Question

Cullumber Ltd. purchased a new machine on April 4, 2014, at a cost of $156,000. The company estimated that the machine would have a residual value of $14,000. The machine is expected to be used for 10,000 working hours during its four-year life. Actual machine usage was 1,500 hours in 2014; 2,400 hours in 2015; 2,000 hours in 2016; 2,200 hours in 2017; and 1,900 hours in 2018. Cullumber has a December 31 year end.

Calculate depreciation for the machine under each of the following methods: (Round expense per unit to 2 decimal places, e.g. 2.75 and final answers to 0 decimal places, e.g. 5,275.) (1) Straight-line for 2014 through to 2018. 2014 expense $enter a dollar amount 2015 expense $enter a dollar amount 2016 expense $enter a dollar amount 2017 expense $enter a dollar amount 2018 expense $enter a dollar amount (2) Diminishing-balance using double the straight-line rate for 2014 through to 2018. 2014 expense $enter a dollar amount 2015 expense $enter a dollar amount 2016 expense $enter a dollar amount 2017 expense $enter a dollar amount 2018 expense $enter a dollar amount (3) Units-of-production for 2014 through to 2018. 2014 expense $enter a dollar amount 2015 expense $enter a dollar amount 2016 expense $enter a dollar amount 2017 expense $enter a dollar amount 2018 expense $enter a dollar amount

Which method results in the highest depreciation expense over the life of the asset? Highest net income? Highest cash flow? select a method that results in the highest depreciation expense over the life of the asset Straight-line methodDiminishing-balance methodUnits-of-production methodAll three methods are the sameNo Impact Which method results in the highest net income? select a method that results in the highest net income Straight-line methodDiminishing-balance methodUnits-of-production methodAll three methods are the sameNo Impact Which method results in the highest cash flow? select a method that results in the highest cash flow Straight-line methodDiminishing-balance methodUnits-of-production methodAll three methods are the sameNo Impact

Answer 1

(1) Straight-line for 2014 through to 2018.:

2014	$       23,667
2015	$       35,500
2016	$       35,500
2017	$       35,500
2018	$       11,833

Working:

a) Straight line Depreciation
Deprciation per year	=(156000-14000)/4	$        35,500.00
Year	Depreciation expense	Accumulated depreciation	Net book value
At acquisition			$     1,56,000.00
2014	$              23,666.67	$    23,666.67	$     1,32,333.33
2015	$              35,500.00	$    59,166.67	$        96,833.33
2016	$              35,500.00	$    94,666.67	$        61,333.33
2017	$              35,500.00	$ 1,30,166.67	$        25,833.33
2018	$              11,833.33	$ 1,42,000.00	$        14,000.00

(2) Diminishing-balance using double the straight-line rate for 2014 through to 2018.:

2014	$       52,000
2015	$       52,000
2016	$       26,000
2017	$       12,000
2018	$                -

Working:

Depreciation Rate = 100/4 * 2 = 50%
Year	Depreciation expense	Accumulated depreciation	Net book value
At acquisition			$     1,56,000.00
2014	$              52,000.00	$    52,000.00	$     1,04,000.00
2015	$              52,000.00	$ 1,04,000.00	$        52,000.00
2016	$              26,000.00	$ 1,30,000.00	$        26,000.00
2017	$              12,000.00	$ 1,42,000.00	$        14,000.00
2018	$                          -	$ 1,42,000.00	$        14,000.00

(3) Units-of-production for 2014 through to 2018.:

2014	$       23,400
2015	$       37,440
2016	$       31,200
2017	$       34,320
2018	$       15,640

Working:

Depreciation Rate =	=(156000-14000)/10000	14.2
Year	Depreciation expense	Accumulated depreciation	Net book value
At acquisition			$     1,56,000.00
2014	$              23,400.00	$    23,400.00	$     1,32,600.00
2015	$              37,440.00	$    60,840.00	$        95,160.00
2016	$              31,200.00	$    92,040.00	$        63,960.00
2017	$              34,320.00	$ 1,26,360.00	$        29,640.00
2018	$              15,640.00	$ 1,42,000.00	$        14,000.00

2. All of the methods are same because in each method, total depreciation will be same and hence net income over the life of asset is also same and also the cash flow.

Which method results in the highest depreciation expense over the life of the asset: All three methods are the same

Which method results in the highest net income : All three methods are the same

Which method results in the highest cash flow: All three methods are the same