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Intermediate Accounting: Reporting...

3rd Edition
James M. Wahlen + 2 others
ISBN: 9781337788281

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BuyFindarrow_forward

Intermediate Accounting: Reporting...

3rd Edition
James M. Wahlen + 2 others
ISBN: 9781337788281
Textbook Problem
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Hathaway Company purchased a copying machine for $8,700 on October 1, 2019. The machine’s residual value was $500 and its expected service life was 5 years. Hathaway computes depreciation expense to the nearest whole month.

Required:

  1. 1. Compute depredation expense (rounded to the nearest dollar) for 2019 and 2020 using the:
  2. a. straight-line method
  3. b. sum-of-the-years’-digits method
  4. c. double-declining-balance method
  5. 2. Next Level Which method produces the highest book value at the end of 2020?
  6. 3. Next Level Which method produces the highest charge to income in 2020?
  7. 4. Next Level Over the life of the asset, which method produces the greatest amount of depreciation expense?

1.

To determine

Compute the depreciation expenses of Company H for the following methods:

  1. a. Straight line method.
  2. b. Sum-of the year’s digits method.
  3. c. Double declining balance method.
Explanation

Depreciation expense: Depreciation expense is a non-cash expense, which is recorded on the income statement reflecting the consumption of economic benefits of long-term asset on account of its wear and tear or obsolesces.

Straight-line depreciation method: The depreciation method which assumes that the consumption of economic benefits of long-term asset could be distributed equally throughout the useful life of the asset is referred to as straight-line method.

Sum-of- the-years’ digits method: Sum-of-the years’ digits method determines the depreciation by multiplying the depreciable base and declining fraction.

Double-declining-balance method: The depreciation method which assumes that the consumption of economic benefits of long-term asset is high in the early years but gradually declines towards the end of its useful life, is referred to as double-declining-balance method

  1. a. Calculate the depreciation expense of Company H under straight line method as follows:

For 2019:

Depreciation expenses=[Acquisition cost – Residual valueUseful life×Depreciation expense incurredMonths in a year]=$8,700$5005 years×3 (October to December)12 =$410

For 2020:

Depreciation expenses=Acquisition cost – Residual valueUseful life=$8,700$5005 years=$1,640

  1. b. Calculate the depreciation expense of Company H for 2019 and 2020 under sum-of years’ digit method as follows:
Year

Depreciable

Base

 ($) (1)

 

Depreciation

rate per year (2)

 

Depreciation expense

($)

20198,200×515×3 Months12=683
20208,200×515×9 Months12=2,050
20208,200×415×3 Months12=547

Table (2)

Note: The depreciation expense for 2020 is $2,597 ($2,050+$547)

Working note (1):

Calculate the depreciable base of asset.

Depreciable base = Purchase price –Residual value = $8,700–$500=$8,200

Working note (2):

Calculate sum-of-the-digits.

Sum-of-the-digits = n×(n+1)2=5×(5+1)2=5×62=15

Note:

In this case, the depreciation rate of (515)  for 1 year has been calculated from October 2019 to November 2019

2.

To determine

Describe the method that produces the highest book value at the end of 2020.

3.

To determine

Describe the method that produces the highest charge to income in the year 2020.

4.

To determine

Indicate the method that produces the greatest amount of depreciation over the life of the asset.

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