Question

Exercise 11-15 (Essay)

On March 10, 2019, Lost World Company sells equipment that it purchased for $192,000 on August 20, 2012. It was originally estimated that the equipment would have a life of 12 years and a salvage value of $16,800 at the end of that time, and depreciation has been computed on that basis. The company uses the straightline method of depreciation.

Following are the assumptions with respect to partial periods:

(1)		Depreciation is computed for the exact period of time during which the asset is owned. (Use 365 days for the base and record depreciation through March 9, 2019.)
(2)		Depreciation is computed for the full year on the January 1 balance in the asset account.
(3)		Depreciation is computed for the full year on the December 31 balance in the asset account.
(4)		Depreciation for one-half year is charged on plant assets acquired or disposed of during the year.
(5)		Depreciation is computed on additions from the beginning of the month following acquisition and on disposals to the beginning of the month following disposal.
(6)		Depreciation is computed for a full period on all assets in use for over one-half year, and no depreciation is charged on assets in use for less than one-half year. (Use 365 days for base.)

Briefly evaluate the methods above, considering them from the point of view of basic accounting theory as well as simplicity of application.

Answer 1

Purchase Price of $192,000, Salvage Value of $16,800 and Life of 12 years are constant. And Straight line depreciation amount for a year of $14,600 is a given.

1.)Depreciation is computed for the exact period of time during which the asset is owned. (Use 365 days for the base and record depreciation through March 9, 2019

Although this is very accurate method to use and recommended, it is quite impractical to spend so much time on every calculation. Also, for a company with lot of acquisitions and disposals, this method would be a nightmare. But this does follow the accrual concept to the T.

In this method the depreciations for last and first years would be as follows

2012, days in use = 134 days (from 20 Aug,2012 to 31 Dec,2012)

Depreciation = (134 / 365) * 14,600 = $5,360

2013-2018 = 6 * 14,600 = $87,600

2019, days in use = 68 (from 1 Jan,2019 to March 9,20190

Depreciation = (68 / 365) * 14,600 = $2,720

Total Accumulated Depreciation till sale = $95,680

2.)Depreciation is computed for the full year on the January 1 balance in the asset account.

As it was acquired during the year,2012, it's 2012 opening balance on January 1 would be zero, and hence no depreciation in that year. This is not in tune with the accrual concept based on which depreciation stemmed from. But is quite easy. Even if it was acquired on January 2, it would not have been depreciated for the whole year and even if it was sold on January 2, it would have been depreciated for the whole year.

So, Depreciation for

2013-2019 = 7 * 14,600 = $102,200

Total Accumulated Depreciation till sale = $102,200

3.)Depreciation is computed for the full year on the December 31 balance in the asset account

As it was acquired during the year,2012, it's 2012 balance on December 31 would be 192,000, and hence full depreciation in that year. This is not in tune with the accrual concept based on which depreciation stemmed from. But is quite easy. Even if it was acquired on December 30, it would have been depreciated for the whole year and even if it was sold on December 30, it would not have been depreciated for the whole year.

So Depreciation

2012-2018 = 7 * 14,600 = $102,200

Total Accumulated Depreciation till sale = $102,200

4.)Depreciation for one-half year is charged on plant assets acquired or disposed of during the year.

Any acquisition or disposal is charged half year depreciation, this suffers from the problems mentioned in 2 and 3 above but still it is half okay.

So Depreciatio for

2012 = 1/2 * 14,600 = $7,300

2013-2018 = 6 * 14,600 = $87,600

2019 = 1/2 * 14,600 = $7,300

Total Accumulated Depreciation till sale = $102,200

5.)Depreciation is computed on additions from the beginning of the month following acquisition and on disposals to the beginning of the month following disposal.

It basically follows a monthly apportionment and it is quite close to the exact method. It evens out any differences during acquisitions with the disposals.

Depreciation for

2012 = 4/12 * 14,600 = $4,866.67 (August 20, so 1 Sep to 31 Dec)

2013 - 2018 = 6 * 14,600 = $87,600

2019 = 3/12 * 14,600 = $3,650 (March 10, so 1 Jan to 1 April)

Total Accumulated Depreciation till sale = $96,116.67

6.)Depreciation is computed for a full period on all assets in use for over one-half year, and no depreciation is charged on assets in use for less than one-half year. (Use 365 days for base.)

Half of the year would be 182.5 days and hence any asset used for 183 days shall be charged for depreciation. This is against the accrual concept.

In 2012, it is used only for 134 days, so no depreciation and in 2019 it is used only for 68 days hence no depreciation in 2019.

So Depreciation

2013-2018 = 6 * 14,600 = $87,600

Total Accumulated Depreciation till sale = $87,600

Good luck