Question

1. Suppose FedEx purchased equipment on January 1, 2016, for $44,000. The expected useful life of the equipment is 10 years or 100,000 units of production, and its residual value is $4,000. Under three depreciation methods, the annual depreciation expense and the balance of accumulated depreciation at the end of 2016 and 2017 are:

	Method A		Method B		Method C
	Annual		Annual		Annual
	Depreciation	Accumulated	Depreciation	Accumulated	Depreciation	Accumulated
Year	Expense	Depreciation	Expense	Depreciation	Expense	Depreciation
2016	$4,000	$4,000	$8,800	$8,800	$1,200	$1,200
2017	4,000	8,000	7,040	15,840	5,600	6,800

1. 1. Identify the depreciation method used in each instance, and show the equation and computation for each; round to the nearest dollar. Assume 3,000 units produced in the first year and 14,000 in the second.
   2. Assume continued use of the same method through year 2018. Determine the annual depreciation expense, accumulated depreciation, and book value of the equipment for 2016 through 2018 under each method, assuming 12,000 units of production in 2018.
2. Suppose FedEx purchases a warehouse building on September 1 for $500,000. The buildings estimated life is 20 years, and its estimated residual value is $80,000. FedEx’s accounting year ends on May 31.
   1. How should FedEx calculate depreciation for September through May?
3. Suppose a hot dog stand cost $50,000 and that the company originally believed the asset had a 10-year useful life with no residual value. After four years, the company believes the asset will remain useful for an additional 10 years. Assume straight-line depreciation.
   1. Calculate accumulated depreciation at the end of the fourth year.
   2. Calculate depreciation expense for the fifth year.
4. Define the following:
   1. Fully depreciated asset
   2. Intangible Asset
   3. Amortization
   4. Patent
   5. Goodwill
5. Refer back to the data in the first problem.
   1. Suppose the income tax authorities permitted a choice between these depreciation methods. Which method would FedEx select for income tax purposes? Why?
   2. Suppose FedEx purchased the equipment described in the table on January 1, 2016. Management has depreciated the equipment by using the double-declining-balance method. On July 1, 2018, FedEx sold the equipment for $27,000 cash. Record depreciation for 2018 and the sale of the equipment on July 1, 2018.

Answer 1

S.No	Particulars	Amount
A	Cost of the Equipment	$44,000
B	Residual Value	($4,000.00)
C	Depreciable Value (A-B)	$40,000
D	Useful Life (Years)	10

A)

i) Straight-line Method of Depreciation:

Depreciation Expense per anum = Depreciable Value/Useful Life

Depreciation Expense per anum = $40,000/10
Depreciation Expense per anum = $4000.

Year	Opening Balance	Method A		Closing Balance
		Depreciation Expense	Accumulated Depreciation
Method Adopted :		Straight Line Method
2016	$44,000	$4,000	$4,000	$40,000
2017	$40,000	$4,000	$8,000	$32,000
2018	$32,000	$4,000	$12,000	$20,000

Written Down Value Method of Depreciation:

Shortcut for Depreciation rate calculation:

Depreciation rate = (100% / life of the asset)*2

Therefore Depreciation rate = (100% / 10)*2

Depreciation rate = 20%

Year	Opening Balance (A)	Method B		Closing Balance ( A - B )
		Depreciation Expense (B = A*20%)	Accumulated Depreciation
Method Adopted :		Written Down Value Method
2016	$44,000	$8,800	$8,800	$35,200
2017	$35,200	$7,040	$15,840	$28,160
2018	$28,160	$5,632	$21,472	$22,528

Units of Production Method :

Depreciable Value: $40,000

Depreciation Expense: (Depreciable Value/Total Estimated units to be produced)*Actual Units Produced

Year	Opening Balance (A)	Depreciable Value (B)	Total Capacity (Units) (C)	Units Produced(D)	Depreciation Expense(B/C)*D	Accumulaeted depreciation (E)	Ending Value (A-E)
2016	$44,000	$40,000	100000	3000	$1,200	$1,200	$42,800
2017	$42,800	$40,000	100000	14000	$5,600	$6,800	$36,000
2018	$36,000	$40,000	100000	12000	$4,800	$11,600	$24,400

b) Depreciation from September To May:

Cost of the Building: $500000

Residual Value: $80000

LIfe of the Asset: 20 Years

Depreciation Under Straight Line Method :

Period: September 1st to May 31st : 9 Months

Depreciation = ((500000-80000)/20)*(9/12)

Depreciation = ($420000/20)*(9/12)

Depreciation = ($21000)*9/12

Depreciation = $15,750

Written Down Value Method

Period: September 1st to May 31st : 9 Months

Depreciation rate = (100%/Life)*2

Depreciation rate = (100/20)*2

Depreciation rate = 10%

Cost Of the Building = $500000

Depreciation = ($500000*10%)*(9/12)

Depreciation = $50000*9/12

Depreciation = $37500

C)

i) Cost of Hotdog = $50000

Useful Life = 10 Years

Residual Value = 0

Depreciation Per Anum under Straight Line Method = ($50000)/10 = $5000 P.a

Accumulated Depreciation for four Years = ($5000*4) = $20000

ii) Book Value after four Years = $50000-$20000 = $30000

Revised Useful Life = 10 Years

Depreciation for Year 5 = $30000/10

Depreciation for Year 5 = $3000.