Question

In: Accounting

On Jan 3, 2017, Limestone Enterprises purchased equipment for $139,200. The equipment has a useful life...

On Jan 3, 2017, Limestone Enterprises purchased equipment for $139,200. The equipment has a useful life of four years or of 12,000 working hours and after the useful life it will have a residual value of $14,000. The machine was used for 1,900 hours in 2017, 2,800 hours in 2018; 3,700 hours in 2019.

Required:

  1. Calculate the depreciation expense for 2017 and 2018 under each of the following methods:
  1. Straight-line,
  2. Double diminishing-balance, and
  3. Units-of -production
  1. Record the journal entry for depreciation expense for the year ended December 31, 2017 under the straight-line method.
  2. Which method results in the lowest profit for the first two years? Why?

Solutions

Expert Solution

Compuatation of Depreciation Expense for year 2017 and 2018:

Requirement 1:

i.

Straight Line Depreciation Expense = (Cost of equipment - residual value) / useful life

= ($139200 - $14000) / 4

= $31300

Depreciation Expense for 2017 = $31300

Depreciation Expense for 2018 = $31300

ii.

Double declining balance methods Depreciation Expense = Cost of equipment x Double declining rate

Double declining rate = (100/useful life) x 2 = (100/ 4) x 2 = 50%

Depreciation Expense for 2017 = $139200 x 50% = $69600

Depreciation Expense for 2018 = ($139200 - $69600) x 50% = $34800.

iii.

Units of production methods depreciation expense = Number of hours run in current year x  Units of Production rate

Units of Production rate = (Cost of equipment - residual value) / Total estimated workings hours

= ($139200 - $14000) / 12000

= $10.43

Depreciation Expense for 2017 = 1900 hours x $10.43 = $19817

Depreciation Expense for 2018 = 2800 hours x $10.43 = $29204.

Requirement 2:

Date

Account Title & Explanation

Debit

Credit

Dec.31

Depreciation Expense

$31300

   Accumulated Depreciation

$31300

(record of depreciation expense)

Requirement 3:

Double declining Balance methods shows lowest profit for the first two years because under double declining balance methods depreciation expense comes too high in comparison of straight line and units of production methods.


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