Question

In: Accounting

On July 1, 2017, Sport Company purchased for $3,600,000 snow-making equipment having an estimated useful life...

On July 1, 2017, Sport Company purchased for $3,600,000 snow-making equipment having an estimated useful life of 5 years with an estimated salvage value of $150,000. Depreciation is taken for the portion of the year the asset is used.

During 2019, the company determined that the equipment would be useful to the company for only one more year beyond 2019. Salvage value is estimated at $200,000. What is the depreciation base of this asset?

Please help me understand how to calculate the depreciation base. I've seen some answers on this forum that calculate a net book value by 2019, but my textbook just uses cost less salvage value without taking into account accumulated depreciation for each year, so I am confused as to which approach is correct. Thanks!

Solutions

Expert Solution

Change in useful life of assets and residual value is considered as a change in accounting estimates, both in IFRS and US GAAP. For change in accounting estimates, the respective standards require the impact of change to be applied on a prospective basis. The application of this is outlined in following steps:

- Consider the book value of the asset as on date of change

- Re-compute the estimated depreciable amount as on the date of change

- Take revised estimate of useful life as on date of change

- Calculated depreciation based on above 2 amounts.

IN the given case, application will be as follows:

Book value as on 31 Dec 2019 (before 2019 depreciation) will be USD 2.565 mn (calculated as below)

Revised salvage value is 200,000. Therefore, the depreciable amount is (2,565,000-200,000=2,365,000)

Now. the asset is expected to be used only for 1 year beyond 2019, i.e. the asset needs to be depreciated by 2020, i.e. including 2019, we have 2 years to write down the asset to salvage value. Therefore, remaining useful life (before 2019 depreciation) is 2 years. Therefore, the depreciable value of USD 2,365,000 will be split equally over 2019 and 2020. Depreciation in 2019 will therefore be (2,365,000/2=1,182,500). Assuming there are no further changes in estimates, the same amount will appear as depreciation in 2020.

Please comment in case any part of the solution is not clear, happy to help.

ekkarill92 answered 1 year ago
Next > < Previous

Related Solutions

On July 1, 2017, Sport Company purchased for $3,600,000 snow-making equipment having an estimated useful life...
On July 1, 2017, Sport Company purchased for $3,600,000 snow-making equipment having an estimated useful life of 5 years with an estimated salvage value of $150,000. Depreciation is taken for the portion of the year the asset is used. Assume the company had used straight-line depreciation during 2017 and 2018. During 2019, the company determined that the equipment would be useful to the company for only one more year beyond 2019. Salvage value is estimated at $200,000 Compute the amount...
On July 1, 2020, Concord Company purchased for $7,200,000 snow-making equipment having an estimated useful life...
On July 1, 2020, Concord Company purchased for $7,200,000 snow-making equipment having an estimated useful life of 5 years with an estimated salvage value of $300,000. Depreciation is taken for the portion of the year the asset is used. Complete the form below by determining the depreciation expense and year-end book values for 2020 and 2021 using the 1. sum-of-the-years'-digits method. 2. double-declining balance method. 2020 2021 Sum-of-the-Years'-Digits Method Equipment $7,200,000 $7,200,000 Less: Accumulated Depreciation $ $ Year-End Book Value...
On July 1, 2020, Flounder Company purchased for $4,140,000 snow-making equipment having an estimated useful life...
On July 1, 2020, Flounder Company purchased for $4,140,000 snow-making equipment having an estimated useful life of 5 years with an estimated salvage value of $172,500. Depreciation is taken for the portion of the year the asset is used. (a) Complete the form below by determining the depreciation expense and year-end book values for 2020 and 2021 using the 1. sum-of-the-years'-digits method. 2. double-declining balance method. 2020 2021 Sum-of-the-Years'-Digits Method Equipment $4,140,000 $4,140,000 Less: Accumulated Depreciation $ $ Year-End Book...
On July 1, 2020, Ayayai Company purchased for $2,880,000 snow-making equipment having an estimated useful life...
On July 1, 2020, Ayayai Company purchased for $2,880,000 snow-making equipment having an estimated useful life of 5 years with an estimated salvage value of $120,000. Depreciation is taken for the portion of the year the asset is used. Complete the form below by determining the depreciation expense and year-end book values for 2020 and 2021 using the 1. sum-of-the-years'-digits method. 2. double-declining balance method. 2020 2021 Sum-of-the-Years'-Digits Method Equipment $2,880,000 $2,880,000 Less: Accumulated Depreciation $ $ Year-End Book Value...
On July 1, 2017, Sparks Company purchased for $4,300,000 an equipment having an estimated useful life...
On July 1, 2017, Sparks Company purchased for $4,300,000 an equipment having an estimated useful life of 5 years with an estimated residual value of $200,000. Depreciation is taken for the portion of the year the asset is used. Instructions (a) Complete the form below by determining the depreciation expense and year-end book values for 2017and 2018 using the       1.   sum-of-the-years'-digits method.       2.   double-declining balance method.       Sum-of-the-Years'-Digits Method                                    2017                           2018           Equipment                                                                  $4,300,000                  $4,300,000       Less: Accumulated Depreciation                                  ...
On January 1, 2018, Sport Company purchased for $800,000 equipment having an estimated useful life of...
On January 1, 2018, Sport Company purchased for $800,000 equipment having an estimated useful life of 4 years with an estimated salvage value of $20,000. Determine the depreciation expense and year-end book values for 2018 and 2019 using the (1). Sum-of-the-Years'-Digits Method (2). Straight-Line Method (3). Double-declining method
On July 1, 2020, Yorkton Company purchased for $420,000 equipment having an estimated useful life of...
On July 1, 2020, Yorkton Company purchased for $420,000 equipment having an estimated useful life of five years with an estimated residual value of $20,000. Depreciation is calculated to the nearest month. The company has a December 31 year-end. Required: Complete the following schedules: (Amount to be deducted should be indicated by a minus sign.)
On July 1, 2016, Johnny Company purchased equipment for $550,000. The estimated useful life of the...
On July 1, 2016, Johnny Company purchased equipment for $550,000. The estimated useful life of the equipment is 10-years. It is predicted that the equipment can be sold at the end of the 10-year period for $90,000. Johnny uses the double-declining balance depreciation method. Johnny recorded depreciation normally during 2016, 2017, and 2018. However, because Johnny determined that the equipment was no longer useful to the company, Johnny sold the equipment on June 30, 2019 for $400,000. 1. Based on...
On January 1, 2017, Sunland Company purchased a copyright for $2292000, having an estimated useful life...
On January 1, 2017, Sunland Company purchased a copyright for $2292000, having an estimated useful life of 16 years. In January 2021, Sunland paid $339000 for legal fees in a successful defense of the copyright. Copyright amortization expense for the year ended December 31, 2021, should be
On July 1, 2012, Okin Company purchased equipment for $280,000; the estimated useful life was 10...
On July 1, 2012, Okin Company purchased equipment for $280,000; the estimated useful life was 10 years and the expected salvage value was $25,000. Straight-line depreciation is used. On July 1, 2016, economic factors cause the market value of the equipment to decrease to $90,000. On this date, Okin evaluates if the equipment is impaired and estimates future cash flows relating to the use and disposal of the equipment to be $125,000. a. Is the equipment impaired at July 1,...
ADVERTISEMENT
Subjects
ADVERTISEMENT
Latest Questions
ADVERTISEMENT