Question

Principles of Financial Accounting

On January 1, 2018, Hobart Mfg. Co. purchased a drill press at a cost of $36,000. The drill press is expected to last 10 years and has a residual value of $6,000. During its 10-year life, the equipment is expected to produce 500,000 units of product. In 2018 and 2019, 25,000 and 84,000 units, respectively, were produced.

1. Compute depreciation expense, accumulated depreciation and the book value of the drill press at December 31, 2018 and 2019, assuming the straight-line method is used.

2. Compute depreciation expense, accumulated depreciation and the book value of the drill press at December 31, 2018 and 2019, assuming the double-declining-balance method is used.

3. Compute depreciation expense, accumulated depreciation and the book value of the drill press at December 31, 2018 and 2019, assuming the units-of-production method is used.

Answer 1

Requirement 1

Straight line Method
A	Cost	$     36,000.00
B	Residual Value	$        6,000.00
C=A - B	Depreciable base	$     30,000.00
D	Life [in years ]	10
E=C/D	Annual SLM depreciation	$        3,000.00

Year Ending December 31	Book Value	Depreciation expense	Ending Book Value	Accumulated Depreciation
2018	$       36,000.00	$        3,000.00	$    33,000.00	$     3,000.00
2019	$       33,000.00	$        3,000.00	$    30,000.00	$     6,000.00

Requirement 2

Double declining Method
A	Cost	$     36,000.00
B	Residual Value	$        6,000.00
C=A - B	Depreciable base	$     30,000.00
D	Life [in years]	10
E=C/D	Annual SLM depreciation	$        3,000.00
F=E/C	SLM Rate	10.00%
G=F x 2	DDB Rate	20.00%

Year Ending December 31	Beginning Book Value	Depreciation rate	Depreciation expense	Ending Book Value	Accumulated Depreciation
2018	$       36,000.00	20.00%	$      7,200.00	$   28,800.00	$    7,200.00
2019	$       28,800.00	20.00%	$      5,760.00	$   23,040.00	$ 12,960.00

Requirement 3

Units of Usage Method
A	Cost	$     36,000.00
B	Residual Value	$        6,000.00
C=A - B	Depreciable base	$     30,000.00
D	Usage in units(in Units)	500000
E=D/C	Depreciation per Unit	$                0.06

Year Ending December 31	Book Value	Usage	Depreciation expense	Ending Book Value	Accumulated Depreciation
2018	$       36,000.00	25000	$      1,500.00	$   34,500.00	$    1,500.00
2019	$       34,500.00	84000	$      5,040.00	$   29,460.00	$    6,540.00