Chapter 7, Problem 48E

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.

Answer to Problem 48E

Method	Depreciation expense for 2019	Depreciation expense for 2020
Straight line method	1655	1655
Double declining balance method	3480	2088
Units of production method	1920	1600

Explanation of Solution

Calculation of depreciation expense using:

1. Straight line method for 2019 and 2020:

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.

2. Double declining balance method for 2019 and 2020:

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.

Depreciation expense for 2020

= declining rate * cost of the machine

= 0.4 * 5220 = 2088

3. Units of production method for 2019 and 2020:

Under this method first we have to calculate the depreciation cost per unit using the following formula:

Depreciation cost per unit

= (cost − residual value) / expected usage of the asset

= (8700 − 425) / 2000000 = 0.004

Then the depreciation expense is calculated by multiplying the cost per unit with the actual usage of the machine. As per the given information the copying machine had printed 480000 copies in 2019 and 400000 copies in 2020.

Depreciation expense for 2019

= cost per unit * actual usage of the machine

= 0.004 * 480000 = 1920

Depreciation expense for 2020

= cost per unit * actual usage of the machine

= 0.004 * 400000 = 1600

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?

Answer to Problem 48E

Method	Book value at the end of 2019	Book value at the end of 2020
Straight line method	7045	5390
Double declining balance method	5220	3132
Units of production method	6780	5180

Explanation of Solution

The book value is calculated by deducting each year depreciation expense from the cost of the machine.

Under straight line method:

End of Year	Depreciation expense	Accumulated Depreciation	Book Value
			8700
2019	1655	1655	7045
2020	1655	3310	5390

Under double declining balance method:

End of Year	Depreciation expense	Accumulated Depreciation	Book Value
			8700
2019	3480	3480	5220
2020	2088	5568	3132

Under units of production method:

End of Year	Depreciation expense	Accumulated Depreciation	Book Value
			8700
2019	1920	1920	6780
2020	1600	3520	5180

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?

Answer to Problem 48E

If the company opts for straight line then the depreciation expenses will be less and the asset book value will be higher in the initial years but during latter stages the expenses will be higher and asset value will be less.

Explanation of Solution

Under double declining balance method the depreciation expenses in the initial periods are higher and hence the book value of the machine will be less but in the latter stages of the machine the depreciation expense become less and hence the book value increases.

Whereas in straight line method the depreciation expense remains same every year until the useful period of the asset and hence the depreciation expense in the initial years will be less and book value will be higher but during latter stages the book value becomes very less when compared to the double declining balance method.