1. Depreciation Expense
Valley Corporation purchased a new piece of equipment on June 1, 2015. The cost of this machine was $500,000. The company estimated that the machine would have a salvage value of $30,000 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:
1. Straight-line depreciation for 2015
2. Units of production method for 2015, assuming that the machine uses 13,000 hours
3. Sum-of-the-year' digits for 2015
4. Double-declining balance for 2015
2. Remaining Life
A patent was purchased from Craig Company for $4,500,000 on June 1, 2015. Lewis estimated the remaining useful life of the patent to be 8 years. The patent was carried in Craig's accounting records at a net book value of $4,000,000 when Craig sold it to Lewis.
During 2016, a franchise was purchased from Faragher Company for $460,000. In addition, 8% of revenue from the franchise must be paid to Faragher. Revenue from the franchise for 2016 was $2,950,000. Lewis estimates the useful life of the franchise to be 12 years and takes a full year's amortization in the year of the purchase.
Lewis incurred research and development costs in 2016 as follows:
Materials and Equipment - $386,500
Personnel - $253,700
Indirect Costs - $105,355
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's estimates that the remaining life of the patent purchased on June 1, 2015, is only five years from January 1, 2016.
a. Prepare a schedule showing the intangible section of Lewis' balance sheet at December 31, 2016. Show supporting computations.
b. Prepare a schedule showing the income statement effects for the year ended December 31, 2016, as a result of the facts above. Show supporting computations.