = December 31
Straight-Line Depreciation Calculation: Depreciation Expense per Year=15,000−3,0008=12,0008=1,500\text{Depreciation Expense per Year} = \frac{15,000 – 3,000}{8} = \frac{12,000}{8} = 1,500
Now, since Taco Hut purchased the equipment on May 1, 2012, we need to account for only part of the year in 2012 (May to December).
Depreciation for 2012: Since the equipment was used for 8 months (May to December), the depreciation expense for 2012 would be: Depreciation for 2012=1,500×812=1,000\text{Depreciation for 2012} = 1,500 \times \frac{8}{12} = 1,000
Depreciation for 2013: Since it’s a full year, the depreciation expense will be the full $1,500.
Answers:
- Depreciation for 2012 = $1,000
- Depreciation for 2013 = $1,500
141. China Dragon (Straight-Line Depreciation)
Given:
- Cost of Equipment = $8,000
- Residual Value = $2,000
- Useful Life = 5 years
- Purchase Date = September 1, 2012
Straight-Line Depreciation Calculation: Depreciation Expense per Year=8,000−2,0005=6,0005=1,200\text{Depreciation Expense per Year} = \frac{8,000 – 2,000}{5} = \frac{6,000}{5} = 1,200
Since China Dragon purchased the equipment on September 1, 2012, the depreciation for 2012 will be for 4 months (September to December).
Depreciation for 2012: Depreciation for 2012=1,200×412=400\text{Depreciation for 2012} = 1,200 \times \frac{4}{12} = 400
Depreciation for 2013: Since it’s a full year, the depreciation will be the full $1,200.
Answers:
- Depreciation for 2012 = $400
- Depreciation for 2013 = $1,200
142. Stephan’s Resorts (Multiple Depreciation Methods)
Given:
- Cost of Equipment = $40,000
- Residual Value = $8,000
- Useful Life = 4 years
- Hours in Year 1 = 2,200 hours
- Total expected hours = 10,000 hours
(1) Straight-Line Depreciation:
Depreciation Expense per Year=40,000−8,0004=32,0004=8,000\text{Depreciation Expense per Year} = \frac{40,000 – 8,000}{4} = \frac{32,000}{4} = 8,000
Depreciation for Year 1 = $8,000
(2) Double-Declining-Balance Depreciation:
Double-Declining Rate = 24=50%\frac{2}{4} = 50\%
Depreciation for Year 1 = 40,000×50%=20,00040,000 \times 50\% = 20,000
(3) Activity-Based Depreciation:
Depreciation per Hour=40,000−8,00010,000=32,00010,000=3.20 per hour\text{Depreciation per Hour} = \frac{40,000 – 8,000}{10,000} = \frac{32,000}{10,000} = 3.20 \text{ per hour}
Depreciation for Year 1 = 2,200×3.20=7,0402,200 \times 3.20 = 7,040
Answers:
- Straight-Line Depreciation = $8,000
- Double-Declining-Balance Depreciation = $20,000
- Activity-Based Depreciation = $7,040
143. Chubbyville Van (Multiple Depreciation Methods)
Given:
- Cost of Van = $23,500
- Residual Value = $2,500
- Useful Life = 4 years
- Total Miles = 105,000 miles
- Actual Miles Driven: Year 1 = 24,000 miles, Year 2 = 26,000 miles, Year 3 = 22,000 miles, Year 4 = 25,000 miles
(1) Straight-Line Depreciation:
Depreciation Expense per Year=23,500−2,5004=21,0004=5,250\text{Depreciation Expense per Year} = \frac{23,500 – 2,500}{4} = \frac{21,000}{4} = 5,250
Answer: $5,250 per year
(2) Double-Declining-Balance Depreciation:
Double-Declining Rate = 24=50%\frac{2}{4} = 50\%
Year 1 Depreciation = 23,500×50%=11,75023,500 \times 50\% = 11,750
Year 2 Depreciation = (23,500−11,750)×50%=5,875(23,500 – 11,750) \times 50\% = 5,875
Year 3 Depreciation = (23,500−11,750−5,875)×50%=2,937.50(23,500 – 11,750 – 5,875) \times 50\% = 2,937.50
Year 4 Depreciation = The remaining amount to reach residual value.
(3) Activity-Based Depreciation:
Depreciation per Mile=23,500−2,500105,000=21,000105,000=0.20 per mile\text{Depreciation per Mile} = \frac{23,500 – 2,500}{105,000} = \frac{21,000}{105,000} = 0.20 \text{ per mile}
For Year 1: 24,000×0.20=4,80024,000 \times 0.20 = 4,800
For Year 2: 26,000×0.20=5,20026,000 \times 0.20 = 5,200
For Year 3: 22,000×0.20=4,40022,000 \times 0.20 = 4,400
For Year 4: 25,000×0.20=5,00025,000 \times 0.20 = 5,000
Answers:
- Straight-Line Depreciation = $5,250 per year
- Double-Declining-Balance Depreciation = $11,750 for Year 1, and continue to apply the formula for the next years.
- Activity-Based Depreciation = $4,800 for Year 1, and continue for the next years.
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