Question

Question 1: Company "Sharon" was founded on January 1st, 2009 and operates in the field of manufacturing and distributing office furniture. On January 1, 2010 the company purchased the following assets: • A building for $55,000. The company spent an additional $5,000 on new paint for the building. The company also spent $15,000 in installing an elevator in the building (that did not have one before). The building is depreciated using the Straight-Line Method, its useful life is 30 years and it has a salvage value of $10,000. A machine for $21,000. The amount paid includes $1,000 for delivery of the machine. The salvage value of the machine is $2,000 and its useful life is 10 years. The machine was sold on Dec 31st, 2012 for $14,200. On January 1st, 2011, the company purchased an electronic operating system. The depreciation expense for the system for the first 12 months of operation is $1,000 (Depreciation expense for 2011). The company uses the double declining balance depreciation method to depreciate the system. The system's useful life is 7 years and it has no salvage value. Required [A] What is the depreciation expense for 2012 for each of the assets above? [B] What are the two long-term operating assets' categories? What are the characteristics of each category? [C] Provide 3 examples of each of the categories specified in your answer to section B.

Answer 1

Part A

	Depreciation expense for 2012
Building	$2167
machine	$1900
electronic operating system	$714

Cost of building = 55000+5000+15000 = $75000

Annual depreciation for building = cost – residual value / estimated useful life = (75000-10000)/30 = $2167

Annual depreciation for machine = cost – residual value / estimated useful life = (21000-2000)/10 = $1900

Depreciation rate = 1/ estimate life * 2 = 1/7*2 = 2/7

Cost of electronic operating system = 1000*7/2 = $3500

Depreciation expense for 2012 = (3500-1000)*2/7 = $714

Part B

The two long-term operating assets’ categories are as follow:

1. Tangible assets
2. Intangible assets

Tangible assets have physical character, and thus can be seen and touched. These assets can be used as a collateral to get business financed. They are used in daily business operations and thus due to wear and tear they depreciate over a period of time and generally have useful salvage value at the end of useful life.

Intangible assets do not have physical character, and thus cannot be seen and touched. They are long-term in nature. Due to change in economic condition their value changes and thus they are nonmonetary assets.

Part C

Tangible assets: Buildings, furniture and machinery

Intangible assets: Goodwill, Trademark and computer software