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Cornerstones of Financial Accounti...

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Jay Rich + 1 other
ISBN: 9781337690881

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Cornerstones of Financial Accounti...

4th Edition
Jay Rich + 1 other
ISBN: 9781337690881
Textbook Problem
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Depreciation Methods

Berkshire Corporation purchased a copying machine for $8,700 on January 1, 2019. The machine’s residual value was $42S and its expected life was 5 years or 2,000,000 copies. Actual usage was 480,000 copies the first year and 400,000 the second year.

Required:

1. Compute depreciation expense for 2019 and 2020 using the (a) straight-line method, (b) double-declining-balance method, and (c) units-of-production method.

2. For each depreciation method, what is the book value of the machine at the end 2019? At the end of the 2020?

3. CONCEPTUAL CONNECTION Assume that Berkshire uses the double-declining-balance method of depreciation. What is the effect on assets and income relative to if Berkshire had used the straight-line method of depreciation instead of the double-declining-balance method of depreciation?

To determine

Concept introduction:

Straight-line Depreciation:

Depreciation is done by allocating the cost of the fixed assets other than land to expense over the useful life of the asset. The most commonly used method of depreciation is straight line method. In this method every year until the useful life of the asset, equal amount of assets cost to depreciation expense is allocated. The formula to calculate straight line depreciation is:

Straight line depreciation = (cost − residual value) / expected useful life

Double declining balance method:

In this method depreciation the book value of an asset declines every year by the constant depreciation rate and hence the depreciation amounts are larger in the initial periods of asset’s life but becomes relatively smaller in the later years. This method is applied for those assets which become obsolete due to technological changes.

Units of production method:

In this method the depreciation expense is determined on the basis of the usage of asset. Once the company estimates the usage rate of the asset then the depreciation expense is calculated based on the usage rate.

Requirement 1:

Compute depreciation expense for 2019 and 2020 using (a) straight line method, (b) double declining balance method and (c) units of production method.

Explanation

Calculation of depreciation expense using:

  1. Straight line method for 2019 and 2020:
  2. Under straight line method the depreciation expense is calculated using the following formula:

    Depreciation expense

    = (cost − residual value) / expected useful life

    = (8700 − 425) / 5 = 1655

    The depreciation expense for 2020 also remains the same under this method.

  3. Double declining balance method for 2019 and 2020:
  4. Under this method first we have to calculate the double declining balance rate and the formula is:

    Double declining balance rate

    = (1 / useful life) * 2

    = (1 / 5) * 2 = 0.4 or 40%

    Then the depreciation expense is calculated by multiplying the double declining balance rate with the book value of the machine.

    Depreciation expense for 2019

    = declining rate * cost of the machine

    = 0.4 * 8700 = 3480

    For 2020 we have to deduct the 2019 depreciation expense of 3480 from the cost of the machine and then multiply it with the declining rate...

To determine

Concept introduction:

Straight-line Depreciation:

Depreciation is done by allocating the cost of the fixed assets other than land to expense over the useful life of the asset. The most commonly used method of depreciation is straight line method. In this method every year until the useful life of the asset, equal amount of assets cost to depreciation expense is allocated. The formula to calculate straight line depreciation is:

Straight line depreciation = (cost − residual value) / expected useful life

Double declining balance method:

In this method depreciation the book value of an asset declines every year by the constant depreciation rate and hence the depreciation amounts are larger in the initial periods of asset’s life but becomes relatively smaller in the later years. This method is applied for those assets which become obsolete due to technological changes.

Units of production method:

In this method the depreciation expense is determined on the basis of the usage of asset. Once the company estimates the usage rate of the asset then the depreciation expense is calculated based on the usage rate.

Requirement 2:

To explain:

What is the book value of machine at the end of 2019 and 2020 under each method?

To determine

Concept introduction:

Straight-line Depreciation:

Depreciation is done by allocating the cost of the fixed assets other than land to expense over the useful life of the asset. The most commonly used method of depreciation is straight line method. In this method every year until the useful life of the asset, equal amount of assets cost to depreciation expense is allocated. The formula to calculate straight line depreciation is:

Straight line depreciation = (cost − residual value) / expected useful life

Double declining balance method:

In this method depreciation the book value of an asset declines every year by the constant depreciation rate and hence the depreciation amounts are larger in the initial periods of asset’s life but becomes relatively smaller in the later years. This method is applied for those assets which become obsolete due to technological changes.

Units of production method:

In this method the depreciation expense is determined on the basis of the usage of asset. Once the company estimates the usage rate of the asset then the depreciation expense is calculated based on the usage rate.

Requirement 3:

To explain:

If Berkshire uses double declining balance method then what is the effect on assets and income if he had opted for straight line method instead of double declining balance method?

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