Question

Swanson & Hiller, Inc., purchased a new machine on September 1 of the current year at a cost of $138,000. The machine’s estimated useful life at the time of the purchase was five years, and its residual value was $8,000. The company reports on a calendar year basis.

Required:

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).

c. Assume that Swanson & Hiller sells the machine on December 31 of the fourth year for $30,500 cash. Compute the resulting gain or loss from this sale under each of the depreciation methods used in part a.

Answer 1

A (2) Calculation of Depreciation(200 percent)

Cost of New Machine   - $138000

Useful life – 5 Years

Salvage value - $8000

The 200% reducing balance method divides 200 percent by the service life years. That percentage will be multiplied by the net book value of the asset to determine the depreciation amount for the year.

So, rate of depreciation is 40%

Because half-year convention is used in First year 20% is used

Period	Calculation of the yearly depreciation amount	Book value	Net book value at the end of the year
Year 1	(138000 – 8,000) × 20% = 26,000	138,000 – 26000 = 112,000	138000 – 8000 – 26000 = 104,000
Year 2	104000× 40% = 41600	112000 – 41600 = 49600	104000– 49600 = 54400
Year 3	54400 × 40% = 21760	49600 – 21760 = 27840	54400 – 21760= 32640
Year 4	32640*40% = 13056	27840-13056 = 14784	32640-13056 = 19584
Year 5	19584*40%= 7834	14784 – 7834= 6950	19854-7834 = 12020

A (3) Calculation of Depreciation(150 percent)

Straight-Line Method:
Annual Depreciation Expense = (Cost of Asset – Salvage Value)/Estimate Useful Life

(Cost – Salvage)/Recover Period
($138000 – $8,000)/5=$26,000 with half year convention.
Note: $26,000 in this question is normal annual depreciation. Based on the following assumptions, the allowed depreciation is:
-Tax/accounting year end of 12/31
-Annual depreciation of $26,000
-With half year convention, 1/2 or $13,000 is allowed.

Therefore, Acquired in September =$13,000/4=$3250 per month allowed

Declining Balance Methods:

(Book value at beginning of year) X (Depreciation Rate)
Book Vale = Cost of asset – accumulated depreciation

For 150% Declining Balance: (1/Recovery Period) X 1.5 i.e. 1/5=.20–> .2 X 1.5 =.30i.e. 30%

• Year 1: $138000 X 30%=$41400** To reflect the half-year convention divide $ 41400 by 2 to get $ 20700 as the amount of depreciation for the first year.
• Year 2: ($ 138000 – $ 20700) X 30% = $ 35190 of depreciation.
• Year 3: ($138000 – $55890) X 40% = $ 24633 of depreciation.
• Year 4: Here there is a switch back the straight line method as the amount depreciated under the double declining balance would be less than under the straight line method. Thus, depreciation is $ 26000
• Year 5: Depreciation will be $ 23477 to maintain a book value equal to the salvage value of $8,000.

(c ) GAIN OR LOSS

a(2)

– salvage value at the end of 4^th year – $ 19584

Gain -$ 30500- $ 19854 = $ 10646

a(3) - 150 Percent Declining balance method

– salvage value at the end of 4^th year – $ 31477

Loss -$ 31477- $ 30500 = $ 977

Straight line method

– salvage value at the end of 4^th year – $ 47000

Profit -$ 47000- $ 30500 = $ 16500