DEPRECIATION

On January 1, 2006 Lem Company bought machinery under a contact that

required a down payment of P100,000, plus 24 monthly payments of P50,000
each, for total cash payments of P1,300,000. The cash equivalent price of the
machinery was P1,100,000. The machinery has an estimated useful life of 10
years and estimated residual value of P50,000. Lem uses straight line
depreciation. In its 2006 income statement,
1. What amount should Lem report as depreciation for this machinery?
a. 105,000
b. 110,000
c. 125,000
d. 130,000

On January 1, 2002, Lane Company acquired equipment for P1,000,000 with

an estimated 10-years useful life. Lane estimated a P100,000 residual value
and used the straight-line method of depreciation. During 2006, after its 2005
financial statements had been issued, Lane determined that, due to
obsolescence, this equipment’s remaining useful life was only four more
years and its residual would be P40,000.
2. In Lane’s December 31, 2006 balance sheet, what was the carrying
amount of this asset?
a. 515,000
b. 490,000
c. 415,000
d. 390,000

Weir Company uses straight-line depreciation for its property, plant, and
equipment, which stated at cost, consisted of the following:
2006 2005
Land 250,000 250,000
Buildings 1,950,000 1,950,000
Machinery and equipment 16,950,000 6,500,000
Total 9,150,000 8,700,000
Less: Accumulated depreciation 4,000,000 3,700,000
5,150,000 5,000,000
Weir’s depreciation expense for 2006 and 2005 was P550,000 and P500,000,
respectively.
3. What amount was debited to accumulated depreciation during 2006
because of property, plant and equipment retirements?
a. 400,000
b. 250,000
c. 200,000
d. 100,000

Poe Company’s depreciation policy on machinery and equipment is as

follows:
 A full year’s depreciation is taken in the year of an asset’s acquisition.
 No depreciation is taken in the year of an asset’s disposition.
 The estimated useful life is five years.
 The straight-line method is used.
On June 30, 2006, Poe sold for P2,300,000 a machine acquired in 2003 for
P4,200,000. The estimated residual value was P600,000.
4. How much gain on the disposal should Poe record in 2006?
a. 140,000
b. 260,000
c. 620,000
d. 980,000

Apex Company purchased a tooling machine in 1996 for P3,000,000. The

machine was being depreciated on the straight line method over an
estimated useful life of twenty years, with no residual value. At the beginning
of 2006, when the machine had been in use for ten years, the company paid
P600,000 to overhaul the machine. As a result of this improvement, the
company estimated that the useful life of the machine would be extended an
additional five years.
5. What should be the depreciation expense recorded for the machine in
2006?
a. 150,000
b. 140,000
c. 210,000
d. 340,000

Carmel Company provided the following information with respect to its

building.
 The building was acquired January 1, 2001 at a cost of
P7,800,000 with an estimated useful life of 40 years and residual
value of P200,000. Yearly depreciation was computed on the
straight line method.
 The building was renovated on January 1, 2003 at a cost of
P760,000. This was considered as improvement. Residual value
did not change.
 On January 1, 2006, the management decided to change the
total life of the building to 30 years.
6. What is the depreciation on the building for 2006?
a. 292,400
b. 266,000
c. 334,400
d. 294,000

A schedule of machinery owned by Lester Company is presented below:

Total cost Estimated Estimated life in
salvage value years
Machine A 5,500,000 500,000 20
Machine B 2,000,000 200,000 15
Machine C 400,000 5
Lester computes depreciation on the straight-line method.
7. Based upon the information presented, the composite life of these
assets should be
a. 13.3
b. 16.0
c. 18.0
d. 19.8

Canada Company purchased a machine on December 2, 2005 at an invoice

price of P4,500,000 with terms 2/10, n/30. On December 10, 2005, Canada
paid the required amount for the machine. On December 2, 2005, Canada
paid P80,000 for delivery of the machine and on December 31, 205, it paid
P310,000 for installation and testing of the machine. The machine was ready
for use on January 1, 2006. It was estimated that the machine would have a
useful life of 5 years, and no residual value of P800,000. Engineering
estimates indicated that the useful life in productive units was 200,000. Units
actually produced during the first two years were 30,000 in 2006 and48,000
in 2007. Canada Company decided to use the productive output method of
depreciation.
8. What is the depreciation of the machine for 2006?
a. 1,560,000
b. 720,000
c. 960,000
d. 600,000
Leonard Company acquired a machine in the first week of July 2005 and paid
the following bills:
Invoice price 5,000,000
Freight in 50,000
Installation cost 150,000
Cost of removing the old machine preparatory to the
installation of the new machine 100,000
The estimated life of the machine is 8 years or a total of 100,000 working
hours with no residual value. The operating hours of the machine totaled:
2005, 5,000 hours; 2006, 12,000 hours. The company follows the working
hours method of depreciation.
9. On December 31, 2006, the carrying amount of the machine is
a. 3,900,000
b. 4,299,000
c. 4,940,000
d. 4,316,000

Frey Company purchased a machine for P4,500,000 on January 1, 2005. The

machine has an estimated useful life of four years and a residual value of
P500,000. The machine is being depreciated using the sum-of-the-years
digits method.
10.The December 31, 2006 asset balance, net of accumulated
depreciation, should be
a. 2,900,000
b. 2,700,000
c. 1,700,000
d. 1,350,000

On April 1, 2005, Kew company purchased new machinery for P3,000,000.

The machinery has an estimated useful life of five years, and depreciation is
computed by the sum-of-the-years’ digits method.
11.The accumulated depreciation on this machinery at December 31,
2006 should be
a. 1,600,000
b. 1,800,000
c. 1,200,000
d. 1,000,000

On January 1, 2004, Mogul Company acquired equipment to be used in its

manufacturing operations. The equipment has an estimated useful life of 10
years and an estimated residual value of P50,000. The depreciation
applicable to this equipment was P240,000 for 2006 computed under the sum
of years’ digit method.
12.What was the acquisition cost of the equipment?
a. 1,650,000
b. 1,700,000
c. 2,400,000
d. 2,450,000

Rago Company takes a full year’s depreciation expense in the year of an

asset’s acquisition, and no depreciation expense in the year of disposition.
Data relating to one of Rago’s depreciable assets at December 31, 2005, are
as follows:
Acquisition year 2003
Cost 1,100,000
Residual value 200,000
Accumulated depreciation 720,000
Estimated useful life 5 years
Using the same depreciation method in 2003, 2004 and 2005,
13.How much depreciation expense should Rago record in 2006 for this
asset?
 a. 120,000
b. 180,000
c. 220,000
d. 240,000

Bergen Company purchased factory equipment which was installed and put
into service January 1, 2005 at a total cost of P1,280,000. Residual value was
estimated at P80,000. The equipment is being depreciated over eight years
by the double declining balance method.
14.For the year 2006, how much depreciation expense should Bergen
record on this equipment?
a. 225,000
b. 240,000
c. 300,000
d. 320,000

On July 1,2005, Mundo Company purchased factory equipment for

P5,000,000. Residual value was estimated at P200,000. the equipment will
be depreciated over ten years using the double declining balance method.
15.Counting the year of acquisition as one half year, Mundo should record
2006 depreciation expense of
a. 1,000,000
b. 900,000
c. 768,000
d. 960,000

Turtle Company purchased equipment on January 1, 2004 for P5,000,000.

The equipment had an estimated 5-year service life. Turtle’s policy for 5-year
assets is to use the 200% double declining balance method for the first two
years of the asset’s life and then switch to the straight line depreciation
method. In its December 31, 2006 balance sheet,
16.What amount should Turtle report as accumulated depreciation for the
equipment?
a. 3,000,000
b. 3,800,000
c. 3,920,000
d. 4,200,000

On December 31, 2006, before the books were closed, the management of
Xavier Company made the following determination about its machinery. The
machinery was purchased on January 1, 2003 for P7,200,000. The machinery
has useful life of 10 years with no residual value and was depreciated using
the straight line method. In 2006, a decision was made to change the
depreciation method from straight line to sum of years’ digits method. The
estimates of useful life and residual value remained unchanged.
17.The depreciation of this machinery for 2006 should be
a. 1,260,000
b. 1,440,000
c. 916,360
d. 720,000

ABC Company acquired equipment on January 1, 2006. The asset has an

estimated life of 4 years. An employee has prepared a depreciation schedule
for this equipment using two methods, straight line and double declining
balance, as follows:
Straight line Double declining
2006 1,500,000 3,250,000
2007 1,500,000 1,625,000
2008 1,500,000 812,500
2009 1,500,000 312,500
6,000,000 6,000,000
 18.What was the acquisition cost of the equipment?
a. 6,000,000
b. 6,500,000
c. 8,125,000
d. 7,000,000
Rapp Company purchased a machine on July 1, 2005, for P6,000,000. The
machine has an estimated useful life of five years and a residual value of
P800,000. The machine is being depreciated from the date of acquisition by
the 150% declining balance method.
19.For the year ended December 31, 2006, Rapp should record
depreciation expense on this machine at
a. 1,530,000
b. 1,326,000
c. 1,040,000
d. 1,800,000

In January 2005, Naval Company purchased equipment at a cost of

P6,000,000 to be used in its manufacturing operations. The equipment was
estimated to have a useful life of eight years with residual value estimated at
P600,000. Naval considered various methods of depreciation and selected
the sum of years’ digits method.
20.On December 31, 2006, the accumulated depreciation should have a
balance of
a. P750,000 less than under the straight line method
b. P750,000 less than under the double declining balance method
c. P900,000 greater than under the straight line method
d. P900,000 greater than under the double declining balance method

On January 1, 2005, London Company purchased a large quantity of personal

computers. The cost of these computers was P6,000,000. On the date of
purchase, the management estimated that the computers would last
approximately 4 years and would have a residual value at that time of
P600,000. The company used the double declining balance method. During
January 2006, the management realized that technological advancements
had made the computers virtually obsolete and that they would have to be
replaced. Management proposed changing the remaining useful life of the
computers to 2 years.
21.What is the depreciation to be recognized for the year 2006?
a. 3,000,000
b. 2,400,000
c. 1,500,000
d. 1,200,000

END