Question

Maserati spa purchased a new machine for its assembly process on August 1, 2019. The cost of this machine was 150,000. The company estimated that the machine would have a residual value of 24,000 at the end of its life. It’s life is estimated at 5 years and it’s working hours are estimated at 21,000 hours. Year end is December 31

Compute the depreciation expense under the following methods. Each of the following should be considered unrelated.

A. Straight line depreciation for 2019

B. Activity method for 2020 assuming that the machine usage was 800 hours

C. Sum of the years digits for 2020

D. Double declining balance for 2020

Answer 1

A. Straight line depreciation for 2019	$    10,500.00
B. Activity method for 2020 assuming that the machine usage was 800 hours	$      4,800.00
C. Sum of the years digits for 2020	$    38,500.00
D. Double declining balance for 2020	$    50,000.00

Workings

A. Straight line depreciation for 2019

(cost of this machine -  residual value)/estimated life

=(150,000-24000)/5

Straight line depreciation for 2019=$25200*5/12=$10500

B. Activity method for 2020 assuming that the machine usage was 800 hours

Depreciation Rate per hr =(cost of this machine -  residual value)/working hours are estimated

=(150,000-24000)/21000

=$6 Per hr

Depreciation =800 hrs * 6 per hr=$4800

C. Sum of the years digits for 2020

5+4+3+2+1=15

5/15*126000*7/2=$24500

4/15*126000*5/12=$14000

Depreciation Expense for 2020=$24500+14000=$38500

D. Double declining balance for 2020

Rate of Depreciation =1/5*2=40%

$150000*40%*5/12=$25000 in 2019

($150000-25000)*40% in year 2020 =$50000