FACULTY OF MANAGEMENT AND SOCIAL SCIENCES

ACTG 1054: Principles of Financial Acctg II

Chp 10: Acctg for Fixed and Intangible assets

To be completed for our second class session, 2020.

Chp 10 Subtopics

 Classifying costs: expense, asset or investment

 Cost of fixed assets
 Depreciation: Straight Line Method

Do your reading assignment, pgs 488 to 495 and/or review your Chp 10 ppt slides on the above
subtopics, and then answer the following questions in your notebooks.
1. What is the similarity and difference between a fixed asset and an investment?

2. Builder’s Hardware spent $15,000 to purchase land. The company plans to hold the land
to do an expansion of the current warehouse. Will the cost (land) be classified as a fixed
asset, investment, or expense? Give your reason.

3. Habet & Habet Co. Ltd hires employees and pays them on a monthly basis. Should the
cost of wages be classified as a fixed asset, investment, or expense? Why?

4. Social Security Board (SSB) purchased photocopying machines from the U.S. The
purchase price of the items was $12,000. In addition, the following costs were incurred:
freight, $3,000 – freight terms, FOB shipping point; installation and testing, $600 and
$500 due to a reprogramming error. At what cost should the machinery be recorded in the
SSB’s accounting records? Journalize the acquisition/purchase of the units.

5. A. In your own words, what does depreciation mean?

B. State 2 reasons why an asset depreciates.

C. Depreciation is a “noncash” expense. Explain.

D. State the 3 factors needed in order to depreciate an asset.

E. What does straight line depreciation mean?

F. Straight line depreciation can be computed using the straight line rate or the straight
line formula. State the formula. State how to calculate the straight-line rate and how to
calculate straight line depreciation using the straight-line rate.

Week 1 Course outline practice exercises/problems and answers

G. Complete on pg 520 PE10-1A, PE 10-1B

PE 10-1A

A) $1,450,000 - $300,000= $1,150,000

B) 10%= 1/10 = 0.1 OR 100%/10 = 10%

C) $1,150,000 / 10 years= $115,000

10-1B.

A) $340,000 - $45,000= $295,000

B) 10%= 1/10= 0.1 OR 100% / 10 = 10%

C) $295,000 / 10 years= $29,500

10-2A

A) $ 69,000 - $ 12,000= $ 57,000

B) $ 57,000/300,000 miles= $0.19 per mile

C) $0.19 * 77,000 miles= $14,630

10- 2B

A) $420,000 - $30,000= $ 390,000

B) $390,000 / 25,000 hours= $15.6 per hour

C) $15.6 * 1850= $28,860

Week 2 practice exercises/problems from course outline

Pg 524 Ex 10-9

A) Straight line method

Year 1= $85,000 / 10= $8,500 per year

Year 2= $8,500 *straight line doesn’t change.

B) DDB Method

Year Beginning Beginning Depreciation Depreciation Ending Ending

Accumulated BV Rate Expense BV Accumulated
depreciation Depreciation
0 $85,000 20% $17,000 $68,000 $17,000
1
$17,000 $68,000 20% $13,600 $54,400 $30,600
2
Working out: Step 1: straight line rate= 100% / 10= 10%

Step 2: multiply the rate by 2= 20%

Step 3= Compute the depreciation expense by multiplying the double-declining-

balance rate from Step 2 times the book value of the asset. (For the first year, the book value of
the asset is its initial cost.)

Year 1= $17,000

Year 2= $13,600

Ex 10-10

A) Straight Line Method

Year 1= $75,000- $10,000= $65,000 - depreciable cost

20 years = 1/20= 0.05 OR 100%/20 yrs = 5% straight line rate

$65,000 / 20yrs = $3,250 annual depreciation OR $65,000 X .05 = $3,250

Year 2= $3,250 * depreciation annual amount is fixed/constant because we are

using the straight-line method.
B) Double Declining balance Method

Year Beginning Beginning Depreciation Depreciation Ending Ending

Accumulated BV Rate Expense BV Accumulated
depreciation Depreciation
0 $75,000 10% $7,500 $67,500 $7,500
1
$7,500 $67,500 10% $6,750 $60,750 $14,250
2

Year 1= $7,500

Year 2= $6,750

Ex 10-11

A) straight line method

Cost of equipment= $105,000

Estimated residual value= $12,000

Estimated useful life= 10 years

Partial yr depreciation for current year = $105,000-$12,000 /10 years X 8

months/12 months

Current year = $93,000 / 10 * 8/12 = $6,200 (May 1 - Dec 31 current year)

Year 2= $105,000-$12,000 /10 = $ 93,000/10 = $9,300 (Jan 1 - Dec 31 following yr)

B) DDB Method

Year Beginning Beginning Depreciation Depreciation Ending Ending

Accumulated BV Rate Expense BV Accumulated
depreciation Depreciation
0 $105,000 20% X 8/12 $14,000 $91,000 $14,000
1
$14,000 $91,000 20% $18,200 $72,800 $32,200
2

Partial year/ current year = $105,000 * 20% = $21,000 X 8/12 = $14, 000

Current year = $14, 000

Following year = $ 18,200 depreciate the asset for the full year since it was now used for the
full year.

Pg 521 PE 10-4A

A) $180,000-$14,400= $165,600

= $165,600/16 = $10,350 annual depreciation

B) $180,000- ($10,350 X 10 yrs) = $76,500 bk value at end of yr 10

C) 76,500- $10,500/8 yrs = $8,250 depreciation expense for next 8 yrs

Pg 525 Ex 10-12

A) $1,200,000 - $250,000= $950,000

= $950,000 / 40= $23,750 annual depreciation

B) $1,200,000 – ($23,750 X 28 yrs) = $535,000 bk value at end of yr 28

C) 535,000 - $180,000/10 yrs = $35,500 depreciation expense for next 10 yrs

Ex 10-13

1. Installed GPS systems on the trucks. (Capital expenditure- Asset improvement)

2. Replaced the transmission fluid on a truck that had been in service for the past four years.

(Revenue expenditure)

3. Overhauled the engine on one of the trucks purchased three years ago. (Capital expenditure-

extraordinary repair)

4. Performed annual service of installing new spark plugs, changing the oil, and greasing the

joints of all trucks and vans. (Revenue expenditure)

5. Rebuilt the engine on one of the vans that had been driven 80,000 miles. (Capital-

extraordinary repair)

6. Repaired a flat tire on one of the vans. (Revenue expenditure)

7. Installed a hydraulic lift to a truck. (Capital- Asset improvement)

8. Tinted the back and side windows of the vans and installed a security system to discourage

theft of contents. (Capital- Asset improvement)

9. Replaced a truck’s suspension system with a new suspension system, allowing for heavier

loads. (Capital- Asset improvement)

10. Installed an optional third-row seat on one of the vans. (Capital- Asset improvement)
 FACULTY OF MANAGEMENT AND SOCIAL SCIENCES
PRINCIPLES OF FINANCIAL ACCOUNTING II (ACTG1054)
CHP 10: ACCTG FOR FIXED AND INTANGIBLE ASSETS

DDB Depreciation Method Date: August, 2020

Learning Activity in Week 2 on Moodle
DFC purchased a motor vehicle on January 1, 2015 for use in normal operations. The motor
vehicle cost $50,000. A residual value of $7,000 was anticipated with a useful life of 8 years.
Complete the table. Round off any decimals to the nearest whole number.

DDB rate = straight line rate X 2 = 100%/8 = 12.5% X 2 = 25%

Book Acc. Dep’n
Book Value
Acc. Dep’n @ DDB Annual Value @ end of yr
Year Cost Beginning of
beginning of yr Rate Dep’n End of
Year
Year

50,000

2015 0 $50,000 .25 $12,500 $37,500 $12,500

50,000

2016 $12,500 $37,500 .25 $9375 $28,125 $21,875

50,000

2017 $21,875 $28,125 .25 $7,031.3 $21,094 $28,906.3

50,000

2018 $28,906.3 $21,094 .25 $5,274 $15,820 $34,180.3

50,000

2019 $34,180.3 $15,820 .25 $3955 $11,865 $38,135.3

50,000

2020 $38,135.3 $11,865 .25 $2,966.3 $8,899 $41,102

50,000

2021 $41,102 $8,899 -------- $1,899 $7,000 $$43,001

50,000 --------

2022 $43,001 $$7,000 $ $0 $7,000 $$43,001

 Book value at end of a year = cost minus accumulated depreciation@ specific yr end OR book value at the
beginning of a year minus depreciation expense for such specific year
 Accumulated depreciation is the sum of depreciation expense up to a certain time
 Depreciation expense refers to depreciation for the specific period only