ALL FORUMULAS AND EQUATIONS MUST BE SHOWN Use this format below for the deprecia

Question

ALL FORUMULAS AND EQUATIONS MUST BE SHOWN

Use this format below for the depreciation schedules. Note that the "factor" column applies to D-D-Bl method and not straight-line.   You can use this format for either methods; you won't use the factor column in your SL calculations.

#1: Prepare depreciation schedules:

P Company’s fiscal year runs from January to December 31. P Co. acquires and installs into operations a new truck on October 1, 2013 at a total cost of $360,000 and has an estimated useful life of four years and estimated salvage value of $40,000.

Hint: pay attention to the dates of acquisition with respect to P Co.’s fiscal year. Required:

1. Prepare a depreciation schedule showing Net Book value (beginning and ending), depreciation expense, and accumulated depreciation for the asset. Prepare one schedule for each method:

a. Straight-line
b. Double-declining balance

2. K Company receives an offer for the truck for $140,000 at the end of the third year.

What factors should K Company consider in determining whether to sell or keep the

truck?

Assume the truck is sold. Prepare the appropriate journal entries showing sale of the

truck under each depreciation method.

#2: Inventory valuation:

1.Complete the following table:

All calculations must be indicated via Excel formulas

Which inventory method would you recommend for reporting for income tax purposes? Why?

The company is operating in an inflationary environment. Which method should the company use to maximize inventory valuation? Why?

4. Should the replacement cost be used to value the ending inventory for any of the methods? Why?

Year NBC beg Factor Depreciation expense Accumulated Depreciation NBV ending

Explanation / Answer

2) Number of units sold

= beginning inventory + purchase - ending inventory

= 160000 +60000+60000-30000 = 250000

FIFO

Ending Inventory = 30000*1.90 = $57000

COGS = 160000*2 + 60000 * 2.25 + 30000 * 1.9 = $512000

LIFO

Ending Inventory = 30000*2 = $60000

COGS = 60000*1.9 + 60000*2.25 + 130000*2 = $509000

Weighted average

Weighted average cost = (160000*2+60000*2.25+60000*1.9) / (160000+60000+60000)=$2.03/unit

COGS = 160000 * 2.03 = $324800

Ending Inventory = 30000*2.03 = $60900

For income tax purpose FIFO is recommended as the COGS is highest and there will be lower income tax incidence because of lower profit.

The FIFO method should be used.

4) Yes, the replacement cost can be used to value the inventory when the company is following Lower of cost or market (LCM) method of valuing inventory. When the cost of the inventory drops below the market price or replacement price, the replacement price is used to value the inventory, instead of value determined under LIFO, FIFO or weighted average method.

Year NBV Beginning Factor Depreciation expense Accumulated depreciation NBV ending 1 $    3,60,000.00 $     20,000.00 $     20,000.00 $ 3,40,000.00 2 $    3,40,000.00 $     80,000.00 $ 1,00,000.00 $ 2,60,000.00 3 $    2,60,000.00 $     80,000.00 $ 1,80,000.00 $ 1,80,000.00 4 $    1,80,000.00 $     80,000.00 $ 2,60,000.00 $ 1,00,000.00 5th year, Nov 30 $    1,00,000.00 $     60,000.00 $ 3,20,000.00 $     40,000.00 Straight line depreciaion for full year = (360000 - 40000)/4 = $80000 Depreciation expense for the first year = (1/4)*80000 = $20000 Depreciation expense for the last year (for 9 months) = (3/4)*80000 = $60000 Straight line rate = 1/useful life = 1/4 = 25% Double declining rate of depreciation = 2 x 25% = 50% Year NBV Beginning Factor Depreciation expense Accumulated depreciation NBV ending 1 $    3,60,000.00           0.50 $     45,000.00 $     45,000.00 $ 3,15,000.00 2 $    3,15,000.00           0.50 $ 1,57,500.00 $ 2,02,500.00 $ 1,57,500.00 3 $    1,57,500.00           0.50 $     78,750.00 $ 2,81,250.00 $     78,750.00 Dec 31, 4th year $        78,750.00 $     38,750.00 $ 3,20,000.00 $     40,000.00 Note: the depreciation for the 4th year = $38750, as salvage value of the asset cannot be less than $40000 If straight line method is beign used, the book value at the end of the third year is greater than $140000, and the company will register a loss on sale of the truck If double declining methos is being used , the book value of the truck will be less than the sale value of the truck and the company will register a profit on sale of the truck. The factors that should be considered: a) The replacement cost of the new truck b) the savings in maintenace and operating costs if new truck is bought c) cost of capital d) salvage value of the old truck

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