Question

24. Over the course of the life of a fixed asset a. Accumulated Depreciation will increase but not exceed depreciable cost. b. book value will decrease but not fall below residual value. c. book value may or may not approximate replacement cost. d. all of the above are correct. 25. During the current year, Gardner Home Center sold 800 power washers for $350 each. The power washers carry a 2-year warranty for repairs. Estimates indicate that repair costs will average 2% of sales. How much warranty expense should be accrued at the end of the current year as a result of the sales of this product? a. $8,400 b. 55,600 c. $2,800 d. No liability should be recorded until units are brought in for repairs. 26. Depreciation is a process by which a. replacement funds are accumulated for plant and equipment. b. the decline in market value of plant and equipment is determined and recorded c. the cost of plant and equipment is allocated to expense over the time periods which benefit from the use of the asset d. the difference between current market value and historical cost of plant and equipment. 27. Company A has equipment that cost $5,250,000 which has accumulated depreciation of $500,000 while Company B has equipment that costs $4,600,000 and has accumulated depreciation of $4,400,000. Assuming both companies use straight line depreciation and estimated useful lives of 40 years with $100,000 residual values, which of the following statements is true? 2. Both companies have relative old equipment. b. Company A's equipment is older than Company B. c. Company A's equipment is newer than Company B. d. Company B's equipment has a higher book value than Company A. Bluedevil Vacuum Cleaner On January 1, 2017, the Bluedevil Vacuum Cleaner Company acquired a machine at a cost of $1,000,000. The machine was expected to last ten years and be worth $50,000 at the end of that time. At the beginning of 2021, Bluedevil decides to overhaul the machine at a cost of $400,000. The overhaul is expected to extend the life of the machine by two years and increase the salvage value as well. Thus, beginning in 2021, the machine will have a remaining useful life of eight years and a residual value of $120,000. 28. Refer to Bluedevil Vacuum Cleaner. Assuming the use of straight-line depreciation both before and after the overhaul, calculate depreciation expense for 2021. a. $95.000 b. $100,000 C. SI12,500 d. 5127,500

Answer 1

24.

When the fixed assets are purchased, these are recorded at historical cost. Over the years, depreciation is provided each year for wear and tear of asset. The sum of depreciation is accumulated depreciation. Accumulated depreciation till date is subtracted from cost to arrive at book value. The book value however may not relate to replacement cost of market.

Hence, the correct option is (d) all of the above are correct

25.

Value of sales made =800*$350 =$280,000.

Warranty for repairs is 2% of sales=$5,600.

Hence correct option is b. $ 5,600

26.

Depreciation is provided for wear and tear for the year. The life of asset is estimated and the asset cost allocated over the life. Hence, the benefit from use of asset over years is defined by the number of years the asset can provide benefit.

The correct option is c. the cost of plant and equipment is allocated to expense over the time periods which benefit from the use of the asset.

27.

	A	B
Costs	5,250,000	4,600,000
Accumulated Depreciation	500,000	4,400,000
Net Costs	4,750,000	200,000

From looking at the net costs, the equipment of Company A is newer than Company B.

Hence, the correct option is b. Company A’s equipment is newer than Company B.

28.

Historical cost = $ 1,000,000

Salvage value = $ 50,000

Depreciation = (1,000,000-50,000)/10 = $ 95,000

Book value at year end 2020 = 1,000,000 – 95,000 * 4 years = $ 620,000

Overhaul cost = $ 400,000

Total cost at beginning = 620,000 +400,000 = $ 1020,000

Remaining life = 8 years

New residual value = $ 120,000

Hence, Depreciation expense for 2021 = (1,020,000 – 120,000)/8 = $ 112,500

Hence, the correct option is c. $ 112,500