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Problem 11.8
- Course
- MOS 3360
- Institution
- University Of Western Ontario (UWO )
Chapter 11 practice question with solution
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Problem 11.8Linda Monkland established Monkland Ltd . In mld-2022 as the sole shareholder. The accounts on June 30, 2023, the
• company's year end, just prior to preparing the required adjusting entries, were as follows :
$100,000 Current liabilities $40,000
Current assets
Long-term bank loan 120,000
Capital assets
Common shares 90,000
Land $40,000
Net income prior to depreciation 30,000
Building 90,000
Equipment 50,000 180,000
· All the capital assets were acquired and put into operation in early July 2022 . Estimates and usage information on
th ese assets were as follows :
Building: 25-year life, $15,000 residual value
Equipment: Five-year life, 15,000 hours of use, $5,000 residual value. The equipment was used for 1,000 hours in
2022 and 1,400 hours in 2023 up to June 30.
Linda is now considering which depreciation method or methods would be appropriate. She has narrowed the choices
down for the building to the straight-line or double-declining-balance method, and for the equipment to the straight-
line, double-declining-balance, or activity method. She has requested your advice and recommendation. In discussions
with her, the following concerns were raised:
1. The company acquires goods from suppliers with terms of 2/10, n/30. The suppliers have indicated that these
terms will continue as long as the current ratio does not fall below 2 to 1. If the ratio falls lower, no purchase
discounts will be given.
2. The bank will continue the loan from year to year as long as the ratio of long-term debt to total assets does not
exceed 46%. \ "
3. Linda has contracted with the company's manager to pay him a bonus equal to 50% of any net income in
excess of $14,000. She prefers to minimize or pay no bonus as long as conditions of agreements with suppliers
and the bank can be met.
4. To provide a strong signal to attract potential investors to join her in the company, Linda believes that a rate of
return on total assets of at least 5% must be achieved.
Instructions:
1. Calculate depreciation for the June 30, 2023 year end considering the choices provided.
Building Equipment
1. Straight-line method 3. Straight-line method
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2. Double-declining balance method 4. Double-declining balance method
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