Question

Swanson & Hiller, Inc., purchased a new machine on September 1 of the current year at a cost of $160,000. The machine’s estimated useful life at the time of the purchase was five years, and its residual value was $10,000. The company reports on a calendar year basis. Required: a-1. Prepare a complete depreciation schedule, beginning with the current year, using the straight-line method. (Assume that the half-year convention is used). a-2. Prepare a complete depreciation schedule, beginning with the current year, using the 200 percent declining-balance method. (Assume that the half-year convention is used). a-3. Prepare a complete depreciation schedule, beginning with the current year, using the 150 percent declining-balance, switching to straight-line when that maximizes the expense. (Assume that the half-year convention is used). b. Which of the three methods computed in part a is most common for financial reporting purposes? c. Assume that Swanson & Hiller sells the machine on December 31 of the fourth year for $31,000 cash. Compute the resulting gain or loss from this sale under each of the depreciation methods used in part a. Swanson & Hiller, Inc., purchased a new machine on September 1 of the current year at a cost of $160,000. The machine’s estimated useful life at the time of the purchase was five years, and its residual value was $10,000. The company reports on a calendar year basis. Required: a-1. Prepare a complete depreciation schedule, beginning with the current year, using the straight-line method. (Assume that the half-year convention is used). a-2. Prepare a complete depreciation schedule, beginning with the current year, using the 200 percent declining-balance method. (Assume that the half-year convention is used). a-3. Prepare a complete depreciation schedule, beginning with the current year, using the 150 percent declining-balance, switching to straight-line when that maximizes the expense. (Assume that the half-year convention is used). b. Which of the three methods computed in part a is most common for financial reporting purposes? c. Assume that Swanson & Hiller sells the machine on December 31 of the fourth year for $31,000 cash. Compute the resulting gain or loss from this sale under each of the depreciation methods used in part a.

Answer 1

Depreciation per year ((160000-10000)/5)			30000
Year 1 is Current year.
depreciation schedule
Method	straight-line method
Year	depreciation Expense	Remarks	Book value at the end of year
1	15000	30000/2	145000
2	30000	Full	115000
3	30000	Full	85000
4	30000	Full	55000
5	30000	Full	25000
6	15000	30000/2	10000

Depreciation rate under Straight line method (1/5=20%),rate Under 200 percent declining-balance method =20%*200% = 40%
Year 1 is Current year.
depreciation schedule
Method	200 percent declining-balance method
Year	Book value at beginning of year	depreciation Expense	Remarks	Book value at the end of year
1	160000	32000	160000*40%*1/2	128000
2	128000	51200	128000*40%	76800
3	76800	30720	76800*40%	46080
4	46080	18432	46080*40%	27648
5	27648	11059	27648*40%	16589
6	16589	6589	Notes below	10000
Notes: end of 6 year Depreciable allowed is 16589-10000. = 6589

Depreciation rate under Straight line method (1/5=20%),rate Under 150% percent declining-balance method =20%*150% = 30%
Year 1 is Current year.
depreciation schedule
Method	150 percent declining-balance, switching to straight-line
Year	Book value at beginning of year	depreciation Expense	Remarks	Book value at the end of year
1	160000	24000	160000*30%*1/2	136000
2	136000	40800	136000*30%	95200
3	95200	30000	(95200*30%) or 30000 whichever is maximum	65200
4	65200	30000	66640*30%	35200
5	35200	25200	Notes below	10000
6	10000	0		10000
Notes: end of 5 year Maximum depreciation allowed is 35200-10000 = 25200

Which of the three methods computed in part a is most common for financial reporting purposes ?
Straight-line method is most common method for financial reporting purposes.
Assume that Swanson & Hiller sells the machine on December 31 of the fourth year for $31,000 cash
	straight-line method	200 percent declining-balance method	150 percent declining-balance, switching to straight-line
Machine sold	31,000	31,000	31,000
Less: Book value at end of Forth year	55,000	27,648	35,200
Gain (Loss) from this sale	(24,000)	3,352	(4,200)