ACCOUNTING QUESTIONS:

Discussion Questions:

1) In the three depreciation methods you have learned, one is unique:

- What is the name of this depreciation method?
- What do you do with the Salvage Value at the beginning?
- What do you with the Salvage Value at the end?

2) What are the two items on the Assets side of the Balance Sheet under "Plant and Equipment" that
CANNOT be depreciated or appreciated by a company?

*** Please note the following example below. The Exercise Questions that follow this example must
use the format below in answering each of the questions. ***

Cruisers, Inc., purchased a molding machine at the beginning of 2010 at a cost of $22,000. The
machine is estimated to have a useful life of to Cruisers, Inc., of 5 years and an estimated salvage value
of $2,000. It is estimated that the machine will produce 200 boat hulls before it wears out.

A) Straight-Line Depreciation:

Annual Depreciation Expense = Cost - Estimated Salvage Value

Estimated Useful Life

Annual Depreciation Expense = $22,000 - $2,000

5 years

Annual Depreciation Expense = $4,000

Straight-Line Depreciation Rate = 1

Life In Years
 Straight-Line Depreciation Rate = 1
5

Straight-Line Depreciation Rate = 20%

Annual Depreciation Expense = 20% x $20,000 = $4,000

B) Units of Production Depreciation:

Depreciation Expense Per Unit Produced = Cost - Estimated Salvage Value

Estimated Total Units To Be Made

Depreciation Expense Per Unit Produced = $22,000 - $2,000

200 Hulls

Depreciation Expense Per Unit Produced = $100

C) Declining-Balance Depreciation:

Straight-Line Depreciation Rate = 1

Life In Years

Straight-Line Depreciation Rate = 1

5

Straight-Line Depreciation Rate = 20%

Double the straight-line depreciation rate is 40%.

Depreciation
Net Book Value At Expense For The Accumulated Net Book Value
Year Beginning Of Year X Factor = Year Depreciation At End Of Year
2010 $22,000 X 0.4 = $8,800 $8,800 $13,200
2011 13,200 X 0.4 = 5,280 14,080 7,920
2012 7,920 X 0.4 = 3,168 17,248 4,752
2013 4,752 X 0.4 = 1,901 19,149 2,851
2014 2,851 X 0.4 = 851 20,000 2,000
Exercise Questions:

1) Lucianno’s Pizza purchased a car to be used in delivering pizzas. The car cost $14,000 (Cost). It will be
used for 5 years (Number of years). After 5 years the residual value (Salvage Value) will be about $2,000.
In these 5 years, Lucianno’s estimates the car will be driven 80,000 miles (Units). Clearly show the
depreciation for each year.

A) Calculate the depreciation for all 5 years using the “Straight-line depreciation method”

B) Calculate the depreciation for all 5 years using the “Units-of-production depreciation method”

The car was driven as follows:

Year 1: 10,000 miles
Year 2: 15,000 miles
Year 3: 18,000 miles
Year 4: 20,000 miles
Year 5: 17,000 miles

Hint: The car was driven a total of 80,000 miles. Miles are the unit.

2) ABC Marketing recently purchased a machine that coast $80,000 (Cost). The machine is expected to
last 4 years and has a residual value of $6,000. Calculate the depreciation expense to be recorded each
year using the “Declining – Balance depreciation method”.
3) Exercise 6.8A (Again use the same presentation as shown on Exhibit 6-4): Depreciation Calculation
Method. Kleener Co. acquired a new delivery truck at the beginning of its current fiscal year. The truck
cost $26,000 and has an estimated useful life of 4 years and an estimated salvage value of $4,000.

Calculate depreciation expense for each year of the truck’s life using:

1. Straight –line depreciation method.

2. Double-declining-balance depreciation method.