Gruman Company purchased a machine for $220,000 on January 2, 2019. It made the following estimates: Service life 5 years or 10,000 hours Production 200,000 units Residual value $20,000 In 2019, Gruman uses the machine for 1,800 hours and produces 44,000 units. In 2020, Gruman uses the machine for 1,500 hours and produces 35,000 units. Required: 1. Compute the depreciation expense for 2019 and 2020 under each of the following methods: a. straight-line b. sum-of-the-years’-digits (round to the nearest dollar) c. double-declining-balance d. activity method based on hours worked e. activity method based on units of output 2. For each method, what is the book value of the machine at the end of 2019? At the end of 2020? 3. Next Level If Gruman used a service life of 8 years or 15,000 hours and a residual value of $10,000, what would be the effect on (a) depreciation expense and (b) book value under the straight-line, sum-of-the-years’-digits, and double-declining-balance depreciation methods?
Depreciation Methods
The word "depreciation" is defined as an accounting method wherein the cost of tangible assets is spread over its useful life and it usually denotes how much of the assets value has been used up. The depreciation is usually considered as an operating expense. The main reason behind depreciation includes wear and tear of the assets, obsolescence etc.
Depreciation Accounting
In terms of accounting, with the passage of time the value of a fixed asset (like machinery, plants, furniture etc.) goes down over a specific period of time is known as depreciation. Now, the question comes in your mind, why the value of the fixed asset reduces over time.
E11-1
Service life 5 years or 10,000 hours
Production 200,000 units
Residual value $20,000
In 2019, Gruman uses the machine for 1,800 hours and produces 44,000 units. In 2020, Gruman uses the machine for 1,500 hours and produces 35,000 units.
Required: 1. Compute the depreciation expense for 2019 and 2020 under each of the following methods:
a. straight-line
b. sum-of-the-years’-digits (round to the nearest dollar)
c. double-declining-balance
d. activity method based on hours worked
e. activity method based on units of output
2. For each method, what is the book value of the machine at the end of 2019? At the end of 2020?
3. Next Level If Gruman used a service life of 8 years or 15,000 hours and a residual value of $10,000, what would be the effect on (a) depreciation expense and (b) book value under the straight-line, sum-of-the-years’-digits, and double-declining-balance depreciation methods?
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