8. Kidd loc uses the straight-line method of depreciating its plant assets. They

Question

8. Kidd loc uses the straight-line method of depreciating its plant assets. They had purchased an asset with arn estimated salvage value of S30,000, however; when the bookkeeper calculated and recorded its annual depreciation, she used an estimated salvage value of S3,000. What effect will this mistake have on the accounting equation? Stockholders' Equit No Effect Understated No Effect Overstated No Effect Assets Liabilities A. Understated B. Understated C. No Effect D. Overstated E. Overstated No Effect No Effect No Effect Qxerstated 9. On January 1,2014, Red Inc. purchased a patent for $23,800. In addition to the purchase price, Red paid legal fees of $1,200 to obtain the patent. Red believes this patent will help to increase its sales for the next 10 years however; the legal remaining life on the patent is 14 years. On January 1,2017, Blue was sued for patent infringement and had to spend $3.500 in legal fees to successfully defend the patent. Determine the book value on this patent at the end of both 2016 and 2017. A. ?. E. 2016 $2500 $25,000 $17,500 $17,500 $21,000 2017 $2,500 $28,500 $18,000 $15,000 $18,000 10. Answer the following true/false questions and then select the correct multiple choice answer: and Development costs should be added to the costs of a patent and then amortized over the lesser of its useful or legal life. A,company should use the depreciation method that most closely resembles the physical wear of the asset. depreciable base of a long term asset is the cost of the asset less the salvage value and is maximum amount that asset should be depreciated. A. True, True, True B. True, True, False C. True, False, True D. False, True, True E. False, False, False

Explanation / Answer

Dear student, only one question is allowed at a time. I am answering the first question

Depreciable amount under straight line method

= (Purchase cost – Salvage value) / Useful life

Original salvage value was $30,000 but the salvage value taken was $3,000. Due to this mistake, the depreciable amount has increased by $27,000 ($30,000 - $3,000)

The increase in the depreciable amount would result in increase in yearly depreciation which will result in understatement of assets as the assets will be shown at lesser value than their original value due to higher deduction of depreciation

On the other hand, income will reduce as higher depreciation will result in higher expenses and lower profits. This will result in understatement of Stockholder’s equity

So, as per above discussion, option B is the correct option

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