Question

The cost of equipment purchased by Bramble, Inc., on June 1, 2020, is $92,400. It is estimated that the machine will have a $8,400 salvage value at the end of its service life. Its service life is estimated at 7 years, its total working hours are estimated at 42,000, and its total production is estimated at 600,000 units. During 2020, the machine was operated 6,900 hours and produced 63,200 units. During 2021, the machine was operated 6,320 hours and produced 55,200 units.

Compute depreciation expense on the machine for the year ending December 31, 2020, and the year ending December 31, 2021, using the following methods. (Round depreciation per unit to 2 decimal places, e.g. 15.25 and final answers to 0 decimal places, e.g. 45,892.)

				2020		2021
(a)		Straight-line		$		$
(b)		Units-of-output		$		$
(c)		Working hours		$		$
(d)		Sum-of-the-years'-digits		$		$
(e)		Double-declining-balance (twice the straight-line rate)		$		$

Answer 1

Solution :

		2020	2021
a	Straight Line	$ 7,000	$ 12,000
b	Units of Output Method	$ 8,848	$ 7,728
c	Working Hours	$ 13,800	$ 12,640
d	Sum of the years digits	$ 12,250	$ 19,250
e	Double Declining Balance	$ 15,399	$ 21,999

Working :

(a) Straight Line :

Depreciation as per Straight Line Method = (Original Cost - Salvage Value) / Useful life

Depreciation for 2020 =($ 92,400 - $ 8,400) / 7 * 7/12

= $ 7,000

Depreciation for 2021 =($ 92,400 - $ 8,400) / 7

= $ 12,000

(b) Unit of Output Method :

Depreciation as per Unit of Output Method = Depreciation per Unit * Units Produced

Depreciation per Unit = (Original Cost - Salvage Value) / Total Estimated Units

Depreciation per Unit = ($ 92,400 - $ 8,400) / 600,000 = $ 0.14

Depreciation for 2020 = 63,200 Units * $ 0.14

= $ 8,848

Depreciation for 2021 = 55,200 * $ 0.14

= $ 7,728

(c) Working Hours Method :

Depreciation as per Working Hours Method = (Original Cost - Salvage Value) / Total Estimated Hours * Hours Operated

Depreciation for 2020 =($ 92,400 - $ 8,400) / 42,000 * 6,900

= $ 13,800

Depreciation for 2021 =($ 92,400 - $ 8,400) / 42,000 * 6,320

= $ 12,640

(d) Sum of Year Digit Method :

Sum of Years = 7 + 6 + 5 + 4 + 3 + 2 + 1 = 28

Depreciation as per Sum of Year Digit Method = (Original Cost - Salvage Value) / Sum of Year * Remaining Year the starting

Depreciation for 2020 =($ 92,400 - $ 8,400) / 28 * 7 * 7/12

= $ 12,250   

Depreciation for 2021 =[($ 92,400 - $ 8,400) / 28 * 7 * 5/12] + [($ 92,400 - $ 8,400) / 28 * 6 * 7/12]

  = $ 8,750 + 10,500

= $ 19,250

(e) Double Declining Method :

Rate of Depreciation = (100% / Useful life) * 2

= (100% / 7) * 2

= 28.57%

	2020	2021
Opening Balance	$ 92,400	$ 77,001
Depreciation	$ 92,400 * 28.57% * 7 / 12 = $ 15,399	$ 21,999
Ending Balance	$ 77,001	$ 55,002

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