Question

Acquisition Cost and Depreciation Reveille, Inc., purchased Machine #204 on April 1, 2016, and placed the machine into production on April 3, 2016. The following information is relevant to Machine #204: Price $60,000 Freight-in costs 2,500 Preparation and installation costs 3,900 Labor costs during regular production operation 10,200 Credit terms 2/10, n/30 Total productive output 138,500 units The company expects that the machine could be used for 10 years, after which the salvage value would be zero. However, Reveille intends to use the machine only 8 years, after which it expects to be able to sell it for $9,800. The invoice for Machine #204 was paid April 10, 2016. The number of units produced in 2016 and 2017 was 23,200 and 29,000, respectively. Reveille computes depreciation expense to the nearest whole month. Required: Compute the depreciation expense for 2016 and 2017, using the following methods. Round your answer to the nearest dollar. Straight-line method: 2016 depreciation = $ 2017 depreciation = $ Sum-of-the-years'-digits method: 2016 depreciation = $ 2017 depreciation = $ Double-declining-balance method: 2016 depreciation = $ 2017 depreciation = $ Activity method (units of production): 2016 depreciation = $ 2017 depreciation = $

Answer 1

Cost of the asset = Price + Freight + Installaltion Cost = $60000 + $2500 + $3900 = $66400

1) Straight Line Method

Depreciation for the year 2016 = [(Cost of Asset-Salvage Value) / Useful Life of the Asset]*9/12 = [($66400-9800)/8]*9/12 = $5306.25

Depreciation for the year 2017 = (Cost of Asset-Salvage Value) / Useful Life of the Asset = ($66400-9800)/8 = $7075

As tehy are expecting to use machine for 8 years, & at the end of end they can sale it for $9800, salvage value is taken to be $9800.

2) Sum-of-the-years'-digits method

Life of Asset is 8 years, therefore Total Time = 1+2+3+4+5+6+7+8 = 36 years

Depreciation for 2016 (For 9 months) = [(66400-9800) / 36*8)]*9/12= $9433

Depreciation for 2017 = [(56600 / 36*8)*3/12] + [(56600 / 36*7)*9/12] = $11399

3)Double-declining-balance method

Depreciation = (66400)/8 = $8300

Depreciation rate = 8300/66400*100 = 12.5%

For double declining method, rate = 12.5*2 = 25%

Depreciation for 2016 for 9 months = (66400*25/100)*9/12 = $12450

For Year 2017 = (66400-12450)*25/100 = $13488

4)  Activity method (units of production)

Depreciation Base = (66400-9800) = $56600

Depreciation per Unit = $56600/138500 units = $0.4087

Depreciation for 2016 = 23200units x $0.4087 = $9482

Depreciation for 2017 = 29000units x $0.4087 = $11852