Compute the straight-line depreciation for each year for equipment with a cost of $50,000, a five-year useful life, and a $5,000 salvage value.
Assignment Exercise 8–1: FIFO and LIFO Inventory
Study the FIFO and LIFO explanations in the chapter.
a1. Use the format in Exhibit 8–1 to compute the ending FIFO inventory and the cost of goods sold, assuming $90,000 in sales; beginning inventory 500 units @ $50; purchases of 400 units @ $50; 100 units @ $65; 400 units @ $80.
a2. Also compute the cost of goods sold percentage of sales.
b1. Use the format in Exhibit 8–2 to compute the ending LIFO inventory and the cost of goods sold, using same assumptions.
b2. Also compute the cost of goods sold percentage of sales.
c. Comment on the difference in outcomes.
Assignment Exercise 8–2: Inventory Turnover
Study the “Calculating Inventory Turnover” portion of the chapter closely, whereby the cost of goods sold divided by the average inventory equals the inventory turnover.
Compute two inventory turnover calculations as follows:
1. Use the LIFO information in the previous assignment to first compute the average inventory and then to compute the inventory turnover.
2. Use the FIFO information in the previous assignment to first compute the average inventory and then to compute the inventory turnover.
Example 8A: Depreciation Concept
Assume that Metropolis Health System (MHS) purchased equipment for $200,000 cash on April 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.
Straight-line depreciation is a method that charges an equal amount of depreciation for each year the asset is in service. In the case of this purchase, straight-line depreciation would amount to $18,000 per year for 10 years. This amount is computed as follows:
Step 1. Compute the cost net of salvage or trade-in value: 200,000 less 10% salvage value or 20,000 equals 180,000.
Step 2. Divide the resulting figure by the expected life (also known as estimated useful life): 180,000 divided by 10 equals 18,000 depreciation per year for 10 years.
Accelerated depreciation represents methods that are speeded up, or accelerated. In other words a greater amount of depreciation is taken earlier in the life of the asset. One example of accelerated depreciation is the double-declining balance method. Unlike straight-line depreciation, trade-in or salvage value is not taken into account until the end of the depreciation schedule. This method uses book value, which is the net amount remaining when cumulative previous depreciation is deducted from the asset’s cost. The computation is as follows:
Step 1. Compute the straight-line rate: 1 divided by 10 equals 10%.
Step 2. Now double the rate (as in double-declining method): 10% times 2 equals 20%.
Step 3. Compute the first year’s depreciation expense: 200,000 times 20% equals 40,000.
Step 4. Compute the carry-forward book value at the beginning of the second year: 200,000 book value beginning Year 1 less Year 1 depreciation of 40,000 equals book value at the beginning of the second year of 160,000.
Step 5. Compute the second year’s depreciation expense: 160,000 times 20% equals 32,000.
Step 6. Compute the carry-forward book value at the beginning of the third year: 160,000 book value beginning Year 2 less Year 2 depreciation of 32,000 equals book value at the beginning of the third year of 128,000.
— Continue until the asset’s salvage or trade-in value has been reached.