Question

In: Accounting

compute the annual depreciation charges over the machine's life assuming a december 31 year end for each of the following depreciation methods.

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. Sum-of-the-years-digits method

        3.Double declining balance method

B. Assume a fiscal year end of september 30 .compute the annual depreciation charges over the machine's life applying each of the following methods.

 1. Straight line method    2. Sum-of-the-years-digits method

 3.Double declining balance method

    

Solutions

Expert Solution

Step 1: Calculation of Depreciation under straight line method.

A) 1.

                              Cost of the asset -  salvage value

 Depreciation =   ------------------------------------

                               estimated useful life of asset

Depreciation = (90,000 - 6000)/5

                     = 16800

This amount of depreciation will be charged every year till the useful life of the asset.                                

       
Straight line Method      
Year  Opening Balance Depreciation Closing Balance
1 90000 16800 73200
2 73200 16800 56400
3 56400 16800 39600
4 39600 16800 22800
5 22800 16800 6000

 

B)1.

Calculation of straight line depreciation for

      Depreciation for an year = 16800

      But it has been purchased after 3 months ,so depreciation has to be charged for 9 months 

 therefore , depreciation = 16800 x 9/12

                                       = 12,600

       
Straight line Method      
Year  Opening Balance Depreciation Closing Balance
1  (9 Months) 90000 12600 77400
2 77400 16800 60600
3 60600 16800 43800
4 43800 16800 27000
5 27000 16800 10200
6 (3 Months) 10200 4200 6000

 

Step 2: Calculation of depreciation under Double declining balance                        method.

A ) 3

Depreciation = 2 x (100% / Useful life of the asset)

                     = 2*20%= 40%

Depreciation 1 year = 90000 x 40% = 36000

Depreciation 2 year = [90000-36000] x 40 %

                                = 21,600

This is the way depreciation is calculated in Double declining Balance Method.

 

Double Declining Balance Method

 
       
Year  Opening Balance Depreciation Closing Balance
1 90000 36000 54000
2 54000 21600 32400
3 32400 12960 19440
4 19440 7776 11664
5 11664 5664 6000
       
    Residual value 6000

B.) 2

Depreciation = 2 x (100% / Useful life of the asset)

                     = 2*20%= 40%

Depreciation 1 year = 90000 x 40% = 36000

 But the machine was purchased after three months so 

      Depreciation = 36000 x 9/12 = 27000

       
Double Declining Balance Method  
Year  Opening Balance Depreciation Closing Balance
1(9 months) 90000 27000 63000
2 63000 25200 37800
3 37800 15120 22680
4 22680 9072 13608
5 13608 5443.2 8164.8
6(3 Months) 8164.8 2164.8 6000
       
    Residual value  6000

 

Step 3 :

A ) 2.

Calculation of depreciation under sum of years digits method

Depreciation =(Cost - salvage value ) x (year factor/ sum of years digits)

 Depreciation for 1st  year = (90000-6000) x (5 /15)

                                            = 28000

Depreciation for 2nd year = (90000-6000) x (4 /15)

                                             = 22400

Depreciation for 3rd year = (90000-6000) x (3 /15)

                                             = 16800

Depreciation for 4th year = (90000-6000) x (2 /15)

                                             = 11200

Depreciation for 5th year = (90000-6000) x (1 /15)

                                            = 5600

Sum of years digits method    
       
Year  Opening Balance Depreciation Closing Balance
1 90000 28000 56000
2 56000 22400 33600
3 33600 16800 16800
4 16800 11200 5600
5 5600 5600 0
       
    Residual Value 6000

 

B ) 3

Sum of years digits method    
Year  Opening Balance Depreciation Closing Balance
1 90000 21000 63000
2 63000 23800 39200
3 39200 18200 21000
4 21000 12600 8400
5 8400 7000 1400
6 1400 1400 0
       
    Residual Value 6000

 

 

 


Depreciation is charged annually over the useful life of the assets.

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