Concept explainers
1.
Calculate the
1.
Explanation of Solution
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.
Calculate the depreciation expense of Company W under straight line method as follows:
Therefore, the depreciation expense of Company W under straight line method is $22,500.
2.
Calculate the depreciation expense of Company W for 2016 and 2017 under activity method based on hours worked.
2.
Explanation of Solution
Activity method: In this method of depreciation, the amount of depreciation is charged based on the units of production or hours worked each year. When the usefulness of an asset is related to the production cost of a unit, this method is more appropriate to use.
Calculate the depreciation expense of Company W for 2016 and 2017 under activity method based on hours worked as follows:
2016:
2017:
Working note (1):
Calculate the cost per hour.
3.
Calculate the depreciation expense of Company W for 2016 and 2017 under activity method based on units of output.
3.
Explanation of Solution
Calculate the depreciation expense of Company W for 2016 and 2017 under activity method based on units of output as follows:
2016:
2017:
Working note (2):
Calculate the cost per unit.
4.
Calculate the depreciation expense of Company W for 2016 and 2017 under sum-of years’ digit method.
4.
Explanation of Solution
Sum-of- the-years’ digits method: Sum-of-the years’ digits method determines the depreciation by multiplying the depreciable base and declining fraction.
Calculate the depreciation expense of Company W for 2016 and 2017 under sum-of years’ digit method as follows:
Year |
Depreciable Base ($) (3) |
Depreciation rate per year |
Depreciation expense ($) | ||
2016 | 650,000 | = | 61,905 | ||
2017 | 650,000 | = | 58,810 |
Table (1)
Working note (3):
Calculate the depreciable base of asset.
Working note (4):
Calculate the denominator of the fraction for sum-of-the-year’s digit.
5.
Calculate the depreciation expense of Company W for 2016 and 2017 under the double-declining balance method.
5.
Explanation of Solution
Double-declining-balance method: The depreciation method which assumes that the consumption of economic benefits of long-term asset is high in the early years but gradually declines towards the end of its useful life, is referred to as double-declining-balance method
Calculate the depreciation expense of Company W for 2016 and 2017 under the double-declining balance method as follows:
2016:
2017:
Working note (5):
Compute the depreciation rate:
Useful life = 20 years
6.
Calculate the depreciation expense of Company W for 2016 and 2017 under the 150%-declining balance method.
6.
Explanation of Solution
Calculate the depreciation expense of Company W for 2016 and 2017 under the 150%- declining balance method as follows:
2016:
2017:
Working note (6):
Compute the depreciation rate:
Useful life = 20 years
7.
Identify the effect of the depreciation expense under straight line, sum of the year’s digit, and declining balance methods, assume Company W used a service life of 16 years, 80,000 hours, or 75,000 units of output.
7.
Explanation of Solution
Identify the effect of the depreciation expense under straight line, sum of the year’s digit, and declining balance methods, assume Company W used a service life of 16 years, 80,000 hours, or 75,000 units of output as follows:
Straight line method:
Activity method (hours worked):
2016:
2017:
Working note (7):
Calculate the cost per hour.
Activity method (unit of output):
2016:
2017:
Working note (8):
Calculate the cost per unit.
Sum-of- the-years’ digits method:
Year |
Depreciable Base ($) (3) |
Depreciation rate per year |
Depreciation expense ($) | ||
2016 | 650,000 | = | 76,471 | ||
2017 | 650,000 | = | 71,691 |
Table (2)
Working note (9):
Calculate the denominator of the fraction for sum-of-the-year’s digit.
Double-declining-balance method:
2016:
2017:
Working note (10):
Compute the depreciation rate:
Useful life = 16 years
150%- declining balance method:
2016:
2017:
Working note (11):
Compute the depreciation rate:
Useful life = 16 years
When the service life of an asset decreases, the depreciation expense gets increased under straight line, sum of year’s digit, and declining balance method.
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