Concept explainers
Depreciation is the amount of decrease in the value of an asset within a set time period due to wear and tear of that particular asset. It helps in readjusting the actual cost of the particular asset o which the depreciation is applied.
Double Declining Balance Method:
It is a method of depreciation in which the rate of depreciation is double the rate of
Straight Line Depreciation:
Straight line depreciation is one of the methods of depreciation in which fixed rate of depreciation is provided throughout the course of depreciation on a particular asset.
Units of Production Depreciation Method:
This is a method of depreciation where the depreciation is not applied as straight line and is calculated with respect to the units that a particular asset produces gives.
The amount of depreciation.
Explanation of Solution
Given,
Cost of machine is $324,000.
Salvage value is $30,000.
Formula to calculate Depreciable cost:
Substitute $257,000 as cost of machine and $20,000 as salvage value,
Total depreciable cost is $294,000.
Computation of depreciation amount:
Year | Straight line($) | Units of production($) | Double Declining Balance($) |
1 | 58,800 | 71,120 | 128,750 |
2 | 58,800 | 64,080 | 64,375 |
3 | 58,800 | 63,400 | 32,188 |
4 | 58,800 | 68,720 | 12,187 |
5 | 58,800 | 26,680 | 11,990 |
Total | 294,000 | 294,000 | 294,000 |
Working Notes:
Straight line method
Calculate Depreciation:
Depreciation that will be charged in the 4 years with respect to straight line method is $58,800.
Year 1
Calculate depreciation with respect to units of production:
Depreciation per unit is 0.2.
Computation of depreciation,
Depreciation that will be charged in the first year is $71,120.
Year 2
Given,
Units produced are $320,400.
Depreciation per unit is 0.2 per unit.
Computation of Depreciation:
Depreciation that will be charged in the second year is $64,080.
Year 3
Depreciation per unit is 0.2 per unit.
Computation of Depreciation:
Depreciation that will be charged in the third year is $63,400.
Year 4
Depreciation per unit is 0.2 per unit.
Computation of Depreciation:
Depreciation charged in the 4th year is $68,720.
Year 5
Depreciation per unit is 0.2 per unit.
Computation of Depreciation:
But the depreciation will be charged $26,680 only as depreciation can’t be charged on the salvage value of the asset.
Double Declining Balance method
Computation of Depreciation rate:
Double declining depreciation rate is 40%.
Year 1
Computation of depreciation in the first year:
Depreciation that will be charged in the first year is $129,600.
Year 2
Computation of book value in year 2:
Book value at the beginning of the second year is $194,400.
Computation of depreciation in the second year:
Depreciation that will be charged in the second year is $77,760.
Year 3
Book value of the asset in the year 2 is $194,400.
Computation of book value in year 3:
Book value at the beginning of the third year is $116,640.
Computation of depreciation in the third year:
Depreciation that will be charged in the third year is $46,656.
Year 4
Book value of the asset in the year 3 is $116,640.
Computation of book value in year 4:
Computation of depreciation in the 4th year:
Depreciation that will be charged in the 5th year is $27,994.
Year 5
Book value of the asset in the year 4 is $69,984.
Computation of book value in year 5:
Computation of depreciation in the 5th year:
But the depreciation charged will only be 11,990 as the depreciation can’t be charged from the salvage value of the asset.
Want to see more full solutions like this?
Chapter 8 Solutions
Gen Combo Ll Financial Accounting Fundamentals; Connect Access Card
- Depreciation On July 1, 2016, Dexter Corp. buys a computer system for $260,000 in cash. Assume that the computer is expected to have a four-year life and an estimated salvage value of $20,000 at the end of that time. Required Prepare the journal entry to record the purchase of the computer on July 1, 2016. Compute the depreciable cost of the computer. Using the straight-line method, compute the monthly depreciation. Prepare the adjusting entry to record depreciation at the end of July 2016. Compute the computers carrying value that will be shown on Dexters balance sheet prepared on December 31, 2016.arrow_forward(Appendix 11.1) Auburn Company purchased an asset on January 1, Year 1, for 150,000. The asset has a MACRS life of 7 years. The residual value of the asset is 35,000. Calculate the depreciation expense for Year 1 and Year 2 using MACRS.arrow_forwardDepreciation Schedules Dunn Corporation acquired a new depreciable asset for $135,000. The asset has a 5-year expected life and a residual value of zero. Required: 1. Prepare a depreciation schedule for all 5 years of the assets expected life using the straight-line depreciation method. 2. Prepare a depreciation schedule for all 5 years of the assets expected life using the double-declining-balance depreciation method. 3. CONCEPTUAL CONNECTION What questions should be asked about this asset to decide which depreciation method to use?arrow_forward
- Working Backward: Depreciation Polk Corp. purchased new store fixtures for $55,000 on January 31, 2014. Polk depreciates assets using the straight-line method and estimated a salvage value for the machine of $5,000. On its December 31, 2016, balance sheet, Polk reported the following: Required What is the yearly amount of depreciation expense for the store fixtures? What is the estimated useful life in years for the store fixtures? Explain your answer.arrow_forward(Appendix 11.1) Depreciation for Financial Statements and Income Tax Purposes Dinkle Company purchased equipment for 50,000. The equipment has an estimated residual value of 5,000 and an expected useful life of 10 years. Dinkle uses straight-line depreciation for its financial statements. Required: What is the difference between the companys income before taxes reported on its financial statements and the taxable income reported on its tax return in each of the first 2 years of the assets life if the asset was purchased on January 2, 2019, and its MACRS life is 5 years?arrow_forwardINTANGIBLE LONG-TERM ASSETS Track Town Co. had the following transactions involving intangible assets: Jan. 1 Purchased a patent for leather soles for 10,000 and estimated its useful life to be 10 years. Apr. 1 Purchased a copyright for a design for 15,000 with a life left on the copyright of 25 years. The estimated remaining (economic) life of the copyright is five years. July 1 Signed a five-year franchise agreement and opened a Starting Line high-tech running shoe store. Paid 50,000 to the franchisor. REQUIRED 1. Using the straight-line method, calculate the amortization of the patent, copyright, and franchise. 2. Prepare general journal entries to record the end-of-year amortizations.arrow_forward
- Effect of depreciation on net income Tuttle Construction Co. specializes in building replicas of historic houses. Tim Newman, president of Tuttle Construction, is considering the purchase of various items of equipment on July 1, 2014, for 400,000. The equipment would have a useful life of five years and no residual value. In the past, all equipment has been leased. For tax purposes, Tim is considering depreciating the equipment, by the straight-line method. He discussed the matter with his CPA and learned that, although the straight-line method could be elected, it was to his advantage to use the Modified Accelerated Cost Recovery System (MACKS) for tax purposes, lie asked for your advice as to which method to use for tax purposes. 1. Compute depreciation for each of the years (2014, 2015, 2016, 2017, 2018, and 2019) of useful life by (a) the straight-line method and (b) MACRS. In using the straight-line method, one-half year's depreciation should be computed for 2014 and 2019.Use the MACRS rates presented in Exhibit 9. 2. Assuming that income before depreciation and income tax is estimated to be 750,000 uniformly per year and that the income tax rate is 40%, compute the net income for each of the years 2014, 2015, 2016, 2017, 2018, and 2019 if (a) the straight-line method is used and (b) MACRS is used. 3. What factors would you present for Tim's consideration in the selection of a depreciation method?arrow_forwardChange in Estimate Assume that Bloomer Company purchased a new machine on January 1, 2016, for $80,000. The machine has an estimated useful life of nine years and a residual value of $8,000. Bloomer has chosen to use the straight-line method of depreciation. On January 1, 2018, Bloomer discovered that the machine would not be useful beyond December 31, 2021, and estimated its value at that time to be $2,000. Required Calculate the depreciation expense, accumulated depreciation, and book value of the asset for each year 2016 to 2021. Was the depreciation recorded wrong in 2016 and 2017? If so, why was it not corrected?arrow_forward
- Financial Accounting: The Impact on Decision Make...AccountingISBN:9781305654174Author:Gary A. Porter, Curtis L. NortonPublisher:Cengage LearningCornerstones of Financial AccountingAccountingISBN:9781337690881Author:Jay Rich, Jeff JonesPublisher:Cengage LearningFinancial & Managerial AccountingAccountingISBN:9781285866307Author:Carl Warren, James M. Reeve, Jonathan DuchacPublisher:Cengage Learning
- Intermediate Accounting: Reporting And AnalysisAccountingISBN:9781337788281Author:James M. Wahlen, Jefferson P. Jones, Donald PagachPublisher:Cengage LearningCollege Accounting, Chapters 1-27AccountingISBN:9781337794756Author:HEINTZ, James A.Publisher:Cengage Learning,