Question

1. A building was purchased for $240,000 and has a useful life of 30 years, and a residual value of $90,000. After it has been used 5 years, its accumulated depreciation using the straight-line method would be

		a. $12,500
		b. $50,000
		c. $25,000
		d. $40,000

2.

Massachusetts Mining Company purchased a gravel pit for $2,500,000. It is estimated that 5 million tons of gravel can be extracted over the pit's useful life, with a residual value of $700,000. If 4 million tons are extracted and sold during the first year, how much depletion expense should be recorded?

		a. $2,000,000
		b. $1,440,000
		c. $1,800,000
		d. $1,050,000

3. If an asset cost $68,000 and has a residual value of $4,000 and a useful life of five years, the depreciation in the third year, using the double-declining balance method, would be (assume a full year of depreciation in the first year):

		a. $5,625
		b. $9,216
		c. $12,000
		d. $9,792

4. Which of the following would not be charged (debited) to the Vehicles account for the cost of a used car purchase?

		a. tax, title, and registration costs incurred prior to putting the car in use
		b. the cost of an oil change after the car has been in use at our business for 3,000 miles
		c. the purchase price of the car
		d. the cost of having pre-existing bumper damage repaired before putting the car in use

Answer 1

1. Option (c) is correct

Under the straight line method, depreciation is calculated by the following formula:

Depreciation = Cost - Residual value / Useful life

Cost = $240000, Residual value = $90000, useful life = 30

Depreciation = ($240000 - $90000) / 30 = $5000

Under straight line method, depreciation remains the same for every year. Accumulated depreciation means depreciation charged till date.

Accumulated depreciation for first 5 years = 5 * $5000 = $25000

2. Option (b) is correct

Under depletion, first we will calculate the unit depletion rate and then we will calculate the depletion expense.

Unit depletion rate = Depletion base / Estimated recoverable units

where, Depletion base = Cost - Residual value.

Depletion base = $2500000 - $700000 = $1800000

Estimated recoverable units = 5000000 tons

Putting the values in the unit depletion rate formula, we get,

Units depletion Rate = $1800000 / 5000000 = $0.36 per ton

In the next step, we will compute the depletion expense as per below:

Depletion expense = Unit depletion rate * No. of units extracted

No. of units extracted was 4000000, so

Depletion = $0.36 * 4000000 = $1440000

3. Option (d) is correct

Under double declining balance method, depreciation is calculated by the following formula:

Double declining rate = 2 / Useful life * 100

Double declining rate = 2 / 5 * 100 = 40%

Depreciation for various years is given below:

For first year:

Depreciation = 40% * $68000 = $27200

Net book value remaining at the end = $68000 - $27200 = $40800

For second year:

Depreciation = 40% * $40800 = $16320

Net book value remaining at the end = $40800 - $16320 = $24480

For third year:

Depreciation = 40% * $24480 = $9792

4. Option (b) is correct

The cost of an oil change after the car has been in use at our business for 3000 miles will not be debited to the vehicles account. All costs that have been incurred before the car is put to use will be debited to vehicles account.