Computation of Depreciation and Depletion
The following independent situations describe facts concerning the ownership of various assets.
(a) Dewey Company purchased a tooling machine in 1998 for $60,000. The machine was being depreciated on the straight line method over an estimated useful life of 20 years with no salvage value. At the beginning of 2008, when the machine had been in use for 10 years, Dewey paid $12,000 to overhaul the machine. As a result of this improvement, Dewey estimated that the useful life of the machine would be extended an additional five years.
(b) Emerson Manufacturing Co., a calendar year company, purchased a machine for $65,000 on January 1, 2006. At the date of purchase, Emerson incurred the following additional costs:
|
Loss on sale of old machinery |
$1,500 |
|
Freight cost |
500 |
|
Installation cost |
2,000 |
|
Testing costs prior to regular operation |
400 |
The estimated salvage value of the machine was $5,000, and Emerson estimated that the machine would have a useful life of 20 years, with depreciation being computed using the straight line method. In January 2008, accessories costing $4,860 were added to the machine to reduce its operating costs. These accessories neither prolonged the machine’s life nor did they provide any additional salvage value.
(c) On July 1, 2008, Lund Corporation purchased equipment at a cost of $34,000. The equipment has an estimated salvage value of $3,000 and is being depreciated over an estimated life of eight years under the double declining balance method of depreciation. For the six months ended December 31, 2008, Lund recorded a half year’s depreciation.
(d) Aiken Company acquired a tract of land containing an extractable natural resource. Geological surveys estimate that the recoverable reserves will be 3,800,000 tons and that the land will have a value of $500,000 after restoration. Relevant cost information follows:
|
Land |
$10,000,000 |
|
Tons mined and sold in 2008 |
700,000 |
(e) In January 2008, Marcus Corporation entered into a contract to acquire a new machine for its factory. The machine, which had a cash price of $200,000, was paid for as follows:
|
$30,000 |
|
|
Down payment |
185,000 |
|
500 shares of Marcus common stock with an agreed upon value of $370 per share |
$215,000 |
Prior to the machine’s use, installation costs of $7,000 were incurred. The machine has an estimated useful life of 10 years and an estimated salvage value of $10,000. The straight line method of depreciation is used.
Instructions: In each case, compute the amount of depreciation or depletion for 2008.