Question

In order to improve its business processes, Martin Corp. Ltd. purchased a new machine on July 1, 2017. The cost price of the machine was $1,250,000. Martin Corp. estimated that the machine will have a useful life of 5 years at the end of which its salvage value will be $32,000. The machine is estimated to produce 496,000 units and work 62,000 hours. During 2017, Martin Corp. used the machine for 6,000 hours and produced 52,000 units.

Martin Corp. financial year ends December 31 and it depreciates this item of PPE on the basis of the nearest full month. Required: Note – Each calculation should be considered unrelated.

Round dollar values computed to 2 decimal places.

Calculate depreciation expense under the following:

a) Straight line method for 2017.

b) Activity method for 2017, using units of output.

c) Activity method for 2017, using working hours.

d) Sum of the years digit method for 2018.

e) Double declining balance method for 2018.  

Answer 1

A	B	C	D	E	F	G	H	I	J
2		Investment in machine (Initial Book Value)	$1,250,000
3		Life of equiment	5
4		Salvage value	$32,000
5		a)
6		Straight line method:
7		Depreciation per year using straight line method can be calculated as follows:
8		Depreciation per year	=(Investment - Salvage Value)/Expected life of equipment
9
10		Using the following data:
11		Investment in machine (Initial Book Value)	$1,250,000
12		Life of equiment	5	years
13		Salvage value	$32,000
14		Depreciation per year	=(Investment - Salvage Value)/Expected life of equipment
15			=(1250000-32000)/5
16			$243,600
17
18		Hence Depreciation per year using Straight line method is	$243,600
19
20		b)
21		Activity Method:
22		Using the following data:
23		Investment in machine (Initial Book Value)	$1,250,000
24		Salvage value	$32,000
25		Depreciable amount	=Beginning value - Salvage Value
26			$1,218,000.00
27		Depreciation cost per unit of service can be calculated as follows:
28		Depreciable amount	$1,218,000.00
29		Total units that can be produced	496000	hrs
30
31		Depreciation cost per unit	=Depreciable Cost / Total Units
32			$2.46	=D28/D29
33
34		Year	Units produced	Depreciation	Depreciation
35				per unit	Expense
36		2017	52000	$2.46	$127,693.55
37
38		Hence Depreciation for 2017 is	$127,693.55
39
40		c)
41		Activity Method:
42		Using the following data:
43		Investment in machine (Initial Book Value)	$1,250,000
44		Salvage value	$32,000
45		Depreciable amount	=Beginning value - Salvage Value
46			$1,218,000.00
47		Depreciation cost per unit of service can be calculated as follows:
48		Depreciable amount	$1,218,000.00
49		Total hours of service	62000	hrs
50
51		Depreciation cost per unit	=Depreciable Cost / Total Units
52			$19.65
53
54		Year	Units of Services	Depreciation	Depreciation
55			Per year	Per Hours	Expense
56
57		2017	6000	$19.65	$117,870.97
58
59		Hence depreciation in 2017 is	$117,870.97
60
61		d)
62		Sum of years digits method
63		Cost of Machine	$1,250,000
64		Life of Machine (n)	5	years
65		Salvage value	$32,000
66
67		Equipment
68		Depreciation in each year is calculated by mutiplying depreciable amount with k/S factor
69		where k is n for year 1, (n-1) for year 2 …, 1 for year n and S is sum of numbers 1 to n i.e n(n+1)/2.
70
71		Depreciable amount	=Beginning value - Salvage Value
72			$1,218,000.00
73		For Harvestor depreciation expense each year is calculated as follows:
74		S =	=n*(n+1)/2
75			15
76		Year	Depreciable amount	k/S factor	Depreciation expense
77
78		2018	$1,218,000	0.27	$324,800.00
79
80		Hence Depreciation for 2018 is	$324,800.00
81
82		e)
83		Double declining Balance Method:
84		Cost of Machine	$1,250,000
85		Salvage Value	$32,000
86		Useful Life	5	years
87		Per year depreciation under straight line	20.00%
88		% depreciation under double declining	40%
89		Under double declining method beginning net book value is used to calculate depreciation for a period and salvage value is ignored.
90		The depreciation stops when net book value equals the salvage value.
91
92		Year	Beginning Net	x	Double declining	=	Depreciation	Ending Net
93			Book Value		rate		Expense	Book Value
94
95		2017	$1,250,000	x	40%	=	$500,000.00	$750,000
96		2018	$750,000	x	40%	=	$300,000.00	$450,000
97
98		Hence depreciation in 2018 is	$300,000.00
99

Formula sheet

A	B	C	D	E	F	G	H	I	J
2		Investment in machine (Initial Book Value)	1250000
3		Life of equiment	5
4		Salvage value	32000
5		a)
6		Straight line method:
7		Depreciation per year using straight line method can be calculated as follows:
8		Depreciation per year	=(Investment - Salvage Value)/Expected life of equipment
9
10		Using the following data:
11		Investment in machine (Initial Book Value)	=D2
12		Life of equiment	=D3	years
13		Salvage value	=D4
14		Depreciation per year	=(Investment - Salvage Value)/Expected life of equipment
15			=(1250000-32000)/5
16			=(D11-D13)/D12
17
18		Hence Depreciation per year using Straight line method is	=D16
19
20		b)
21		Activity Method:
22		Using the following data:
23		Investment in machine (Initial Book Value)	=D2
24		Salvage value	=D4
25		Depreciable amount	=Beginning value - Salvage Value
26			=D23-D24
27		Depreciation cost per unit of service can be calculated as follows:
28		Depreciable amount	=D26
29		Total units that can be produced	496000	hrs
30
31		Depreciation cost per unit	=Depreciable Cost / Total Units
32			=D28/D29	=D28/D29
33
34		Year	Units produced	Depreciation	Depreciation
35				per unit	Expense
36		2017	52000	=D32	=D36*E36
37
38		Hence Depreciation for 2017 is	=F36
39
40		c)
41		Activity Method:
42		Using the following data:
43		Investment in machine (Initial Book Value)	=D2
44		Salvage value	=D4
45		Depreciable amount	=Beginning value - Salvage Value
46			=D43-D44
47		Depreciation cost per unit of service can be calculated as follows:
48		Depreciable amount	=D46
49		Total hours of service	62000	hrs
50
51		Depreciation cost per unit	=Depreciable Cost / Total Units
52			=D48/D49
53
54		Year	Units of Services	Depreciation	Depreciation
55			Per year	Per Hours	Expense
56
57		2017	6000	=$D$52	=D57*E57
58
59		Hence depreciation in 2017 is	=F57
60
61		d)
62		Sum of years digits method
63		Cost of Machine	=D2
64		Life of Machine (n)	5	years
65		Salvage value	=D4
66
67		Equipment
68		Depreciation in each year is calculated by mutiplying depreciable amount with k/S factor
69		where k is n for year 1, (n-1) for year 2 …, 1 for year n and S is sum of numbers 1 to n i.e n(n+1)/2.
70
71		Depreciable amount	=Beginning value - Salvage Value
72			=D63-D65
73		For Harvestor depreciation expense each year is calculated as follows:
74		S =	=n*(n+1)/2
75			=D64*(D64+1)/2
76		Year	Depreciable amount	k/S factor	Depreciation expense
77
78		2018	=$D$72	=(D64-1)/$D$75	=D78*E78
79
80		Hence Depreciation for 2018 is	=F78
81
82		e)
83		Double declining Balance Method:
84		Cost of Machine	=D2
85		Salvage Value	=D4
86		Useful Life	=D3	years
87		Per year depreciation under straight line	=1/D86
88		% depreciation under double declining	=D87*2
89		Under double declining method beginning net book value is used to calculate depreciation for a period and salvage value is ignored.
90		The depreciation stops when net book value equals the salvage value.
91
92		Year	Beginning Net	x	Double declining	=	Depreciation	Ending Net
93			Book Value		rate		Expense	Book Value
94
95		2017	=D84	x	=D$88	=	=D95*F95	=D95-H95
96		=C95+1	=I95	x	=D$88	=	=D96*F96	=D96-H96
97
98		Hence depreciation in 2018 is	=H96
99