Chapter Review Problems

Transcription

1 Chapter Review Problems Unit 19.1 Depreciation for financial accounting 1. Depreciation for financial accounting is identical to depreciation for federal income tax purposes. (T or F) False For Problems 2 7, assume that your business buys a computer for $1,300 on January 12. You project that the computer will be worth $150 at the end of its 5-year useful life. 2. What is the asset s basis? $1, What is the useful life? 5 years 4. What is the salvage value? $ What is the depreciable basis? $1,150 ($1,300 - $150). This is the amount that can be depreciated. 6. If you take depreciation expense of $230 per year, what is the accumulated depreciation at the end of year 3? $230 3 years = $ What is the book value at the end of year 3? $1,300 - $690 = $ A business can take depreciation on a delivery truck that they lease from someone. (T or F) False. To take depreciation, a business must own the asset. 9. Suppose an office supply business buys a building for $800,000. If the building is used as a retail location, the business can depreciate the $800,000. (T or F) False. Part of the purchase price is for land, and because land does not wear out, only the building portion can be depreciated. For Problems 10 13, assume that your business buys a copy machine for $2,400 on January 1. You project that you can sell the copy machine at the end of its 5-year useful life for $ Calculate the annual depreciation using straight-line depreciation. Annual depreciation = Depreciable basis Useful life = $2,000 5 = $ Prepare a depreciation schedule for the 5-year useful life. Depreciation Accumulated Year expense depreciation Book value Begin $2,400 1 $400 $ 400 $2,000 2 $400 $ 800 $1,600 3 $400 $1,200 $1,200 4 $400 $1,600 $800 5 $400 $2,000 $400 Chapter Review Problems 391

2 12. Calculate depreciation for each year (to the nearest dollar) using the units-of-production method. Assume that the copy machine will produce 160,000 copies during its useful life; its salvage value after producing the 160,000 copies is projected to be $400. The machine produced copies as follows: Year 1: 34,200 Year 2: 35,800 Year 3: 30,100 Year 4: 38,400 Year 5: 35,200 Depreciation per unit = Depreciable basis Total estimated units of production = 160,000 $2,000 = $ (1.25 per copy) Begin $2, ,200 copies $ $428 $1, ,800 copies $ $448 $1, ,100 copies $ $376 $1, ,400 copies $ = $480 $ ,200 copies $ = $440; limited to $268 * $400 Total $2,000 NA * Note: Because book value cannot go below the $400 salvage value, year 5 depreciation is limited to $ Calculate depreciation for each year (to the nearest dollar) using the 200% declining-balance method. Rate = 200% 5 = 40% (For each year, multiply the previous year-end book value by 40%.) Begin $2,400 1 $2,400 40% = $960 $1,440 2 $1,440 40% = $576 $864 3 $864 40% $346 $518 4 $518 40% $207; limited to $118* $400 5 $0 $400 Total $2,000 NA * Note: Because book value cannot go below the $400 salvage value, depreciation for year 4 is limited to $118, and no deprecation is taken in year 5. For Problems 14 and 15, assume you buy a business desk. 14. You purchased the desk on May 27 and paid for the desk on June 10. The desk was delivered on June 4; but because you were remodeling your office, you did not begin using the desk until June 17. For how many months can you take depreciation in the first calendar-year? The determining factor is when the asset is placed in service (June 17). Because the desk was not placed in service during the first 15 days of June, you get no depreciation for June. You get depreciation for 6 months (July through December). 15. The desk cost $1,800. Using 7-year straight-line depreciation, with a $400 salvage value, figure depreciation for each of the first 2 calendar-years. Year 1: $1, = $100 Year 2: $1,400 7 = $200 Unit 19.2 Depreciation for federal income taxes (MACRS) 16. For MACRS, salvage value is ignored. (T or F) True 17. For MACRS purposes, assets with a 27.5-year recovery period are presumed to have been purchased in the middle of the year, regardless of the actual purchase date. (T or F) False year property is presumed to have been purchased in the middle of the month it was purchased. 392 Chapter 19 Depreciation

3 For Problems 18 21, determine the recovery period. 18. Computer. 5 years (See Illustration 19-3) 19. Car. 5 years 20. Warehouse building. 39 years 21. Desk. 7 years For Problems 22 26, find MACRS depreciation (to the nearest dollar). 22. Year 1 for a 5-year $2,500 property. Use the rates of Illustration 19-4: $2,500 20% = $ Year 4 for a 3-year $8,000 property. $8, % $ Year 2 for a 5-year $800 property. $800 32% = $ Year 1 for 27.5-year property purchased August 2 (building value = $220,000). Illustation 19-5: $220, % $3, Year 12 for 39-year property purchased May 27 (building value = $970,000). Illustration 19-6: $970, % $24, Your business buys a copy machine for $1,500 on January 12. You project a 3-year useful life, with a salvage value of $500. Determine MACRS depreciation, rounded to the nearest dollar, for each year. For MACRS, we don t decide on a useful life; the IRS dictates the life. In Illustration 19-3, we find the recovery period for a copy machine is 5 years not 3 years. Also, for MACRS we ignore salvage value. Use Illustration Year 1: $1,500 20% $300 Year 2: $1,500 32% 480 Year 3: $1, % 288 Year 4: $1, % 173 Year 5: $1, % 173 Year 6: $1, % + 86 Total $1, Refer to Problem 27. Why, if the copy machine has a 5-year recovery period, is depreciation taken for 6 years? You get only half a year s depreciation in year 1; this carries some depreciation into year You purchased a duplex on September 29 for $250,000. The county assessor s valuation of the property indicates that 20% of the total value is for land and 80% for buildings. Calculate MACRS depreciation for each of the first 3 years. Building value = $250,000 80% = $200,000. Use Illustration 19-5, September column. Year 1: $200, % $2,122 Year 2: $200, % $7,272 Year 3: $200, % $7, Refer to Illustration Explain why the January rate for year 1 is less than the rate for year 2. Taxpayers are allowed only 11.5 months depreciation for year In May 2002, Prince & Rulon, Attorneys at Law, purchased new office furniture at a cost of $36,200. Assuming they take the maximum Section 179 expense deduction, what are the total deductions they can take on the office furniture for the year? Section 179 expense deduction $24,000 MACRS depreciation Depreciable basis: $36,200 - $24,000 = $12,200 Depreciation: $12, % (see Ill. 19-4, 7-yr) + 1,743 Total deductions on office furniture for the year $25,743 Chapter Review Problems 393

4 Challenge problems For Problems 32 35, assume your business buys a delivery truck for $35,000 on May 22, You project the truck will have a salvage value of $8,000 at the end of it s 5-year useful life. Calculate straight-line depreciation for each of the first 3 calendar-years. Calendar year 1: $27, = $3,150 Calendar year 2: $27,000 5 = $5,400 Calendar year 3: $27,000 5 = $5, Calculate depreciation for the first 3 calendar-years using the 200% declining-balance method. Rate = 200% 5 = 40% (For each 12 months, multiply the previous year-end book value by 40%.) Months Depreciation Book value Begin $35, $35,000 40% = $14,000 $21, $21,000 40% = $8,400 $12, $12,600 40% = $5,040 $7,560 Calendar year 1: $14, $8,167 Calendar year 2: ($14, ) + ($8, ) $10,733 Calendar year 3: ($8, ) + ($5, ) = $3,500 + $2,940 = $6, Calculate MACRS depreciation for the first 3 calendar-years. Calendar year 1: $35,000 20% = $7,000 Calendar year 2: $35,000 32% = $11,200 Calendar year 3: $35, % = $6, Which of the three methods provides the greatest depreciation expense for the first 3 calendar-years? Straight-line: $3,150 + $5,400 + $5,400 = $13, % declining-balance: $8,167 + $10,733 + $6,440 = $25,340 (200% declining balance has the greatest) MACRS: $7,000 + $11,200 + $6,720 = $24,920 Practice Test For all problems, round annual depreciation amounts to the nearest dollar. 1. Your business buys a delivery van for $30,000. You figure the van will be useful for 5 years and have a value of $5,000 at the end of the 5-year period. What are the (a) basis, (b) useful life, (c) salvage value, (d) depreciable basis, (e) accumulated depreciation at the end of year 2 if you take $5,000 depreciation each year, and (f) the book value at the end of year 2? a. $30,000 b. 5 years c. $5,000 d. $25,000 e. $10,000 f. $20, Your business buys a copy machine for $6,000 on January 1. You estimate that the copy machine will produce 250,000 copies during its useful life; its salvage value after producing the 250,000 copies is projected to be $1,000. The copy machine produced 78,200 copies in year 1 and 65,300 copies in year 2. Calculate depreciation for each of the first two years using the units-of-production method. $5, ,000 = $0.02 (2 per copy) Year 1: 78,200 copies $0.02 = $1,564 Year 2: 65,300 $0.02 = $1, Chapter 19 Depreciation

5 3. Your business buys a desk on January 10 for $2,000 with an 8-year useful life and a $500 salvage value. Calculate depreciation for each of the first 2 years using the 125% declining-balance method. 125% 8 = % (For each year, multiply the previous year-end book value by %.) Begin $2,000 1 $2, % $313 $1,687 2 $1, % $264 $1, See Problem 3. Assume, instead, the desk is purchased September 18. Calculate depreciation for each of the first 2 calendar-years using the 125% declining-balance method. Get no depreciation for the first 9 months. After Year 1: $ $78 Year 2: ($ ) + ($ ) = $ $66 $ See Problem 3. Calculate MACRS depreciation for each of the first 2 calendar-years. Desks have 7-yr recovery period; salvage value is ignored. Year 1: $2, % $286 Year 2: $2, % $ Suppose you buy an apartment building for $850,000 on July 28. Land value represents 20% of the purchase price. Calculate MACRS depreciation for each of the first 2 calendar-years. Building value = $850,000 80% = $680,000 Use Illustration 19-5, July column: Year 1: $680, % $11,336 Year 2: $680, % $24, Your business buys office furniture on February 26, 2003 for $28,000. What is the maximum total income tax deduction for the year? Section 179 expense deduction for 2003 $25,000 MACRS depreciation Depreciable basis: $28,000 - $25,000 = $3,000 Depreciation: $3, % (see Ill. 19-4, 7-yr) Total deduction on office furniture for the year $25,429 Practice Test 395