Question

Schrade Company bought a machine for $128,000 cash. The estimated useful life was four years and the estimated residual value was $6,500. Assume that the estimated useful life in productive units is 135,000. Units actually produced were 58,000 in year 1 and 60,000 in year 2. Determine the appropriate amounts to complete the following schedule. (Round your answers to the nearest dollar amount. Do not round intermediate calculations.) Depreciation Expense for Net Book Value at the End of Year 2 Year 2 Method of Depreciation Straight-line Units-of-production Double-declining-balance Year 1 Year 1

Answer 1

Answer:

Net book value (NBV) at the end of Year 2, under:

• straight-line method is $67,250
• units-of-production method is $21,800
• double-declining balance is $32,000

If there is need for NBV for Year 1, simply subtract the depreciation for Year from the cost.

Explanation:

Under straight-line method, depreciation expense is (cost - residual value) / Estimated useful life = ($128,000 - $6,500) / 4 years = $30,375 yearly depreciation expense.

Accumulated depreciation for 2 years is $30,375  x 2 years $60,750.

The net book value of the asset (cost - accumulated depreciation) is: $128,000 - $60,750 = $67,250.

The unit-of-production method is used when the asset value closely relates to the units of output it is able to produce. It is expressed with the formula below:

(Original Cost - Salvage value) / Estimated production capacity x Units/year

At Year 1, depreciation expense (DE) is: ($128,000 - $6,500) / 135,000 units x 58,000 units = $52,200/year

At Year 2, depreciation = ($128,000 - $6,500) / 135,000 units x 60,000 units = $54,000/year

Accumulated depreciation for 2 years is $52,200 + $54,000 = $106,200.

Note that this depreciation method results in higher depreciation charge when the asset is heavily used, at this time, it was in year 2.

The NBV under this method is is: $128,000 - $106,200 = $21,800.

The double-declining method is otherwise known as the reducing balance method and is given by the formula below:

Double declining method = 2 X SLDP X BV

SLDP = straight-line depreciation percentage

BV = Book value

SLDP is 100%/4 years = 25%, then 25% multiplied by 2 to give 50%

At Year 1, 50% X $128,000 = $64,000

At Year 2, 50% X $64,000 ($128,000 - $64,000) = $32,000

Accumulated depreciation for 2 years is $64,000 + $32,000 = $96,000.

The NBV under this method is is: $128,000 - $96,000 = $32,000.