Question

Question: (Comprehensive Depreciation Computations) Kohlbeck Corporation, a manufacturer of steel products, began operations on October 1, 2016. The accounting department of Kohlbeck has started the fixed-asset and depreciation schedule presented on page 595. You have been asked to assist in completing this schedule. In addition to ascertaining that the data already on the schedule are correct, you have obtained the following information from the company’s records and personnel.

1. Depreciation is computed from the first of the month of acquisition to the first of the month of disposition.
2. Land A and Building A were acquired from a predecessor corporation. Kohlbeck paid \(800,000 for the land and building together. At the time of acquisition, the land had an appraised value of \)90,000, and the building had an appraised value of \(810,000.
3. Land B was acquired on October 2, 2016, in exchange for 2,500 newly issued shares of Kohlbeck’s common stock. At the date of acquisition, the stock had a par value of \)5 per share and a fair value of \(30 per share. During October 2016, Kohlbeck paid \)16,000 to demolish an existing building on this land so it could construct a new building.
4. Construction of Building B on the newly acquired land began on October 1, 2017. By September 30, 2018, Kohlbeck had paid \(320,000 of the estimated total construction costs of \)450,000. It is estimated that the building will be completed and occupied by July 2019.
5. Certain equipment was donated to the corporation by a local university. An independent appraisal of the equipment when donated placed the fair value at \(40,000 and the salvage value at \)3,000.
6. Machinery A’s total cost of \(182,900 includes installation expense of \)600 and normal repairs and maintenance of \(14,900. Salvage value is estimated at \)6,000. Machinery A was sold on February 1, 2018.
7. On October 1, 2017, Machinery B was acquired with a down payment of \(5,740 and the remaining payments to be made in 11 annual installments of \)6,000 each beginning October 1, 2017. The prevailing interest rate was 8%. The following data were abstracted from present value tables (rounded).

   Present Value of \(1.00 at 8%
   10 years	.463
   11 years	.429
   15 years	.315

Present Value of an Ordinary Annuity of \)1.00 at 8%
10 years	6.710
11 years	7.139
15 years	8.559

KOHLBECK CORPORATION Fixed-Asset and Depreciation Schedule For Fiscal Years Ended September 30, 2017, and September 30, 2018
Depreciation Expense year ended September 30
Assets	Acquisition Date	Cost	Salvage	Deprecation method	Estimated Life in years	2017	2018
Land A	October 1, 2016	\( (1)	N/A*	N/A	N/A	N/A	N/A
Building A	October 1, 2016	(2)	\)40,000	Straight-line	(3)	\(13,600	(4)
Land B	October 2, 2016	(5)	N/A	N/A	N/A	N/A	N/A
Building B	Under construction	\)320,000 to date	—	Straight-line	30	—	(6)
Donated Equipment	October 2, 2016	(7)	3,000	150% declining-balance	10	(8)	(9)
Machinery A	October 2, 2016	(10)	6,000	Sum-of-the-years-digits	8	(11)	(12)
Machinery B	October 1, 2017	(13)	—	Straight-line	20	—	(14)

Instructions

For each numbered item on the schedule above, supply the correct amount. (Round each answer to the nearest dollar.)

Short answer

Answer

1	$80,000	8	$6,000
2	$720,000	9	$5,100
3	50 Years	10	$168,000
4	$13,600	11	$36,000
5	$91,000	12	$10,500
6	No depreciation	13	$52,000
7	$40,000	14	$2,600

Step-by-step solution

Meaning of Depreciation

In accounting terms, depreciation can be referred to as an expense incurred on an intangible asset due to corrosion and abrasion. A firm may adopt various methods for computing depreciation to reflect the true and accurate value of the asset.

(1) Calculation of appraisal value

$$\begin{gathered} \text{Appraisal} \text{value}=\text{Cost}\text{of}\text{land}\text{and}\text{building}\times \text{Proprtion}\text{value} \\ =\$8000,000\times \frac{1}{10} \\ =\$80,000 \end{gathered}$$

(2) Calculation of appraisal value

$$\begin{gathered} \text{Appraisal} \text{value}=\text{Cost}\text{of}\text{land}\text{and}\text{building}\times \text{Proprtion}\text{value} \\ =\$8000,000\times \frac{9}{10} \\ =\$720,000 \end{gathered}$$

(3) Calculation of estimated life in years

$$\begin{gathered} \text{Estimated} \text{life}=\frac{\text{Cost}\text{of}\text{asset}-\text{Salvage}\text{value}}{\text{Annual}\text{depreciation}} \\ =\frac{\$720,000-\$40,000}{\$13,600} \\ =50\text{years} \end{gathered}$$

(4) Calculation of depreciation expense

The Corporation followed the straight-line depreciation method, so the depreciation will be charged $13,600 throughout the year.

(5) Calculation of the cost

$$\begin{gathered} \text{Cost}=\left(\text{Number} \text{of}\text{shares}\times \text{Fair}\text{value}\right)+\text{Demolition}\text{cost} \\ =\left(2,500\times \$30\right)+\$16,000 \\ =\$75,000+16,000 \\ =\$91,000 \end{gathered}$$

(6) Calculation of depreciation

The machine that was purchased has not been used yet, so there will be no depreciation before use.

(7) Calculation of fair value

The fair value was $40,000 when an independent appraisal of the equipment was donated.

(8) Calculation of depreciation expense

$$\begin{gathered} \text{Depreciation}=\text{Cost} \text{of}\text{asset}\times \text{Times}\text{percentage} \\ =\$40,000\times \frac{1}{10}\times 150\% \\ =\$6,000 \end{gathered}$$

 Step 10: (9) Calculation of depreciation expense

$$\begin{gathered} \text{Depreciation}=\left(\text{Cost} \text{of}\text{asset}-\text{Prior} \text{depreciation}\right)\times \text{Times}\text{percentage} \\ =\left(\$40,000-\$6,000\right)\times 15\% \\ =\$34,000\times 15\% \\ =\$5,100 \end{gathered}$$

(10) Calculation of cost

$$\begin{gathered} \text{Cost}=\text{Total}\text{cost}-\text{Repair}\text{and}\text{maintenance} \\ =\$182,900-\$14,900 \\ =\$168,000 \end{gathered}$$

 Step 12: (11) Calculation of depreciation

$$\begin{gathered} \text{Depreciation}=\left(\text{Cost} \text{of}\text{asset}-\text{Salvage}\text{value}\right)\times \text{Times} \\ =\left(\$168,000-\$6,000\right)\times \frac{8}{36} \\ =\$36,000 \end{gathered}$$

 Step 13: (12) Calculation of depreciation

$$\begin{gathered} \text{Depreciation}=\left(\text{Cost}\text{of}\text{asset}-\text{Salvage}\text{value}\right)\times \text{Times}\times \text{Year} \\ =\left(\$168,000-\$6,000\right)\times \frac{7}{36}\times \frac{4}{12} \\ =\$10,500 \end{gathered}$$

(13) Calculation of cost

Annual payment ($6,000) plus down payment ($5,740) multiply by the current value of annuity payable at 8% for 11 years which is 7.710 to compute the cost. Because the payments are made at the beginning of each year, this may be found in an annuity due table. Alternatively, you can convert a standard annuity to an annuity due factor by following these steps: Use the present value of an ordinary annuity for 11 years (7.139) multiplied by 1.08. To get $46,260, multiply this factor (7.7110) by the $6,000 yearly payment and add the $5,740 down payment. So, the cost is $52,000.

(14) Calculation of depreciation

$$\begin{gathered} \text{Depreciation}=\frac{\text{Cost}\text{of}\text{asset}}{\text{Estimated}\text{useful}\text{life}} \\ =\frac{\$52,000}{20} \\ =\$2,600 \end{gathered}$$