Concept explainers
1(a)
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 determine: the amount of depreciation for four years ending December 31 by straight-line method.
1(a)
Explanation of Solution
Determinethe amount of depreciation for four years ending December 31 by straight-line method.
Year | Depreciation Expense (1) |
Year 1 | $71,250 |
Year 2 | $71,250 |
Year 3 | $71,250 |
Year 4 | $71,250 |
Total | $285,000 |
Table (1)
Working note:
Compute depreciable expense under
Cost of the equipment= $320,000
Residual value of the equipment = $35,000.
Estimated Useful life of the equipment = 4 years
Therefore, the amount of depreciation for four years ending December 31 by straight-line method is $71,250.
1(b)
the amount of depreciation for four years ending December 31 by units-of-activity method.
1(b)
Explanation of Solution
Determinethe amount of depreciation for four years ending December 31 by units-of-activity method.
Year | Number of Hours (A) | Depreciable Rate (B) (2) | Depreciation Expense (A×B) |
Year 1 | 7,200 | $14.25 | $102,600 |
Year 2 | 6,400 | $14.25 | $91,200 |
Year 3 | 4,400 | $14.25 | $62,700 |
Year 4 | 2,000 | $14.25 | $28,500 |
Total | $285,000 |
Table (2)
Working notes:
Determinethe depreciable rate of the equipment.
Cost of the equipment= $320,000
Residual value of the equipment = $35,000.
Estimated Useful life of the equipment = 20,000 operating hours.
Therefore, the amount of depreciation for four years ending December 31 by units-of-activity method are Year 1: $102,600, Year 2: $91,200, Year 3: $62,700, and Year 4: $28,500.
1(c)
the amount of depreciation for four year years ending December 31 by double-declining-balance method
1(c)
Explanation of Solution
Determinethe amount of depreciation for four years ending December 31 by double-declining-balance method.
Year | Depreciable Expense |
Year 1 | $160,000 (3) |
Year 2 | $80,000 (4) |
Year 3 | $40,000 (5) |
Year 4 | $5,000 (6) |
Total | $285,000 |
Table (3)
Working notes:
Compute depreciable expense for Year 1.
Compute depreciable expense for Year 2.
Compute depreciable expense for Year 3.
Compute depreciable expense for Year 4.
Note (6):
Since the depreciation expense should not exceed the residual value of $35,000. Thus, it should be adjusted to make the book value of the equipment (cost less accumulated depreciation) equal to its residual value. Thus, the depreciation expense for Year 4 would be
Therefore, the amount of depreciation for four years ending December 31 by double-declining-balance method are Year 1: $160,000, Year 2: $80,000, Year 3: $40,000, and Year 4: $5,000.
2.
the method that yields the highest depreciation expense for Year 1.
2.
Explanation of Solution
The method that yields the highest depreciation expense for Year 1 is double-declining-balance method that is, $160,000.
3.
the method that yields the most depreciation over the four-year life of the equipment.
3.
Explanation of Solution
As calculated above, the total depreciation expense under three method for the four-year life of the equipment is same, that is, $285,000. Thus, it cannot be determined
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Chapter 9 Solutions
Financial & Managerial Accounting
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