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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

Clearcopy, a printing company, acquired a new press on January 1, 2019. The press cost $173,400 and had an expected life of 8 years or 4,500,000 pages and an expected residual value of $15,000. Clearcopy printed 675,000 pages in 2019.

Required:

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

2. What is the book value of the machine at the end of 2019 under each method?

1.

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 the straight-line method. In this method, every year until the useful life of the asset, an equal amount of assets cost to depreciation expense is allocated.

Double declining balance method:

In this method depreciation, the book value of the 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 become 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 the asset. Once the company estimates the usage rate of the asset, the depreciation expense is calculated based on the usage rate.

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

Explanation

Calculation of depreciation expense for 2019 using:

  1. Straight line method:
  2. Under straight-line method the depreciation expense is calculated using the following formula:

    Depreciation expense

      = (cost residual value)expected useful life

      = (173400 15000)8= 19800

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

    Double declining balance rate

      = (1useful life) × 2

      = (18) × 2=0.25or25%

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

    Depreciation expense

      = declining rate ×cost of the machine

      = 0

2.

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 the straight-line method. In this method, every year until the useful life of the asset, an equal amount of assets cost to depreciation expense is allocated.

Double declining balance method:

In this method depreciation, the book value of the 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 become 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 the asset. Once the company estimates the usage rate of the asset, the depreciation expense is calculated based on the usage rate.

To calculate:

The book value of machine at the end of 2019 each method.

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