Page 436 - Accounting Principles (A Business Perspective)

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Salvage value The amount of money the company expects to recover, less disposal costs, on the date a plant
asset is scrapped, sold, or traded in. Also called scrap value or residual value.
Straight-line depreciation See depreciation.
Tangible assets Assets that we can see and touch such as land, buildings, and equipment.
Units-of-production depreciation See depreciation.
Useful life Refers to the length of time the company owning the asset intends to use it.
Self-test
True-false
Indicate whether each of the following statements is true or false.
The cost of land includes its purchase price and other related costs, including the cost of removing an old
unusable building that is on the land.
Depreciation is the process of valuation of an asset to arrive at its market value.

The purpose of depreciation accounting is to provide the cash required to replace plant assets.
Expenditures made on plant assets that increase the quality of services are debited to the accumulated
depreciation account.
Plant asset subsidiary ledgers are used to increase control over plant assets.
Multiple-choice
Select the best answer for each of the following questions.
On 2010 January 1, Jackson Company purchased equipment for USD 400,000, and installation and testing
costs totaled USD 40,000. The equipment has an estimated useful life of 10 years and an estimated salvage value of
USD 40,000. If Jackson uses the straight-line depreciation method, the depreciation expense for 2010 is:

a. USD 36,000.
b. USD 40,000.
c. USD 44,000.
d. USD 80,000.
e. USD 88,000.
In Question 1, if the equipment were purchased on 2010 July 1, and Jackson used the double-declining-balance
method, the depreciation expense for 2010 would be:

a. USD 88,000.
b. USD 72,000.
c. USD 36,000.
d. USD 44,000.
e. USD 40,000.
Hatfield Company purchased a computer on 2008 January 2, for USD 10,000. The computer had an estimated
salvage value of USD 3,000 and an estimated useful life of five years. At the beginning of 2010, the estimated
salvage value changed to USD 1,000, and the computer is expected to have a remaining useful life of two years.
Using the straight-line method, the depreciation expense for 2010 is:

a. USD 1,400.
b. USD 1,750.
c. USD 2,250.
d. USD 1,800.

Accounting Principles: A Business Perspective 437 A Global Text