Question

Exercise 11-6 Martinez Company purchased equipment for $270,000 on October 1, 2017. It is estimated that the equipment will have a useful life of 8 years and a salvage value of $15,000. Estimated production is 40,800 units and estimated working hours are 19,700. During 2017, Martinez uses the equipment for 520 hours and the equipment produces 1,000 units. Compute depreciation expense under each of the following methods. Martinez is on a calendar-year basis ending December 31. (Round rate per hour and rate per unit to 2 decimal places, e.g. 5.35 and final answers to 0 decimal places, e.g. 45,892.) (a) Straight-line method for 2017 $ (b) Activity method (units of output) for 2017 $ (c) Activity method (working hours) for 2017 $ (d) Sum-of-the-years'-digits method for 2019 $ (e) Double-declining-balance method for 2018 $

Answer 1

a. Straight-line Method :

Annual depreciation = ( Cost - Salvage Value ) / Estimated Useful Life = $ ( 270,000 - 15,000 ) / 8 years = $ 31,875

Depreciation expense for 2017 = $ 31,875 x 3/12 = $ 7,969

b. Activity ( units of output) Method:

Depreciation expense per unit of output = ( Cost - Salvage Value ) / Estimated Production in Units = $ ( 270,000 - 15,000 ) / 40,800 units = $ 6.25

Depreciation expense for 2017 = 1,000 units x $ 6.25 = $ 6,250

c. Activity ( working hours ) Method :

Depreciation expense per working hour = ( Cost - Salvage Value ) / Estimated Working Hours = $ ( 270,000 - 15,000 ) / 19,700 = $ 12.94

Depreciation expense for 2017 = $ 12.94 x 520 hours = $ 6,729

d. Sum-of the years' digits method for 2019 :

Depreciation expense : October 1 2017 - September 30 2018 : 8 / 36 x $ ( 270,000 - 15,000) = $ 56,667

Depreciation expense : October 1, 2018 - September 30, 2019 : 7 / 36 x $ ( 270,000 - 15,000) = $ 49,583

Depreciation expense for Oct 1, 2019 - December 31 2019 : 6 / 36 x $ ( 270,000 - 15,000) x 3 / 12 = $ 10,625.

Depreciation expense for 2019 = $ 49,583 x 9 / 12 + $ 10,625 = $ 47,812

e. Double declining balance method :

Double declining depreciation rate = 100 / 8 * 2 = 25 %.

Depreciation expense for 2017 = $ 270,000 x 25 % x 3/12 = $ 16,875.

Depreciation expense for 2018 = $ ( 270,000 - 16,875 ) x 25 % = $ 63,281