Question

(Chapter Ten) A new machine costs $120,000, has an estimated useful life of five years and an estimated salvage value of $15,000 at the end of that time. It is expected that the machine can produce 210,000 widgets during its useful life. The New Times Company purchases this machine on January 1, 2013, and uses it for exactly three years. During these years the annual production of widgets has been 80,000, 50,000, and 30,000 units, respectively. On January 1, 2016, the machine is sold for $45,000. Required: Calculate the depreciation expense for each of the first three years using: a. Straight-line b. Units-of-production c. Double-declining-balance

Answer 1

Answer:

a) Depreciation expense for each of the first three years using straight-line was:

1. 2013 = $21,000.    
2. 2014 = $21,000.
3. 2015 = $21,000.

b) Depreciation expense for each of the first three years using units-of-production was:

1. 2013 = $40,000.    
2. 2014 = $25,000.
3. 2015 = $15,000.

c) Depreciation expense for each of the first three years using double-declining-balance was:

1. 2013 = $48,000.    
2. 2014 = $28,800.
3. 2015 = $17,280.

Explanation:

Note: To calculate depreciation expense or accumulated depreciation you need to have and understand the following:

i) Cost of the asset /Acquisition cost =  This is the amount utilized by the business entity to purchase and get the asset operational and includes transport installation and even insurance expenses.

ii) Salvage Value / Residual value = This is the value of the asset after its useful life.

iii) Total Depreciation Cost = This is the total amount by which the asset is expected to depreciate over its useful life and can be attained by subtracting the salvage value or from the acquisition cost.

iv) Useful life of the asset = this is the period the asset will be of economic value to the business.

a) To compute depreciation expense for each of the first three years using straight-line follow the steps illustrated:

Step 1: Determine the cost of the depreciation cost .

The depreciation cost = Acquisition cost - Salvage cost.

The cost of the depreciation cost = 120,000 - 15,000 = $105,000.

Step 2: Determine the annual depreciation expense cost.

The annual depreciation expense cost = (depreciation cost/Useful Life)

Annual depreciation expense cost = (105,000/5) = $21,000.

Since it is the straight balance method, the depreciation expense cost will be the same through out the asset's useful life.Thus the depreciation expense for each of 2013, 2014 and 2015 was $21,000.

b) To compute depreciation expense for each of the first three years using units-of-production follow the steps illustrated:

Step 1: Determine the cost of the depreciation cost .

The depreciation cost = Acquisition cost - Salvage cost.

The cost of the depreciation cost = 120,000 - 15,000 = $105,000.

Step 2: Determine the depreciation rate per unit of production.

The depreciation rate per unit of production = depreciation cost / Useful  units

The depreciation rate per unit of production = 105,000 /210,000  = $ 0.5 per unit of widget produced.

Step 3: Determine the depreciation expense for each of the 3 years.

The depreciation expense = depreciation rate per unit × No. of units (widget) produced.

The depreciation expense for 2013 = 0.5 × 80,000 = $40,000.

The depreciation expense for 2013 = 0.5 × 50,000 = $25,000.

The depreciation expense for 2013 = 0.5 × 30,000 = $150,000.

c) To compute depreciation expense for each of the first three years using double-declining-balance follow the steps illustrated:

Step 1: Determine the cost of the depreciation cost .

The depreciation cost = Acquisition cost - Salvage cost.

The cost of the depreciation cost = 120,000 - 15,000 = $105,000.

Step 2: Determine the depreciation rate.

The depreciation rate  = (1 / Useful  life) × 100

The depreciation rate  = (1 / 5) × 100 = 20%

Since it is double declining method we multiply the rate by two.Thus the applicable rate is 20% × 2 = 40%

Step 3: Determine the depreciation expense for each of the 3 years.

depreciation expense for each year= Asset carrying value × depreciation rate.

The depreciation expense for 2013 = 120,000×40% = $48,000.

The depreciation expense for 2014 = 72,000×40% = $28,800.

The depreciation expense for 2015 = 43,200×40% = $17,280.