Complete both sections 1 and 2. Depreciation Expense Valley Corporation purchase

Question

Complete both sections 1 and 2. Depreciation Expense Valley Corporation purchased a new piece of equipment on June 1, 2015. The cost of this machine was $325,000. The company estimated that the machine would have a salvage value of $25,000 at the end of its service life. Its life is estimated at four years, and its working hours are estimated at 50,000 hours. The year end is December 31. Compute the depreciation expense under the following methods in an Excel spreadsheet. Each of the following should be considered unrelated: Straight-line depreciation for 2015 Units of production method for 2015, assuming that machine usage was 13,000 hours Sum-of-the-years’ digits for 2015 Double-declining balance for 2015 Remaining Life Taylor Lewis Company has provided information on intangible assets as follows. A patent was purchased from Craig Company for $4,000,000 on June 1, 2015. Lewis estimated the remaining useful life of the patent to be eight years. The patent was carried in Craig’s accounting records at a net book value of $3,500,000 when Craig sold it to Lewis. During 2016, a franchise was purchased from Faragher Company for $360,000. In addition, 8% of revenue from the franchise must be paid to Faragher. Revenue from the franchise for 2016 was $1,950,000. Lewis estimates the useful life of the franchise to be 12 years and takes a full year’s amortization in the year of purchase. Lewis incurred research and development costs in 2016 as follows: Materials and equipment $286,500 Personnel $153,700 Indirect costs $95,355 $535,555 Lewis estimates that these costs will be recouped by December 31, 2019. The materials and equipment purchased have no alternative uses. On January 1, 2016, because of recent events in the field, Lewis estimates that the remaining life of the patent purchased on June 1, 2015, is only five years from January 1, 2016. Prepare a schedule showing the intangible section of Lewis’s balance sheet at December 31, 2016. Show supporting computations in good form. Prepare a schedule showing the income statement effect for the year ended December 31, 2016, as a result of the facts above. Show supporting computations in good form.

Explanation / Answer

Valley Corporation Depreciation as per Straight Line Method Date of Purchased Cost Salvage Value Service Life Depreciation for the year 2015 1st June 2015 3250000 25000 4 470313 Depreciation as per Units of Production Method Date of Purchase Cost Salvage Value Total Working Hours Hours used Depreciation 1st June 2015 3250000 25000 50000 13000 838500 Depreciation as perSUM of Digits Method Date of Purchase Cost Salvage Value Sum of Digit of 2015 Depreciation for the year 1st June 2015 3250000 25000 4 1290000 Depreciation as per Double declining Method Date of Purchase Cost Salvage Value Service Life Depreciation 1st June 2015 3250000 25000 4 Years 940625 Lewis Balance Sheet As on 31st December 2016 Intangible Assets Patent 3708333 Less: Amortisation 741667 2966666 Franchise from Faragher Company Franchise Cost 360000 Amortisation 30000 330000 Research and Development Cost 535555 Less: Amortisation 535555 0 TOTAL Intangible Asset 3296666 Schedule of Income Statement Amortisation of Patent ($3708333/5) $741,667 Franchise Cost $30,000 Payment to Faragher Company ($1950000*8%) $156,000 Research and development cost $535,555 Total Charges against income $1,463,222

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