The Lewis Company acquired a large, highly-automated machine for $3,000,000 on February 28, 2016. It is estimated that this machine will have an eight-year useful life and a residual value of $120,000. A. Determine the depreciation expense for the calendar year 2016 and 2017 under the straight-line method. The figures for the double-declining balance method are provided: Straight-Line Method DDB Method 2016 2017 2016 2017 $625 $594 B. Show what would be presented for this machine on the balance sheet at the end of 2017 under these two methods of depreciation. Be sure to show the complete (3-line) presentation.
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 calculation of depreciation expenses using Straight-line method:
Depreciation expenses = (Cost of assets - Residual value) / Life of assets
Note: In the Straight-line depreciation method depreciation expenses remain same for the whole life of assets.
Given:
Cost of Assets = $3,000,000
Life of assets = 8 years
Residual value = $120,000
A. Depreciation expenses for the year 2016 and 2017:
Depreciation expenses for 2016 = [($3,000,000 - $120,000) / 8]*10/12
= [ $2,880,000 / 8] * 10/12
= $360,000 * 10 / 12
= $300,000
Note: Machine was purchased on 28th Feb. so for 2016 depreciation was calculated for 10 months only.
Depreciation expenses for 2017 = ($3,000,000 - $120,000)/8
= $2,880,000 / 8
= $360,000 per year
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