The cost of equipment purchased by Charleston, Inc., on June 1, 2020, is $89,000. It is estimated that the machine will have a $5,000 salvage value at the end of its service life. Its service life is estimated at 7 years, its total working hours are estimated at 42,000, and its total production is estimated at 525,000 units. During 2020, the machine was operated 6,000 hours and produced 55,000 units. During 2021, the machine was operated 5,500 hours and produced 48,000 units. Instructions Compute depreciation expense on the machine for the year ending December 31, 2020, and the year ending December 31, 2021, using the following methods. a. Straight-line. d. Sum-of-the-years’-digits. b. Units-of-output. e. Declining-balance (twice the straight-line rate). c. Working hours.
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.
The cost of equipment purchased by Charleston, Inc., on June 1, 2020, is $89,000. It is estimated that the machine will have a $5,000 salvage value at the end of its service life. Its service life is estimated at 7 years, its total working hours are estimated at 42,000, and its total production is estimated at 525,000 units. During 2020, the machine was operated 6,000 hours and produced 55,000 units. During 2021, the machine was operated 5,500 hours and produced 48,000 units.
Instructions
Compute
a. Straight-line. d. Sum-of-the-years’-digits.
b. Units-of-output. e. Declining-balance (twice the straight-line rate).
c. Working hours.
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