Question

CHAPTER 2 The Balance Sheet 83 2.17. The Lazy Ranch just purchased equipment time 0000. The equipment is expected to last five years and have no salvage value (a) Calculate the depreciation expense using the straight-line method for the first two years the equipment is owned (b) Calculate the depreciation expen using the double declining balance method for the first two years the equipment is owned 2.18. Using the information below for Dean Caroration calculate the amount of dividends Dean most likely paid to common stockholders in 2013, 2014, and 2015. Retained Earnings Balances Year Net Income January 1, 2013 $ 700 December 31, 2013 890 2008 $250 December 31, 2014 1,045 2009 December 31, 2015 1,010 2010 40 225 2.19. From the following accounts, prepare a balance sheet for Chester Co. for the current calendar year. Accrued interest payable $ 1.400 Property, plant, and equipment 34,000 Inventory 12.400 Additional paid-in capital 7,000 Deferred taxes payable (noncurrent) 1,600 Cash 1,500 Accumulated depreciation 10,500 Bonds payable 14,500 Accounts payable 4,300 Common stock 2.500 Prepaid expenses 700 Land held for sale 9,200 Retained earnings Current portion of long-term debt 1,700 Accounts receivable 6,200 Notes payable 8,700 2.20 Writing Skills Problem. At fiscal year-end December 31, 2015. Shop World had the following assets and liabilities on its balance sheet (in millions): Current liabilities Long-term debt Other liabilities Total assets 59,459 12,330 1,180 37.411 Shop World reported the following information on leases in the notes to the financial statements: Total rent expense was $195 million in 2015, 5189 million in 2014, and $188 million in 2013. Most of the long-term leases include options to renew, with terms varying from 1 to 50 years. Certain leases also include options to purchase the property.

Answer 1

Answer to Q 2.17:-

Straight Line method of Depreciation reduces the value of an asset gradually over its useful life. The process is as follows:

> Determine the initial cost of the asset. Lets assume C.

> Subtract the estimated salvage value at the end of the useful life. Lets assume S.

> Determine the estimated useful life, in years, of the asset. Lets assume L.

> Straight Line Rate of Depreciation = (1 / L * 100)%.

> Straight Line amount of Depreciation each year = (C - S) / L.

Double Declining Balance Method of Depreciation is a form of accelerated depreciation method in which the rate of depreciation is twice the Straight Line Rate of Depreciation. The process is as follows:-

> Determine the initial cost of the asset. Lets assume 100.

> Subtract the estimated salvage value at the end of the useful life. Lets assume 20.

> Determine the estimated useful life, in years, of the asset. Lets assume 5.

> Calculate Straight Line Rate of Depreciation = (1 / 5 * 100)%. = 20%

> Now multiply the above Straight Line Rate of Depreciation by 2. This will be the applicable depreciation rate for Double Declining Balance Method. i.e. 20% * 2 = 40%.

> Now Depreciation amount for the first year = 40% of 100 = 40

> Ending period value = 100 - 40 = 60.

> Now Depreciation amount for the next year = 40% of 60 = 24.

> Ending period value = 60 - 24 = 36.

> The steps are repeated till the estimated salvage value is reached.

Solution:-

> As per Straight Line method of Depreciation:-

Cost of the asset = $ 60,000.

Salvage Value = 0.

Useful life = 5 years.

Rate of Depreciation = (1 / 5 * 100)%. = 20%

Depreciation expense for Year 1 = 20% of 60000 = $ 12,000.

Depreciation expense for Year 2 = 20% of 60000 = $ 12,000.

> As per Double Declining Balance Method:-

Cost of the asset = $ 60,000.

Salvage Value = 0.

Useful life = 5 years.

Rate of Depreciation = 2 * (1 / 5 * 100)%. = 40%

Depreciation expense for Year 1 = 40% of 60000 = 24000.

Value of the asset at the end of Year 1 = 60000 - 24000 = 36000.

Depreciation expense for Year 2 = 40% of 36000 = 14400.

Value of the asset at the end of Year 2 = 36000 - 14400 = 21600.

Depreciation expense for Year 1 = $ 24,000.

Depreciation expense for Year 2 = $ 14,400.

Answer to Q 2.18:-

Assuming there are no other related entries,

Calculation of Balance of Ledger Retained Earnings will be:

Opening Balance + Net Income - Dividends Paid = Closing Balance.

As per the available data,

Dividends Paid = Opening Balance + Net Income - Closing Balance.

So,

Dividends Paid in the Year 2013 = 700 + 250 - 890 = 60.

Dividends Paid in the Year 2014 = 890 + 225 - 1045 = 70.

Dividends Paid in the Year 2015 = 1045 + 40 - 1010 = 75.

Retained Earnings: (in $)	2013	2014	2015
Opening Balance	700	890	1045
Add: Net Income for the Year	250	225	40
Less: Dividends Paid	60	70	75
Closing Balance	890	1045	1010