Question

Assume Organic Ice Cream Company, Inc., bought a new ice cream production kit (pasteurizer/homogenizer, cooler, aging vat, freezer, and filling machine) at the beginning of the year at a cost of $14,000. The estimated useful life was four years, and the residual value was $980. Assume that the estimated productive life of the machine was 9,300 hours. Actual annual usage was 3,720 hours in Year 1; 2,790 hours in Year 2; 1,860 hours in Year 3; and 930 hours in Year 4. Required: 1. Complete a separate depreciation schedule for each of the alternative methods. a. Straight-line. b. Units-of-production. c. Double-declining-balance.

Answer 1

Answer:

Organic Ice Cream Company, Inc.

Depreciation Schedules:

a. Straight-line.

Year         Cost      Depreciation    Accumulated      Net book Value  

                                                        Depreciation

Year 1    $14,000      $3,255             $3,255                $10,745

Year 2   $14,000      $3,255             $6,510                  $7,490

Year 3   $14,000      $3,255             $9,765                 $4,235

Year 4   $14,000      $3,255           $13,020                    $980

b. Units-of-production.

Year         Cost      Depreciation    Accumulated      Net book Value  

                                                        Depreciation

Year 1    $14,000      $5,208             $5,208                $8,792

Year 2   $14,000      $3,906               $9,114                $4,886

Year 3   $14,000      $2,604              $11,718               $2,282

Year 4   $14,000       $1,302            $13,020                 $980

c. Double-declining-balance.

Year         Cost      Depreciation    Accumulated      Net book Value  

                                                        Depreciation

Year 1    $14,000      $7,000              $7,000                $7,000

Year 2   $14,000      $3,500            $10,500                $3,500

Year 3   $14,000       $1,750            $12,250                 $1,750

Year 4   $14,000         $770            $13,020                   $980

Explanation:

a) Data and Calculations:

Cost of new ice cream production kit = $14,000

Residual value = $980

Depreciable value = $13,020

Estimated useful life = 4 years

Annual depreciation expense under straight-line method = $3,255 ($13,020/4)

Estimated productive life of the machine = 9,300 hours

Units-of-productive hours depreciation method per hour = $1.40 ($13,020/9,300)

Year 1 3,720 hours * $1.40 = $5,208

Year 2 2,790 hours * $1.40 = $3,906

Year 3 1,860 hours * $1.40 = $2,604

Year 4  930 hours* $1.40 = $1,302

Double-declining-balance method:

Depreciation rate = 100/4 * 2 = 50%

Year 1 = $14,000 * 50% = $7,000

Year 2 = $7,000 * 50% = $3,500

Year 3 = $3,500 * 50% = $1,750

Year 4 = $770 ($1,750 - $980)