Question

Gruman Company purchased a machine for $198,000 on January 2, 2016. It made the following estimates:

Answer 1

Answer:

$36,000 $36,000

b. $60,000 $48,000

c. $79,200, $47,520

d. $30,600, $21,600

e. $40,000 $34,000

Explanation:

A. Straight line depreciation expense = (Cost of asset - Salvage value) / useful life

( $198,000 -  $18,000 ) / 5 = $36,000

Depreciation expense each year would be $36,000

B. Sum-of-the-year digits = (remaining useful life / sum of the years ) x  (Cost of asset - Salvage value)

Sum of the years = 1 +2 +3 +4 + 5  = 15

Depreciation expense in year 1 = (5/15) X ( $198,000 -  $18,000 ) = $60,000

Depreciation expense in year 2 = (4/15) x ( $198,000 -  $18,000 ) = $48,000

C. Depreciation expense using the double declining method = Depreciation factor x cost of the asset

Depreciation factor = 2 x (1/useful life)  

2 x(1/5) = 0.4

Depreciation expense in year 1 = 0.4 x  $198,000 = $79,200

Book value at the end of year 1 =  $198,000 - $79,200 = $118,800

Depreciation expense in year 2 = 0.4 x $118,800 = $47,520

D. Activity method based on hours worked = (hours worked that year / total hours of the machine) x  (Cost of asset - Salvage value)

Depreciation expense in year 1 = (1,700 / 10,000) x ( $198,000 -  $18,000 ) = $30,600

Depreciation expense in year 1 = (1,200 / 10,000) x ( $198,000 -  $18,000 ) = $21,600

E. Activity method based on units of output = (output produced that year / total output capacity of the machine) x  (Cost of asset - Salvage value)

Depreciation expense in year 1 =  ( 40,000 / 180,000) x ( $198,000 -  $18,000 ) = $40,000

Depreciation expense in year 12=  ( 34,000 / 180,000) x ( $198,000 -  $18,000 ) = $34,000