Financial Accounting: An Integrated Statements Approach, 2nd Edition

438 Chapter 9 Fixed Assets and Intangible Assets

equipment, $9,000, by^2 – 3 (the straight-line rate of^1 – 3 multiplied

by 2). The depreciation for the second year of $2,000 (answer

C) is then determined by multiplying the book value at the

end of the first year, $3,000 (the cost of $9,000 minus the first-

year depreciation of $6,000), by^2 – 3. The third year’s deprecia-

tion is $400 (answer D). It is determined by multiplying the

book value at the end of the second year, $1,000, by^2 – 3 , thus

yielding $667. However, the equipment cannot be depreci-

ated below its residual value of $600; thus, the third-year de-

preciation is $400 ($1,000 $600).

3. B A depreciation method that provides for a higher de-
   preciation amount in the first year of the use of an asset and a

gradually declining periodic amount thereafter is called an ac-

celerated depreciation method. The declining-balance method

(answer B) is an example of such a method.

4. C The accumulated depreciation is debited for the over-
   haul cost of $40,000. The book value of $45,000 is depreciated
   over the five-year remaining life; thus, the net decrease
   in accumulated depreciation is $31,000 ($40,000$9,000)
   (answer C)


5. C Fixed asset turnover ratioRevenueAverage book
   value of fixed assets, or {$500,000/[($80,000$120,000)/2]}, or
   5.0 (answer C).