AFA 717 Lecture 1: 10b - Copy

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bluegnat451

6 Jun 2018

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Depreciation or amortization:

• Starts when asset is in its intended condition, location and is available for use.

• With straight-line and accelerated methods, depreciation continues when the asset is

idle.

• Stops when asset derecognized (sold) or classified as held-for-sale.

• Asset is not depreciated below its residual value.

• Major Spare Parts – are a separate component and depreciated separately.

Depreciation begins when put into service.

• Standby Equipment – depreciated when ready for use.

Depreciation linked to the equipment it is acting as back up for.

Assumes asset provides equivalent service each year of its life

Relates depreciation/amortization directly to the passage of time

Results in a constant amount recognized per time period

The straight-line method is:

• logically appealing;

• rational and systematic; and

• the most popular method in use

easy to use

Use either: service-hours method or productive output method (also called the units-of-

production method)

No depreciation recorded for idle assets

The method is rational and systematic. It logically matches expenses to revenue and is only

used for tangible assets

Drawbacks:

• If obsolescence is a factor, these methods will not portray this reality.

• Methods can produce different results, depending on the ratio of machine-hours to

units produced.

• Difficult to accurately estimate the total projected activity.

• Recognize greater amounts of depreciation early in the useful life and lesser amounts

later

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Document Summary

Starts when asset is in its intended condition, location and is available for use: with straight-line and accelerated methods, depreciation continues when the asset is idle. Stops when asset derecognized (sold) or classified as held-for-sale: asset is not depreciated below its residual value, major spare parts are a separate component and depreciated separately. Standby equipment depreciated when ready for use. Depreciation linked to the equipment it is acting as back up for. Assumes asset provides equivalent service each year of its life. Relates depreciation/amortization directly to the passage of time. Results in a constant amount recognized per time period. The straight-line method is: logically appealing; rational and systematic; and the most popular method in use easy to use. Use either: service-hours method or productive output method (also called the units-of- production method) It logically matches expenses to revenue and is only used for tangible assets.

Related Questions

5. Archie Co. purchased a framing machine for $45,000 on January 1, 2018. The machine is expected to have a four-year life, with a residual value of $5,000 at the end of four years.

Using the straight-line method, depreciation for 2019 and book value at December 31, 2019, would be:

a. $10,000 and $20,000

b. $10,00 an $25,000

c. $11,250 and $17,500

d. $11,250 and $22,500

6. On September 30, 2018, Bricker Enterprises purchased a machine for $200,000. The estimated service life is 10 years with a $20,000 residual value. Bricker records partial-year depreciation based on the number of months in service.

Depreciation for 2018, using the double-declining balance method, would be:

a. $40,000

b. $10,000

c. $36,000

d. $9,000

7. An asset was acquired on January 1, 2018, for $15,000 with an estimated 4-year life and $1,000 residual value. The company uses straight-line depreciation. Calculate the gain or loss if the asset was sold on December 31, 2020, for $5,000.

a. $500 gain

b. $3,000 loss

c. $1,500 gain

d. $500 loss

8. On January 1, 2018, Tabitha Designs purchased a patent giving it exclusive rights to manufacture a new type of synthetic clothing for $240,000. While the patent had a remaining legal life of 15 years at the time of purchase, Tabitha expects the useful life to be only eight more years. In addition, Tabitha purchase equipment related to production of the new clothing for $140,000. The equipment has a physical life of 10 years but Tabitha plans to use the equipment only over the patentâs service life and then sell it for an estimated $20,000. Tabitha uses straight-line for all long-term assets. The amount to expense in 2021 related to the patent and equipment should be:

a. $40,000

b. $38,000

c. $45,000

d. $31,000

9. Russell Enterprises acquired a franchise from Michael Incorporated for $300,000. The franchise agreement is for a period of six years. Russell uses straight-line to amortize all intangible assets. What would be the reported book value of the franchise two years after the purchase?

a. $300,000

b. $250,000

c. $200,000

d. $100,000

10. Herman Apparel has purchased equipment on January 1, 2015, for $560,000. In 2015-2017, Herman depreciated the asset on a straight-line basis with an estimated useful life of eight years and a $80,000 residual value. In 2018, Herman has started to change its business strategy and now believes that the equipment will be used for only another two years (five years total) but does not believe the residual value has changed. What depreciation would Herman record for the year 2018 on this equipment?

a. $150,000

b. $175,000

c. $124,000

d. $ 96,000

sapphirewasp163

Before you begin this assignment, it will be helpful if you review

McDonald'sMcDonald's

Corporation

20152015

annual report

(https://www.sec.gov/Archives/edgar/data/63908/000006390816000103/mcd-12312015x10k.htm ).

McDonald'sMcDonald's

Corporation is the world's leading global food service retailer with more than 36,000 locations worldwide in more than 100 countries. The corporation operates and franchises

McDonald'sMcDonald's

restaurants, which serve menu items such as the Big Mac, Chicken McNuggets, and McFlurry desserts. In addition,

McDonald'sMcDonald's

also serves McCafe beverages and pastries.Read the requirements

Requirement 1. Where would

McDonald'sMcDonald's

Corporation report plant assets on its financial statements? How are plant assets reported and what is the value as of December 31,

20152015 ?

(Enter any amounts in millions, to the nearest tenth of a million, X.X, as shown in the financial statements.)

Plant assets are reported at	cost	on the	consolidated balance sheet.
The gross value of plant assets at December 31, 2015 is $		37,692.4	(in millions).

Requirement 2. Does

McDonald'sMcDonald's

Corporation depreciate its plant assets? How do you know? What is the depreciation method used and the useful lives?

No,

McDonald'sMcDonald's

Corporation does not depreciate its plant assets. We know this because there is no difference between the cost and net value of the plant assets as shown on the consolidated balance sheet. This is reasonable given that the company's only category of plant assets is land, which is not depreciated. As such, no depreciation method is in use.

Yes,

McDonald'sMcDonald's

Corporation depreciates its plant asset. We know this because information about depreciation can be found in the Notes to the Consolidated Financial Statement and an accumulated depreciation and amortization balance is shown on the consolidated balance sheet. The company use the straight-line method to depreciate assets with the following estimated useful lives: up to 40 years for buildings, the lesser of the useful lives of assets or lease terms for leasehold improvements, and three to 12 years for equipment.

Yes,

McDonald'sMcDonald's

Corporation depreciates its plant asset. We know this because information about depreciation can be found in the Notes to the Consolidated Financial Statement and an accumulated depreciation and amortization balance is shown on the consolidated balance sheet. The company use the double-declining-balance method to depreciate assets with the following estimated useful lives: up to 30 years for buildings, five to 10 years for leasehold improvements, and three to 12 years for furniture and equipment.

Yes,

McDonald'sMcDonald's

Corporation depreciates its plant asset. We know this because information about depreciation can be found in the Notes to the Consolidated Financial Statement and depreciation expense is reported on the consolidated statement of income. The company use the double-declining-balance method to depreciate assets with the following estimated useful lives: up to 40 years for buildings, the lesser of the useful lives of assets or lease terms for leasehold improvements, and three to 12 years for equipment.

Use the following to answer questions 26-27:

On October 12, 2006, Livingston Corporation invested $500,000 inshort-term available-for-sale marketable securities. The marketvalue of this investment was $530,000 at December 31, 2006, but hadslipped to $525,000 by December 31, 2007.

26. Refer to the above data. Infinancial statements prepared on December 31, 2006, LivingstonCorporation reports:

A) The asset Investments in Marketable Securities at $500,000 withfootnote disclosure of the market value of $530,000.

B) The asset Investments in Marketable Securities at$530,000, and a $30,000 Unrealized Holding Gain included in totalstockholders' equity.

C) The asset Investments in Marketable Securities at$530,000, and a $30,000 gain recognized in the incomestatement.

D) The asset Investments in Marketable Securities at $500,000, anda $30,000 Unrealized Holding Gain included in total stockholders'equity.

27. Refer to the above data. Assuming Livingston does not sell thisinvestment; financial statements prepared at December 31, 2007,report:

A) Investments in Marketable Securities of $500,000, reduced by a$30,000 Unrealized Holding Gain on Investments, in the assetsection of the balance sheet.

B) The asset Investments in Marketable Securities of$500,000 in the balance sheet, and a $25,000 Unrealized HoldingLoss on Investments in the income statement.

C) The asset Investments in Marketable Securities of$525,000, and a $5,000 Unrealized Holding Loss deducted from totalstockholders' equity.

D) Investment in Marketable Securities of $525,000 in the assetsection of the balance sheet, with a $25,000 Unrealized HoldingGain on Investments included in the stockholders' equitysection.

28. Anasset which costs $7,200 and has accumulated depreciation of $1,800is sold for $4,500. What amount will be recognized when the assetis sold?

A) A gain of $900

B) A loss of $900

C) A loss of $2,700

D) A gain of $2,700

29. Coca-Cola's famous name printed in distinctive typeface is anexample of:

A) A trademark.

B) A patent.

C) A copyright.

D) Goodwill.

30. CarlsonImports sold a depreciable plant asset for cash of $35,000. Theaccumulated depreciation amounted to $70,000, and a loss of $5,000was recognized on the sale. Under these circumstances, the originalcost of the asset must have been:

A) $65,000.

B) $75,000.

C) $100,000.

D) $110,000.

31. Tivoli Instrumentation solda depreciable asset for cash of $100,000. The original cost of theasset was $400,000. Tivoli recognized a gain of $15,000 on thesale. What was the amount of accumulated depreciation on the assetat the time of its sale?

A) $315,000.

B) $85,000.

C) $385,000.

D) $300,000.

32. Machinery acquired new on January 1 at a cost of $50,000 wasestimated to have a useful life of 10 years and a residual salvagevalue of $20,000. Straight-line depreciation was used. On January1, following six full years of use of the machinery, managementdecided that the estimate of useful life had been too long and thatthe machinery would have to be retired after two more years, thatis, at the end of the eighth year of service. Under this revisedestimate, the depreciation expense for the seventh year of usewould be:

A) $6,000.

B) $8,000.

C) $11,000.

D) $12,000.

33. The ability of a partner toenter into a contract on behalf of all partners is called

a. voluntary agency.

b. mutualagency.

c. unlimitedliability.

d. voluntaryassociation.

34. Which of the following doesnot result in dissolution of a partnership?

a. Admissionof a new partner

b. Sale ofpartnership assets

c. Death of apartner

e. Bankruptcyof a partner

35. Jerry and Rose have agreed toform a partnership. Accordingly Rose will invest $40,000 worth ofequipment which has a note payable of $15, 000 which thepartnership assumes, and Jerry will invest $40,000 in cash. TheRoseâs capital account balance will be.

A. $40,000

B. $25,000

C. $15,000

D. $80,000

36. One method of distributing income and losses is to give eachpartner a stated

ratio of the total income or loss.There are two partners Jerry & Rose, each making an equalcontribution to the firm (50/50). However the partnership agreementstates that distributions would be made 60% and 40% respectively.Jerry and Rose are partners of the firm which had a net income$100,000. Therefore Jerryâs share of income is:

A. $50,000

B. $40,000

C. $100,000

D. $60,000

37. After March, 2004 international standards required thatgoodwill

A) Be capitalized and amortized over 20 years or less.

B) Be capitalized and amortized over 40 years or less.

C) Be capitalized and reviewed annually and its value should beadjusted if impaired.

D) Be expensed immediately.

38. Manufacturing overhead isbest described as:

A) All manufacturing costs other than direct materials and directlabor.

B) All period costs associated with manufacturingoperations.

C) Indirect materials and indirect labor.

D) All operating expenses other than selling expenses and generaland administrative expenses.

39. Which of the followingcosts would not be considered part of the manufacturing overhead ofa furniture manufacturer?

A) The cost of compliance with federal factory safetyregulations.

B) Depreciation expense on factory equipment.

C) The cost of grease used to lubricate factoryequipment.

D) The cost of wood used in furniture construction.

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AFA 717 Lecture 1: 10b - Copy

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