Alladin Company purchased Machine #201 on May 1, 2020. The following information relating to Machine #201 was gathered at the end of May. Price $85,000 Credit terms 2/10, n/30 Freight-in $10,800 Preparation and installation costs $13,800 Labor costs during regular production operations $10,500 It is expected that the machine could be used for 10 years, after which the salvage value would be zero. Alladin intends to use the machine for only 8 years, however, after which it expects to be able to sell it for $1,500. The invoice for Machine #201 was paid May 5, 2020. Alladin uses the calendar year as the basis for the preparation of financial statements. Instructions a. Compute the depreciation expense for the years indicated using the following methods. (Round to the nearest dollar.) 1. Straight-line method for 2020. 2. Sum-of-the-years’-digits method for 2021. 3. Double-declining-balance method for 2020. b. Suppose Kate Crow, the president of Alladin, tells you that because the company is a new organization, she expects it will be several years before production and sales reach optimum levels. She asks you to recommend a depreciation method that will allocate less of the company’s depreciation expense to the early years and more to later years of the assets’ lives. What method would you recommend?
Depreciation Methods
The word "depreciation" is defined as an accounting method wherein the cost of tangible assets is spread over its useful life and it usually denotes how much of the assets value has been used up. The depreciation is usually considered as an operating expense. The main reason behind depreciation includes wear and tear of the assets, obsolescence etc.
Depreciation Accounting
In terms of accounting, with the passage of time the value of a fixed asset (like machinery, plants, furniture etc.) goes down over a specific period of time is known as depreciation. Now, the question comes in your mind, why the value of the fixed asset reduces over time.
Alladin Company purchased Machine #201 on May 1, 2020. The following information relating to Machine #201 was gathered at the end of May.
| Price |
$85,000
|
| Credit terms |
2/10, n/30
|
| Freight-in |
$10,800
|
| Preparation and installation costs |
$13,800
|
| Labor costs during regular production operations |
$10,500
|
It is expected that the machine could be used for 10 years, after which the salvage value would be zero. Alladin intends to use the machine for only 8 years, however, after which it expects to be able to sell it for $1,500. The invoice for Machine #201 was paid May 5, 2020. Alladin uses the calendar year as the basis for the preparation of financial statements.
Instructions
a. Compute the
1. Straight-line method for 2020.
2. Sum-of-the-years’-digits method for 2021.
3. Double-declining-balance method for 2020.
b. Suppose Kate Crow, the president of Alladin, tells you that because the company is a new organization, she expects it will be several years before production and sales reach optimum levels. She asks you to recommend a depreciation method that will allocate less of the company’s depreciation expense to the early years and more to later years of the assets’ lives. What method would you recommend?
Trending now
This is a popular solution!
Step by step
Solved in 6 steps with 6 images
