Chapter 9, Problem 9.8AP

(a)

To determine

Methods of Depreciation: Depreciation refers to the reduction in the monetary value of a fixed asset due to its wear and tear, or obsolescence. It is a method of distributing the cost of the fixed assets over its estimated useful life.

The three methods of depreciation are:

• Straight-line method: Under the straight-line method of depreciation, the same amount of depreciation is allocated every year over the estimated useful life of an asset.
• Units-of-activity method: In this method of depreciation, the amount of depreciation is charged based on the unit of production each year.
• Double-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.

To Compute: the amount of accumulated depreciation on each machine at December 31^st, 2018.

Explanation of Solution

Computethe amount of accumulated depreciation on each machine at December 31^st, 2018.

Year	Computation	Accumulated depreciation December 31st
Machine 1 Straight-line method
2015	$\$84,000\left(1\right)\times 12.5\%\left(2\right)=\$10,500$	$10,500
2016	$\$84,000\times 12.5\%=\$10,500$	$21,000 $(\$10,500+\$10,500)$
2017	$\$84,000\times 12.5\%=\$10,500$	$31,500 $(\$21,000+\$10,500)$
2018	$\$84,000\times 12.5\%=\$10,500$	$42,000 $(\$31,500+\$10,500)$
Machine 2 Declining-balance method
2016	$\$85,000\times 40\%\left(3\right)\times \frac{6}{12}=\$17,000$	$17,000
2017	$\$68,000\times 40\%=\$27,200$	$44,200 $(\$17,000+\$27,200)$
2018	$\$40,800\times 40\%=\$16,320$	$60,520 $(\$44,200+\$16,320)$
Machine 3 Units-of-activity method
2016	$\text{800}\text{hours}\times \$2\left(4\right)=\$1,600$	$1,600
2017	$\text{4,500}\text{hours}\times \$2=\$9,000$	$10,600 $(\$1,600+\$9,000)$
2018	$\text{6,000}\text{hours}\times \$2=\$12,000$	$22,600 $(\$10,600+\$12,000)$

Table (1)

Working notes:

Compute depreciable cost for straight line method for Machine 1.

$\begin{array}{c}\text{Depreciable cost}=\text{Cost}-\text{Salvage value}\\ \text{= \$96,000 – \$12,000}\\ \text{=\$84,000}\end{array}$ (1)

Determine the depreciation rate for straight line method for Machine 1.

$\begin{array}{c}\text{Depreciation}\text{rate = }\frac{\text{1}}{\text{Useful}\text{life}}\times 100\\ =\frac{1}{8\text{years}}\times 100\\ =12.5\%\end{array}$ (2)

Compute depreciable rate for declining-balance method for Machine 2.

$\begin{array}{c}\text{Depreciation}\text{rate = }\frac{\text{1}}{\text{Useful}\text{life}}\times 100\times 2\\ =\frac{1}{5}\times 100\times 2\\ =40\%\end{array}$ (3)

Compute depreciation per unit for units-of-activity method for Machine 3.

$\begin{array}{c}\text{Depreciation per unit = }\frac{\text{Cost}-\text{Salvage value}}{\text{Estimated units of useful life}}\\ =\frac{66,000-6,000}{30,000}\\ =\$2\text{per unit}\end{array}$ (4)

Note:

Double-declining-balance ignores the salvage value for calculating depreciation.

(b)

To determine

To Calculate: the amount of depreciation expense for Machine 2 for 2016 and 2017.

Explanation of Solution

Calculate the amount of depreciation expense for Machine 2 for 2016 and 2017.

For 2016:

Cost of the Machine 2= $85,000

Depreciation Rate =40% (3)

Number of months used in 2016 = 9 months (April 1, 2016-December 31, 2016)

$\begin{array}{c}\text{Depreciation =}\left[\begin{array}{l}\text{Machine cost}\times \text{Depreciation rate}\\ \times \frac{\text{No}\text{. of months used}}{12}\end{array}\right]\\ =\$85,000\times 40\%\times \frac{9}{12}\\ =\$25,500\end{array}$ (5)

For 2017:

Cost of the Machine 2= $85,000

Accumulated Depreciation =$25,500 (5)

Depreciation Rate =40% (3)

Number of months used in 2017 = 12 months (January 1, 2017-December 31, 2017)

$\begin{array}{c}\text{Depreciation =}\left[\begin{array}{l}\left(\begin{array}{l}\text{Machine cost}-\\ \text{Accumulated}\text{Depreciation}\end{array}\right)\times \text{Depreciation rate}\\ \times \frac{\text{No}\text{. of months used}}{12}\end{array}\right]\\ =\left(\$85,000-\$25,500\right)\times 40\%\times \frac{12}{12}\\ =\$23,800\end{array}$

Conclusion

Therefore, the amount of depreciation expense for Machine 2 for 2016 is $25,500 and 2017 is $23,800.