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Intermediate Accounting: Reporting...

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

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Intermediate Accounting: Reporting...

3rd Edition
James M. Wahlen + 2 others
ISBN: 9781337788281
Textbook Problem
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Depreciation Methods Lord Company purchased a machine on January 2, 2019, for $70,000. The machine had an expected residual value of $10,000, an expected life of 8 years or 24,000 hours, and a capacity to produce 100,000 units. During 2019, Lord produced 12,000 units in 2,500 hours. In 2020, Lord produced 15,000 units in 3,000 hours.

Required:

  1. 1. Prepare a schedule showing depreciation expense for 2019 and 2020 and the book value of the asset at the end of 2019 and 2020 for each of the following methods (round your answers to the nearest dollar):
    1. a. straight-line method
    2. b.activity method base on hours worked
    3. c. activity method based on units of output
    4. d.sum-of-the-years’-digits method
    5. e. double-declining-balance method
  2. 2. Next Level Under what conditions would it be appropriate to use each of the depreciation methods discussed above?

1.

To determine

Prepare a schedule screening the depreciation expenses, and book value of the asset for 2019 and 2020 of company L under the following methods:

  1. a. Straight line method
  2. b. Activity based method for hours worked.
  3. c. Activity based method for units of output.
  4. d. Sum-of the years-digits method.
  5. e. 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.

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.

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.

Prepare a schedule screening the depreciation expenses, and book value of the asset for 2019 and 2020 of company L under different method as follows:

SCHEDULE
Method BeginningBook Value (A)Depreciation (B)Ending Book Value (AB)
a. Straight-line Method   
2019$70,000 $7,500 (1) $62,500
2020$62,500 $7,500 (1)  $55,000
    
b. Activity based method for Hours worked   
2019$70,000 $6,250 (2)  $63,750
2020$63,750 $7,500 (2)   $56,250
    
c. Activity based method for Units of output   
2019$70,000 $7,200 (4)    $62,800
2020$62,800 $9,000 (4)    $53,800
    
d. Sum-of-the-years’-digits   
2019$70,000 $13,333 (6)      $56,667
2020$56,667 $11,667 (6)     $45,000
    
e. Double-declining-balance   
2019$70,000 $17,500 (9)$52,500
2020$52,500 $13,125 (9) $39,375

Table (1)

Working note (1):

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

For 2019:

Depreciation expenses=Acquisition cost – Residual valueUseful life =$70,000$10,0008 years=$7,500 per year

Therefore, the depreciation expense of Company L under straight line method is $22,500 and it will be same for each year.

Working note (2):

b. Calculate the depreciation expense of Company L for 2019 and 2020 under activity method based on hours worked as follows:

2019:

Depreciation expense  = (Hours worked  ×Cost per hour)=2,500 hours ×$2.50 per hour (3)=$6,250

2020:

Depreciation expense  = (Hours worked  ×Cost per hour)=3,000 hours ×$2.50 per hour (3)=$7,500

Working note (3):

Calculate the cost per hour.

Cost per hour = Cost of equipment Residual valueTotal estimated serivce hours=$70,000$10,00024,000 hours=$2

2.

To determine

State the conditions that would be more appropriate to use the given depreciation methods.

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