Quiz 6 Solution

1. a) Exchange with Choctaw Company

New machine          86,179

Acc. Depr                85,000

Cash                        23,000

Old machine                      191,000

Gain                                      3,179

b)      Exchange with Shawnee Company

New machine        \$114,000

Acc. Depr                  85,000

Old machine                      \$191,000

Cash                                        8,000

2.         a) Accounting Error discovered in the year of the error.  First reverse the wrong journal entry and make necessary correction

Asset   \$35,000

Cash    \$15,000

Loss       20,000

Depr Exp         \$1067

A/D                 \$1067

Cash    \$ 15,000

A/D        20,267

Asset   \$35,000

Gain         267

b)         Depr Exp         \$8,000

A/D         \$8,000

c)      Betterment resulting in new cost basis

Depr Exp   \$21,716

A/D          \$21,716

d)    Method change – prospective change

Depr Exp         \$5,886                                     (51.2 – 10)/7

A/D         \$5,886

e)      Past error discovered – Prior period adjustment

Asset         \$45,000

A/D                             \$  6,750

Retained Earnings       \$38,250

Depr Exp   \$5,738

A/D         \$5,738

# 3

a)         Let c = cost of the machine

6 year A/D = [(c – 1800)/12] * 6 = c -22300 è c = \$42,800

b)         Two ways to answer this question

i)        Each year the depreciation declines by \$14,000 è n = 5 years

ii)      n/[(n(n+1)/2] *(240,000 – 30,000) = 70,000 è n = 5 years

c)         Straight line depreciation = (23mm –2mm)/35 = \$600 K

A/D = 23mm – 20.6 mm = 2.4mm è Hence 4 year depreciation has been taken

Warehouse purchased on January 1, 1996

d) i) New depr exp = (BV –salv)/useful life è (26622 – 4,000)/5 = \$4524

Depr Exp         \$4524

A/D                 \$4524

ii)New SL depreciation = (26,622 – 5,000)/8 è 2703

JE        Depr Exp         \$2,703

A/D                 \$2,703

4.

a) On December 31, 2002,

Depreciation Exp        \$9,600

A/D                              \$9,600

b) Now for the 2003 depreciation

Depreciation exp                                \$4,800

A/D                                                      \$4,800

c) On 3/31/2004

Equipment                   \$15,000

Cash                            \$15,000

New book value following the betterment       (40,000 – 30,400) +15,000 = \$24,600 with 5 more years to go and salvage = 900 using DDB

On 12/31/2004

Depreciation   Exp      \$9,840

A/D                              \$9,840

d)             Depreciation for 2005 = \$5904  ((2/5)*(24,600 – 9840))

Depreciation for 2006 = \$1181  ((2/5)*(24,600 – 15,744))*(4/12)

4/31/2006

Acc. Depr                   \$47,325

Cash                             20,000

Asset                           \$55,000

Gain                              12,325