You have been hired by Patterson Planning Corp., an events planning company that

Question

You have been hired by Patterson Planning Corp., an events planning company that recently had a fire in which some of the accounting records were damaged.

In reviewing the fixed asset records, you find three depreciation schedules that are not labeled. They are listed in the following table. One of the assets has a depreciation rate of $4.40 per hour.

Depreciation

1. Determine which depreciation method is shown in each schedule on the Patterson Planning Corp. panel. Then match each schedule to the asset description that best characterizes the type of assets often depreciated using that method.

2. For each of the depreciation schedules shown on the Patterson Planning Corp. panel, fill in the following information. Leave any cells blank that cannot be determined from the depreciation schedule.

Year Schedule A Schedule B Schedule C 1 $6,000.00 $10,125.00 $8,800.00 2 3,600.00 13,500.00 6,600.00 3 2,160.00 13,500.00 7,480.00 4 1,296.00 13,500.00 6,600.00 5 444.00 3,375.00 4,400.00 6 7,040.00 7 4,840.00 8 Total $13,500.00 $54,000.00 $45,760.00

Explanation / Answer

1) Schedule A

Depreciation charged under Schedule A is reducing by same rate each year, therefore diminishing balance method of depreciation is used for schedule A.

Depreciation rate charged under this method will be equal to rate of decrease in depreciation from year to year which is calculated as follows:-

Depreciation rate = (Dep. in Year 1 - Dep. in Year 2)/Dep. in Year 1

= ($6,000 - $3,600)/$6,000 = $2,400/$6,000 = 0.40 or 40%

Schedule B

Depreciation charged under Schedule B is constant (i.e. $13,500) over the years except in year 1 and year 5 which is due to time factor (i.e. used for 9 months in year 1 and 3 months in year 5). Therefore Straight line method is used for Schedule B.

Schedule C

As it is given in the question that one of the assets has a depreciation rate of $4.40 per hour, therefore units of production depreciation method is used for schedule C.

2) Schedule A

Useful life = 5 years

Residual Value = Can not be Determined

Asset Cost = Depreciation charged in year 1/Depreciation rate

= $6,000/40% = $15,000

Schedule B

Useful Life = 4 years (because in year 1, 9 months depreciation is charged and in year 5, 3 months depreciation is charged).

Annual Depreciation = (Cost - Residual Value)/Useful Life

$13,500 = (Cost - Residual Value)/4 years

Cost - Residual Value = $13,500*4 years = $54,000

Thus cost is $54,000 and residual value is zero. (because total depreciation charged over useful life can not exceed cost).

Residual Value = $0

Asset Cost = $54,000

Schedule C

Useful Life = 7 years

Total Depreciation charged over 7 yrs = $45,760

Total Operating Hours = Total Depreciation charged/Variable rate per hour

= $45,760/$4.40 per hour = 10,400 hrs

Asset Description Depreciation Schedule Used Asset producing steady revenues Schedule B Asset generating greater revenues in the early years Schedule A Asset with variable in-service time Schedule C

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