Question

KC Corporation purchased a new machine for its assembly process on August 1, 2010. The cost of this machine was $150,000. The company estimated that the machine would have a salvage value of $24,000 at the end of its service life. Its life is estimated at 5 years and its working hours are estimated at 21,000 hours. Year-end is December 31. Instructions: Compute the depreciation expense under the following methods. (a) Straight-line depreciation. (b) Double-declining balance c) Search from the internet various accounting standards related to Depreciation.

Answer 1

(a) Depreciation using straight line method:-

= (Purchase Price - Salvage Value)/No of months

= (150,000 - 24,000)/60 months

= $2100 per month

Depreciation for the year 2010 - $2100 * 5 = $10,500

Year 2011 to 2014 - $2100 * 12 = $25,200 per year

Year 2015 - $2100 * 7 = $14,700

Total - 60 months - $126,000

(b) Depreciation using Double declining method:-

Double declining rate = Total Depreciation Rate / Depreciable Base * 2

= 100/5 * 2 = 40%

Year	Rate	Multiplier	Depreciation	Balance
2010	20	2	25,000 (150,000*40%*5/12)	125,000 (150,000 - 25,000)
2011	20	2	50,000 (125,000 * 40%)	75,000 (125,000 - 50,000)
2012	20	2	30,000 (75,000 * 40%)	45,000 (75,000 - 30,000)
2013	20	2	18,000 (45,000 * 40%)	27,000
2014	20	2	10,800 (27,000 * 40%)	16,200
2015	20	2	3,780 (16,200*40%*7/12)	12,420

(c)  In the U.S., GAAP, or generally accepted accounting principles, governs asset depreciation in accounting. Accounting depreciation is calculated based on different asset elements and the depreciation methods prescribed by GAAP rules.

Accounting rules under GAAP require that companies capitalize a fixed-asset purchase and then recover the asset's cost through periodic depreciation charge, rather than expensing the total purchase in the immediate period. The cost allocation approach matches expenses of using an asset with the revenues that the asset helps generate in different periods over the life of the asset. Depreciation elements for an asset include the original purchase cost of the asset, the estimated salvage value of the asset after depreciation, and the intended economic life of the asset in service.

Accounting rules per the U.S. GAAP allow a number of depreciation methods that companies may choose based on asset types and management decisions about capital investment and replacement. Three commonly used depreciation methods are the activity-based method, the straight-line method and the accelerated depreciation method.