ACCOUNTING 2610 – FALL 2011 - QUIZ # 5 QUIZ # 5 (5 Points) Name_______________________ Mail-file Status: Olin / Non-Olin Problem 1 (3 Points) Cornucopia, Inc., naturally, makes cornucopias. The cornucopias are filled with various items, and are sold as gift baskets. On January 1, 2008, Cornucopia, Inc. purchased a new cornucopia manufacturing machine at a cost of $ 120,000. Cornucopia initially assumed that the machine would last ten years, and that it would have a salvage value of $ 10,000 at the end of the tenth year. Using the information provided above, please answer the following questions: A. (1) Assume that on January 1, 2008, Cornucopia decided to use the “Straight Line” method to depreciate the machine. Under this assumption, what is the balance of “Accumulated Depreciation” related to the machine that would appear on Cornucopia’s December 31, 2009 Balance Sheet? B. (1) Assume that on January 1, 2008, Cornucopia decided to use the Double- Declining Balance method to depreciate the machine. If Cornucopia makes an “adjusting entry” at the end of the year to record depreciation for the entire year, what is the “adjusting entry” that Cornucopia would make at the end of 2009 in order to record the appropriate amount of depreciation for 2009? (You may assume that Cornucopia “expenses” their cornucopia depreciation.)C. (1) Suppose that on January 1, 2008, Cornucopia began depreciating the machine using Double Declining Balance. On January 1, 2011, Cornucopia concluded that the machine would only last until December 31, 2014, and would have a salvage value of $ 5,000 at that time. Cornucopia will continue to depreciate the machine using Double Declining Balance Given the revised estimates, how much depreciation will Cornucopia report for the fiscal year ending December 31, 2011? Problem 2 (1 Point) Do you AGREE or DISAGREE with the above statement? “For Depreciable Assets with a salvage value of $ 0, Accelerated Depreciation Methods will never fully depreciate the asset.” Circle either AGREE or DISAGREE, and BRIEFLY support your answer.Problem 3 (1 Point) The following statement is TRUE / FALSE. (Circle One) Under US GAAP, when a firm changes one of the estimates used in calculating depreciation, the firm is required to “restate” the financial statements from previousyears to illustrate the impact of the revision of the estimate.SOLUTION TO ACCT 2610 – QUIZ # 5 – Fall 2011Problem 1A. Under the Straight Line Method, Depreciation for a year is calculated as: Annual Depreciation = Cost - Salvage Value Estimated Life = $ 120,000 - 10,000 = $ 11,000 per year 10 Years Accordingly, at the end of 2009, two years after the asset was purchased, the balance in Accumulated Depreciation would be $ 22,000 (equal to 2 x $ 11,000). B. First, estimate the percentage of remaining book value that would be reported as depreciation expense in any given year. This percentage amount is 20%, calculated as (100% / 10 years ) x 2. Using this percentage, depreciation for 2008, 2009 and 2010 would be calculated as follows: Depreciation Accumulated Net Book Expense Depreciation Value2008: $ 120,000 x 20% = $ 24,000 $ 24,000 $ 96,000 2009: $ 96,000 x 20% = 19,200 43,200 76,8002010: $ 76,800 x 20% = 15,360 58,560 61,440 Thus, the appropriate adjusting entry for 2009 would be: DR Depreciation Expense (E+) $ 19,200 CR Accumulated Depreciation (XA+) $ 19,200C. In referring to the table in Part B, the “Net Book Value” of the equipment on January 1, 2011 is $ 61,440. When a firm revises their estimates used in calculating depreciation, the firm will calculate depreciation “as if” the firm purchased a new asset at the current book value. If, on Jan. 1, 2011 Cornucopia concluded that the machine would only last until Dec. 31, 2014, there are now four years remaining in the life of the asset. The percentage of the remaining book value that would be recorded each year would be 50% (i.e. (100%/4) years x 2). (Note: Full credit was also given if you divided by 7 years and calculated the applicable amount of depreciation accordingly.) Thus, in 2011, Cornucopia would record depreciation in the amount of $ 30,720 (equal to $ 61,440 x 50%).Problem 2 Could AGREE with the statement in the sense that whatever percentage of remaining book value was recorded as depreciation in any particular year, there would always be a percentage of remaining book value left. Could DISAGREE with the statement in the sense that most firms have a provision address this issue by either “fully depreciating” the asset in the last year of the asset’s useful life, or transitioning to the straight-line method over the remaining useful life in the first year in which straight-line depreciation over the remaining useful life exceeds the amount of depreciation resulting from application of the declining balance method.Problem 3 The statement is FALSE. Under current US GAAP, when a firm changes an accounting estimate, the impact of the change is reflected in the current and subsequent accounting periods, but the balance sheet is not updated for the cumulative effect of the change. ACCT 2610 - QUIZ # 5 – FALL 2011SUMMARY OF RESULTS Total Score Number 5 16 4 – 4.5 26 3 – 3.5 16 2 – 2.5 4 < 2 0
View Full Document
Unlocking...