Chapter 9, Problem 2AP

a)

To determine

Prepare a complete depreciation schedule, beginning with 2012, under

1. 1) Straight line
2. 2) 200 percent declining balance
3. 3) 150 percent declining balance, switching to straight line when that maximizes depreciation expense.

Explanation of Solution

1. Straight-line Depreciation: Under the straight-line method of depreciation, the same amount of depreciation is allocated every year over the estimated useful life of an asset. The formula to calculate the depreciation cost of the asset using the residual value is shown as below:

$\text{Depreciation cost = }\frac{\left(\text{Cost of the asset}-\text{Residual value}\right)}{\text{Estimated useful life of the asset}}$

Prepare a complete depreciation table under straight line method.

Year	Computation	Depreciation Expense	Accumulated Depreciation	Book Value
2012	$\$100,000\times (1÷5\text{year)}\times \frac{1}{2}$	$10,000	$10,000	$98,000
2013	$\$100,000\times (1÷5\text{year)}$	20,000	30,000	78,000
2014	$\$100,000\times (1÷5\text{year)}$	20,000	50,000	58,000
2015	$\$100,000\times (1÷5\text{year)}$	20,000	70,000	38,000
2016	$\$100,000\times (1÷5\text{year)}$	20,000	90,000	18,000
2017	$\$100,000\times (1÷5\text{year)}\times \frac{1}{2}$	10,000	100,000	8,000

Table (1)

Working Notes:

Calculate the depreciable cost of the equipment, if cost of the equipment is $108,000 and the residual value of the equipment is $8,000.

Therefore, the depreciable cost of the equipment is $100,000$\left(\$108,000-\$8,000\right)$.

(1)

2. 200 percent declining balance method (Accelerated method): In this method of depreciation, the diminishing value of the asset is taken into consideration for determining the depreciation for the succeeding years.

$\text{200 percent declining-balance = }\left(\text{Cost of the asset}\right)\times \frac{200\%}{\text{Useful Life}}$

Depreciation rate for 200 percent declining balance method:

$\begin{array}{c}\text{Depreciation rate for 200 percent declining-balance = }\frac{200\%}{\text{Useful Life}}\\ =\frac{200\%}{5\text{years}}\\ =40\%\end{array}$

Prepare a complete depreciation table under 200 percent declining balance method.

Year	Computation	Depreciation Expense	Accumulated Depreciation	Book Value
2012	$108,000 $\times$ 40% $\times$$\frac{1}{2}$	$21,600	$21,600	$86,400
2013	86,400 $\times$ 40%	34,560	56,160	51,840
2014	51,840 $\times$ 40%	20,736	76,896	31,104
2015	31,104 $\times$ 40%	12,442	89,338	18,662
2016	18,662 $\times$ 40%	7,465	96,803	11,197
2017	100,000 – 96,803	3,197	100,000	8,000

Table (2)

3. 150 percent declining balance method (Accelerated method): In this method of depreciation, the diminishing value of the asset is taken into consideration for determining the depreciation for the succeeding years.

$\text{150\% declining-balance = }\left(\text{Cost }-\text{Accumulated Depreciation}\right)\times \frac{150\%}{\text{Useful Life}}$

Depreciation rate for 150 percent declining balance method:

$\begin{array}{c}\text{Depreciation rate for 150 percent declining-balance = }\frac{150\%}{\text{Useful Life}}\\ =\frac{150\%}{5\text{years}}\\ =30\%\end{array}$

Prepare a complete depreciation table under 150 percent declining balance method.

Year	Computation	Depreciation Expense	Accumulated Depreciation	Book Value
2012	$108,000 $\times$30% $\times$$\frac{1}{2}$	$16,200	$16,200	$91,800
2013	91,800 $\times$ 30%	27,540	43,740	64,260
2014	64,260 $\times$ 30%	19,278	63,018	44,982
2015	44,982 $\times$ 30%	13,495	76,513	31,487
2016	($31,487 – $8,000) ÷ 2 years	11,743.5	88,257	19,743
2017	($31,487 – $8,000) ÷ 2 years	11,743.5	100,000	8,000

Table (3)

Note: The method of depreciation for the years 2016, and 2017 are switched to straight line method. For the years 2016 and 2017, depreciation expense is maximized that is under the 150 percent declining-balance method the depreciation amount is $9,446 and under the straight line method depreciation amount is $11,743.5$\left(\left[\$31,487-\$8,000\right]÷2\text{years}\right)$.

Hence, the depreciation method is switched to straight line method with an amount of $11,743.5 depreciation expense.

b)

To determine

Identify the depreciation method that is most common for financial reporting purposes and explain.

Explanation of Solution

Straight line depreciation method is the most common depreciation method used for financial reporting. The main reason is that the amount of depreciation expense under straight-line method reported is very less in the initial years as compared to other depreciation methods.

c)

To determine

Compute the gain or loss from the sale of machine under each of the depreciation methods used in requirement (a), and explain whether that gain or loss reported in the company’s income statement has any direct cash effect.

Explanation of Solution

Disposal of Assets: Disposal is an activity of selling the worn-out assets that is no longer in need for the business, in return of some consideration.

Compute the gain or loss from the sale of machine under the straight line method.

Cash proceeds	$29,000
Book value at December 31, 2015	(38,000)
Loss on disposal	$(9,000)

Table (4)

Compute the gain or loss from the sale of machine under the 200 percent declining balance method.

Cash proceeds	$29,000
Book value at December 31, 2015	(18,662)
Gain on disposal	$10,338

Table (5)

Compute the gain or loss from the sale of machine under the 150 percent declining balance method.

Cash proceeds	$29,000
Book value at December 31, 2015	(31,487)
Loss on disposal	$(2,487)

Table (6)

In the income statement, there is no direct cash effect due to the gain or loss of sale of the machine. But, the sale proceeds of the machine ($29,000) has direct cash effect on the income statement.