E11-15 (Lol,2) (Depreciation for Fractional Periods) On March 10, 2019, Lost Wor
ID: 2333715 • Letter: E
Question
E11-15 (Lol,2) (Depreciation for Fractional Periods) On March 10, 2019, Lost World Company sells equipment that it pur- chased for $192,000 on August 20, 2012. It was originally estimated that the equipment would have a life of 12 years and a sal- vage value of $16,800 at the end of that time, and depreciation has been computed on that basis. The company uses the straight- line method of depreciation. nstructions (a) Compute the depreciation charge on this equipment for 2012, for 2019, and the total charge for the period from 2013 to 2018, inclusive, under each of the six following assumptions with respect to partial periods (1) Depreciation is computed for the exact period of time during which the asset is owned. (Use 365 days for base and record depreciation through March 9,2019.)Explanation / Answer
Equipment purchased on August 20,2012 = $192000.
Useful life=12 years
Salvage value= $16800
Depreciation=(192000-16800)/12 =$14600 p.a
a. Computation of depreciation charge:
(Assuming books of accounts closes on 31st december every year since not given)
1. Depreciation charge for 2012:
Number of days since asset purchased on August 20, 2012= 11+30+31+30+31=133 days
So, depreciation for 2012= $14600*133/365= $5320
Depreciation from 2013 till 2018=6*$14600= $87600
Number of days for 2019 (from Jan1,2019 till March, 10,2019=31+28+10=69 days
So, depreciation for 2019= $14600*69/365= $2760
2. When depreciation is calculated on January 1 balance on the asset account:
Depreciation for 2012 shall be $0 since asset has been purchased in the middle of the year 2012.
Depreciation from 2013 till 2018 shall be= 6*14600=$87600
Depreciation for 2019= $14600 since the asset has been sold o march and the balance on january 1, 2019 was full asset value.
3. When depreciation is calculated on December 31 balance on the asset account:
Depreciation for 2012 shall be $14600 since asset has been purchased in the middle of the year 2012.
Depreciation from 2013 till 2018 shall be= 6*14600=$87600
Depreciation for 2019= $0 since the asset has been sold o march.
4.Depreciation for one half year is charged on assets acquired or sold during the year:
Depreciation for 2012 shall be ($14600*6/12)= $7300 since asset has been purchased in the middle of the year 2012.
Depreciation from 2013 till 2018 shall be= 6*14600=$87600
Depreciation for 2019= $14600*6/12= $7300 since the asset has been sold on march.
5. Depreciation is calculated on additions from the beginning of the month following acquisitions and disposal to the beginning of the momth following disposal:
1. Depreciation charge for 2012:
Number of days from 1st september 2012 to 31st dec 2012 = 30+31+30+31=122 days
So, depreciation for 2012= $14600*122/365= $4880
Depreciation from 2013 till 2018=6*$14600= $87600
Number of days for 2019 (from Jan1,2019 till March, 31,2019=31+28+31=90 days
So, depreciation for 2019= $14600*90/365= $3600
6. Depreciation charged for full period when asset is used for more than half of the year and no depreciation when used for less than half year:
Depreciation for 2012 shall be $0 since asset purchased on august and ence used for less than half of the year on 31st dec 2012.
Depreciation from 2013 till 2018 shall be= 6*14600=$87600
Depreciation for 2019= $0.since the asset has been sold on march.
b. The above methods are various methods used in various firms for calculation of depreciation. The accountin gpolicy should be used and followed consiustently from year to year in any method. The company was following straigt line method of depreciation.
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