Question

Facts: On April 1, 2020, Foster Company purchased used equipment. The company recorded the cost of the equipment as $66,000. The company expected the equipment to last four years or 8,000 hours, with an estimated salvage value of $6,000 at the end of the useful life. The equipment was used 500 hours during 2020.

1. What amount of depreciation expense will Foster Company record in 2020 using the straight-line method of depreciation? Show your calculations.

2. What amount of depreciation expense will Foster Company record in 2020 using the units-of-activity method of depreciation? Show your calculations.

3. After reviewing Foster Company's records, regulators discover that the company improperly capitalized $10,000 of revenue expenditures in determining the cost of its equipment. Explain how Foster's error affects the company's financial statements if Foster uses straight-line depreciation

Answer 1

Answer 1:

$ 15,000

Calculation:

Depreciation (as per SLM) = (Cost - salvage value) / Number of years

A	Cost	$ 66,000
B	Residual / Salvage Value	$   6,000
C	Number of years	4
(A-B)/C	Depreciation (SLM)	$15,000

Answer 2:

$ 3,750

Calculation:

Depreciation rate (as per Units of production method) = (Cost - salvage value) / Total expected units

A	Cost	$    66,000
B	Residual / Salvage Value	$      6,000
C	Expected Numer of units	8,000
(A-B)/C	Depreciation Rate	$        7.50
	Machine hours used in 2020	500.00
	Depreciation	$ 3,750.00

Answer 3:

As $ 10,000 is capitalized improperly,

1. The value of equipment will be reduced in the Balance Sheet. Present value of assets in Balance will be 66,000 (-) 15,000 = $ 51,000. Correct value in Balance Sheet = 56,000 (-) 12,500 = $ 43,500. So, assets will reduce by $ 7,500.

2. the depreciation will change and reduce by $ 2,500. This will increase the net income of the company by $ 2,500.

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