Introduction to Financial and Managerial Accountin Problem Set 5 - Answers | Massachusetts Institute of Technology

University:
Massachusetts Institute of Technology
Course:
15.501/516 | Accounting
Academic year:

2023
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246

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2
Author:

Gwendolyn Navarro

Financial and Managerial Accounting 1. a. Under straight-line Depreciation, the yearly expense will be (Acquisition Cost – Salvage Value)/ Estimated Useful Life (in years). Acquisition cost = $4,000 + $9,000 + $400 + $600 = $14,000 Salvage Value = $2,000 Est. UL = 6 years, or 24,000 hours So annual SL Depreciation = (14,000 – 2,000) / 6 = $2,000 b. Under the activity method, depreciation will be charged by hour of machine usage using the following formula (14,000 – 2,000) / 24,000 hrs = $.50 / hour Hence, depreciation expense for the first three years will be: Year 1: 5,000 hours × $.50 / hr = $2,500 Year 2: 4,500 hours × $.50 / hr = $2,250 Year 3: 4,000 hours × $.50 / hr = $2,000 c. Book Value at start of 2000 = $14,000 – (3 * $2,000) = $8,000 The improvement increases the Book Value to $8,000 + $4,000 = $12,000 The amount to be depreciated over the remaining life is $12,000 - $2,000 = $10,000 The remaining useful life is 8 – 3 = 5. d. e. Hence, the depreciation expense for 2002 will still be $2,000 = $10,000 / 5 years. Accumulated Depreciation at the end of 2005 will be 7 × $2,000 or $14,000 The Acquisition cost was $14,000 + 4,000 = $18,000, so the Book Value is $4,000. Since the machine is sold for only $1,000, there is a loss of $3,000. BSE: Cash + PPE – Accum Deprec. = Ret. Earnings +$1,000 –$18,000 –14000 = –$3,000 Reported Net Income for 2005 will be lower by $3,000, the amount of the loss on disposal. In the Statement of Cash flows, Dove will report an inflow of $1,000 in the investing section. In the Operating section, using the indirect method, Dove will add back the $3,000 loss to Net Income, since it reduced Net Income without reducing cash. 2. Depreciation at Delta and Pan Am Airlines Delta Year Purch 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 Pan Am Depreciation Expense 3,000 3,000 3,000 3,000 2,062.5 2,062.5 2,062.5 2,062.5 2,062.5 2,062.5 2,062.5 Net Book Value at End of Year 50,000 47,000 44,000 41,000 38,000 35,937.5 33,875 31,812.5 29,750 27,687.5 25,625 23,562.5 Year Purch 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 Depreciation Expense 1,700 1,700 1,700 1,700 1,373 1,373 1,373 1,373 1,373 1,373 1,373 Net Book Value 50,000 48,300 46,600 44,900 43,200 41,826.9 40,453.8 39,080.7 37,707.6 36,334.5 34,961.4 33,588.3 Depreciation computations 1989-1992 Original Cost 50,000 Residual value (10%) 5,000 45,000 Amount to depreciate 15 Life in years Depreciation expense/yr, $3,000 1993-1999: Depreciation computations: 1989-1992 Original Cost 50,000 Residual value (10%) 7,500 Amount to depreciate 42,500 Life in years 25 Depreciation expense/yr, $1,700 1993-1999: Depreciation computations 1993-1999 Depreciation computations 1993-1999 Net book value @ 1/1/93 Life in years Already depreciated Extended years Remaining years Depreciation expense/yr Net book value @ 1/1/93 Life in years Already depreciated Extended years Remaining years Depreciation expense/yr $38,000 15 (4) 5 16 $2,062.5 $43,200 25 (4) 5 26 $1,373.1

Introduction to Financial and Managerial Accountin Problem Set 5 - Answers

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