On January 1, 2017, a machine was purchased for $120,000. The machine has an estimated salvage value of $6,000 and an estimated useful life of 6 years. The machine can operate for 200,000 hours before it needs to be replaced. The company closed its books on December 31 and operates the machine as follows: 2017, 35,000 hrs; 2018, 45,000 hrs; 2019, 55,000 hrs; 2020, 30,000 hrs; 2021, 20,000 hrs; 2022, 15,000 hrs. (a) Compute the annual depreciation charges over the machine’s life assuming a December 31 year-end for each of the following depreciation methods: (1) Straight-line method. (2) Activity method. (3) Sum- of-the-years’-digits method. (4) Double-declining-balance method. (b) Assume a fiscal year-end of March 31. Compute the annual depreciation charges over the asset’s life applying each of the following methods: (1) Straight-line method. (2) Sum-of-the-years’-digits method. (3) Double-declining-balance method.
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.
On January 1, 2017, a machine was purchased for $120,000. The machine has an estimated salvage
value of $6,000 and an estimated useful life of 6 years. The machine can operate for 200,000 hours
before it needs to be replaced. The company closed its books on December 31 and operates the
machine as follows: 2017, 35,000 hrs; 2018, 45,000 hrs; 2019, 55,000 hrs; 2020, 30,000 hrs; 2021,
20,000 hrs; 2022, 15,000 hrs.
(a) Compute the annual
for each of the following depreciation methods: (1) Straight-line method. (2) Activity method. (3) Sum-
of-the-years’-digits method. (4) Double-declining-balance method.
(b) Assume a fiscal year-end of March 31. Compute the annual depreciation charges over the asset’s life
applying each of the following methods: (1) Straight-line method. (2) Sum-of-the-years’-digits method.
(3) Double-declining-balance method.
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