Use the following data for questions 1 and 2. On 12 March 2010, Shoreham, Inc. acquired melting equipment for $45,600. The estimated life of the equipment is 6 years, with an estimated residual value of $2,400 1 Refer to above data. In its financial statements, Shoreham uses straight-line depreciation with the half-year convention. The book value of the equipment at 31 December 2011 will be: a S26,600. b $42,000. c $34,800. d Some other amount. 2 Refer to above data. In its financial statements, Shoreham uses double-declining-balance depreciation with half-year convention. The book value of the equipment at 31 December 2011 will be: a $20,267. b $12,667. c $25,333. d Some other amount. 3 Sam Dairy sold a delivery truck for cash of $86,800. The original cost of the truck was $336,000, and a loss of S53,200 was recognized on the sale. The accumulated depreciation at the dat? of sale must have been: a $249,200. b S145,600. c $33,600.d $196,000. 4 Lee Corporation purchases Presley Company\'s entire business for $2,700,000. The fair market value of Presley\'s net identifiable assets is $2,400,000. a Presley should record goodwill of $300,000. b Lee paid $300,000 for goodwill generated by Presley c Lee should charge the $300,000 excess paid for Presley Company directly to expense. d Presley should record amortization over a period not to exceed 40 years. 5 Throughout the current year, Chan Company treated sales taxes paid on purchases of PPE assets as revenue expenditures. As a result, the current year\'s: a Profit is overstated. b Revenue is overstated c Depreciation expense is understated. d None of the above; payments of sales taxes should be treated as revenue expenditures.
Q1
The depreciation per year on the machine would be equal to
(Cost of the asset - Residual Value) / Useful life
= (45,600-2,400) / 6
= 7,200
Depreciation provided till date would be
= 3,600 (Half for Year 2010) + 7,200 (Full for Year 2011)
= 10,800
Hence the book value would be total cost - depreciation till date i.e. 45,600 - 10,800 equal to 34,800.
Q2
Annual Straight line depreciation rate is 100% / 6 years i.e. 16.6667%. So under double declining balance method, the rate would be double of 16.6667% i.e. 33.33% or 1/3rd.
The depreciation for year 1 would be
45,600 X 33.33% = 15,200 divided by 2 to arrive at 1st year depreciation = 7,600
Depreciation for year 2 would be(45,600-7,600) X 33.33% = 12,666.67
So the book value would be = 45,600-7,600-12,666.67 =25,333.33
Q3
Sale Value= Original Cost of the Asset - Accumulated Depreciation - Loss on Sale of Asset
86,800 = 336,000 - Accumulated Dep - 53200
Hence Accumulated Depreciation = 86800-336,000+53,200 = -196,000
Q 4
Lee corporation paid 300,000 to Presley for goodwill generated by Presley.
As Lee corporation paid Presley over and above its net identifiable assets, it means that there was a goodwill generated by Presley which would benefit Lee Corporation in the future.
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