Question

3) On January 1, 2019, the Peninsula Paper Company purchased manufacturing equipment for $600,000. The equipment has a 5-year estimated useful life and a salvage value of $50,000.  

Part 1:  Calculate the following:

straight-line method

1. 2019---Depreciation expense

b.  Accumulated Depreciation as of 12/31/20

       c.  Book value as of 6/30/20

d.. If the company sold the equipment on July 1, 2020 for $ 350,000 what would the gain or loss be if the company had used the straight-line depreciation method?  Specify the amount and whether or not the company would record a gain or loss on the disposal.

double-declining balance method

a.  2019---Depreciation expense:

b.  Accumulated Depreciation as of 12/31/20 (assuming the equipment was not sold on 7/1/20):

Part 2

a)  If the company chose to use the units of production depreciation method what additional information would it need to calculate depreciation for 2019 for this same piece of equipment?

b)  How much would the book value of the equipment be at the end of its useful life under all 3 methods?

c)  Why would a company choose an accelerated deprecation method as opposed to straight-line?  Be specific.

Answer 1

Solution to part 1.a. Depriciation expense for 2019 = (6,00,000-50,000)/5= 1,10,000 b. Accumulated dep till 12/31/20 = (600,000-50,000)/5*2 =220,000 c. Book value as on 6/30/2020 = Cost - Depreciation = (600,000 - {110,000*1.5})= 435,000 d. Gain/(Loss) = sale value - Book value = 350,000 - 435,000 = (85,000) so, co would record a loss of $85,000. Double declining method​- a. Depreciation for 2019 = Dep rate = 1/Useful life * 100 = 1/5*100 = 20*2 =40% 600,000*40% = 240,000 b. Accumulated dep = ( 240000{600,000*40%} +144,000{360,000*40%}) = 504,000. Solution to part 2.a.For unit of dep method estimated units of production & value of production is required. b. Book value at the end of 2019 = straight line dep = (600,000-110,000) = 490,000 , double declining method = (600,000-240,000) = 360,000 & for unit method of dep as units of production is not provided so Book value can't be determined. c. A company can choose any of these method depending upon the use of machine. If such machine would get detoriated very quickly then we should use double declining method so that proper fund get accumulated for such asset unless use straight line .