FINANCIAL MATHEMATICS

QUESTIONS ON DEPRECIATION

A firm bought a machine for $20,000 which is expected to be

1 used for 5 years and then sold for $2,000. What is the annual
amount of depreciation if the straight line method is used?

A machine costing $10,000 has an expected life of 4 year and

2 estimated residual value of $500. Calculate the depreciation
charge per year

A machine cost $25,650 depreciates to a scrap value of $500 in

10 years. Calculate:

3 (a) the annual rate of depreciation if the reducing balance method

of depreciation is to be used

(b) the book value at the end of the sixth year

A firm estimates that office equipment depreciates in value by

40% in its first year of use, by 25% of its value at the beginning of
that year during its second year of use, and thereafter each year
10% of its value at the beginning of that year

Calculate:
4
(a) the value after eight years’ of equipment costing $550
new

(b) the value when new of equipment valued at $100 after

five years’ of use.

The total cost of a fleet of lorries is $180,00 and the residual

5 value after five years is $20,00. Using the diminishing balance
method find the rate of annual depreciation.

Five word processors are brought for an office, the total cost of
the equipment being $12,000. The residual value of the machine
after five years is estimated to be $3,000. Find the annual
percentage depreciation to be charged if
6
(a) the fixed installment method is used

(b) the diminishing balance method is used ( answer to 2

decimal plac

FINANCIAL MATHEMATICS

ANSWERS ON DEPRECIATION

1. $3,600
 2. $2,375

3. (a) 32.55% (b) $2,415.34

4. (a) $131.53 (b) $304.83

5. 35.56%

6. (a) 15% (b) 24.21%

Problem #

On April 1, 2005, a company disposed of equipment for $14,200 cash that

had cost $35,000 on January 1, 2001. The equipment had a salvage value of
$5,000 and a useful life of 10 years. The double-declining-balance
depreciation method was used. On December 31, 2004, accumulated
depreciation was $20,664. Prepare a journal entry to record depreciation
for 2005 up to the date of disposal of the equipment. Prepare a journal
entry to record the disposal of the equipment.

Solution</FONT
2005 Depreciation to Date of Disposal
Depreciation Expense 716.80
Accumulated Depreciation - Equipment 716.80
($35,000 - $20,664) x .2 x (3/12) = $716.80
Entry to record disposal of equipment
Accumulated Depreciation - Equipment 21,380.80
Cash 14,200.00
Equipment 35,000.00
Gain on Sale of Equipment* 580.80
Calculation of Gain on Sale of Equipment
Cost of equipment $35,000.00
Accumulated Depreciation ($20,664 +
21,380.80
$716.80)
Book Value of equipment $13,619.20
 Cash received 14,200.00
Gain on sale $580.80

Short Problem #1

Match each of the following terms a through j with the appropriate

definitions 1 through 10.

a. Extraordinary repairs
b. Obsolescence
c. Amortization
d. Depletion
e. Salvage Value
f. Book Value
g. Land Improvements
h. Copyright
i. Inadequacy
j. Patent
_____ 1. Estimate of amount to be recovered at the end of a
plant asset's useful life.
_____ 2. Major repairs that extend the useful life of a plant
asset beyond prior expectations.
_____ 3. A process of allocating the cost of an intangible asset
to expense over its estimated useful life.
_____ 4. A right granted that gives its owner the exclusive
privilege to publish and sell musical, literary, or artistic
work during the life of the creator plus 50 years.
_____ 5. A condition which, because of new inventions and
improvements, a plant asset can no longer be used to
produce goods or services with a competitive
advantage.
_____ 6. The total cost of a plant asset less its accumulated
depreciation.
_____ 7. The process of allocating the cost of natural resources
to the periods when they are consumed.
_____ 8. An exclusive right granted to its owner to manufacture
 and sell an item, or to use a process, for 17
years.
_____ 9. A condition where the capacity of plant assets is
too small to meet the company's productive
demands.
_____ 10. Assets that increase the benefits of land, have a
limited useful life, and are subject to
depreciation.

1. Once the estimated depreciation expense for an asset is calculated:

a. It can't be changed due to the historical cost principle.
b. It may be revised based on new information.
c. Any changes are accumulated and recognized when the asset is
sold.
d. The estimate cannot be changed but the new information should be
disclosed.
e. It cannot be changed due to the consistency principle.