Week 6 Chapter 8 Lesson 8 Chapter 8 Lesson This chapter provides an overview of
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Week 6 Chapter 8 Lesson 8 Chapter 8 Lesson This chapter provides an overview of the inventory concept and types of inventories. Inventory includes all the items (goods) that by the company. Various healtheare organization deal with inventory and must account for it. an organization has for sale in the normal course of its business. Inventory is an asset, owned Review the following key terms: Depreciation FIFO Inventory Inventory Turnover LIFO Salvage Value Useful Life (of an asset) . Complete PRACTICE Exercise 8-1:Depreciation Concept Practice Exercise 8-l: Depreciation Concept Assume that MHS purchased equipment for $600,000 cash on Apil 1 (the first day of its fiscal year). This equipment has an expected life of 10 years. The salvage value is 10% of cost. No equipment was traded in on this purchase. RequiredExplanation / Answer
Q1) Straight-line depreciation is an equal amount of depreciation in each year.
Straight-line depreciation amount = (Cost – Salvage value) / Life years
= (600,000 – 600,000 × 10%) / 10
= (600,000 – 60,000) / 10
= 540,000 / 10
= $54,000
Depreciation schedule (Straight-line)
Year
Depreciation, $
Book value, $
1
54,000
600,000 – 54,000 = 546,000
2
54,000
546,000 – 54,000 = 492,000
3
54,000
492,000 – 54,000 = 438,000
4
54,000
438,000 – 54,000 = 384,000
5
54,000
384,000 – 54,000 = 330,000
6
54,000
330,000 – 54,000 = 276,000
7
54,000
276,000 – 54,000 = 222,000
8
54,000
222,000 – 54,000 = 168,000
9
54,000
168,000 – 54,000 = 114,000
10
54,000
114,000 – 54,000 = 60,000
Note: The expected salvage value ($60,000) at the end of of 10th year should be recoverd through the selling of equipment.
Q2) Double-declining rate = (1 / Life years) × 200
= (1 / 10) × 200
= 20%
Depreciation schedule (Double-declining)
Year
Depreciation, $
Book value, $
1
600,000 × 20% = 120,000
600,000 – 120,000 = 480,000
2
480,000 × 20% = 96,000
480,000 – 96,000 = 384,000
3
384,000 × 20% = 76,800
384,000 – 76,800 = 307,200
4
307,200 × 20% = 61,440
307,200 – 61,440 = 245,760
5
245,760 × 20% = 49,152
245,760 – 49,152 = 196,608
6
196,608 × 20% = 39,321.6
196,608 – 39,321.6 = 157,286.4
7
157,286.4 × 20% = 31,457.28
157,286.4 – 31,457.28 = 125,829.12
8
125,829.12 × 20% = 25,165.82
125,829.12 – 25,165.82 = 100,663.3
9
100,663.3 × 20% = 20,132.66
100,663.3 – 20,132.66 = 80,530.64
10
80,530.64 – 60,000 = 20,530.64
80,530.64 – 20,530.64 = 60,000
Note: The depreciation amount is adjusted in the 10th year in order to sustain the salvage value.
Year
Depreciation, $
Book value, $
1
54,000
600,000 – 54,000 = 546,000
2
54,000
546,000 – 54,000 = 492,000
3
54,000
492,000 – 54,000 = 438,000
4
54,000
438,000 – 54,000 = 384,000
5
54,000
384,000 – 54,000 = 330,000
6
54,000
330,000 – 54,000 = 276,000
7
54,000
276,000 – 54,000 = 222,000
8
54,000
222,000 – 54,000 = 168,000
9
54,000
168,000 – 54,000 = 114,000
10
54,000
114,000 – 54,000 = 60,000
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