Question

On January 1, 20X2, The GenKota Winery purchased a new bottling system. The system has an expected life of 5 years. The system cost $325,000. Shipping, installation, and set up was an additional $35,000. At the end of the useful life, Julie Hayes, chief accountant for GenKota, expects to dispose of the bottling system for $96,000. She further anticipates total output of 660,000 bottles over the useful life.

1.) Assuming use of the straight-line depreciation method, prepare a schedule showing annual depreciation expense, accumulated depreciation, and related calculations for each year.

2.)Assuming use of the units-of-output depreciation method, prepare a schedule showing annual depreciation expense, accumulated depreciation, and related calculations for each year. Actual output, in bottles, was 100,000 (20X2), 130,000 (20X3), 150,000 (20X4), 160,000 (20X5), and 120,000 (20X6).

3.)Assuming use of the double-declining balance depreciation method, prepare a schedule showing annual depreciation expense, accumulated depreciation, and related calculations for each year.

Answer 1

1)

Straight line depreciation = (Cost - Salvage value)/useful life

Cost of the asset = 325,000 + 35,000 = $360,000

Year depreciation = (360,000 - 96,000)/5

= $52,800

Accumulated depreciation

Year 1 = 52,800

Year 2 = 52,800*2 = $105,600

Year 3 = 52,800*3 = 158,400

Year 4 = 52,800*4 = 211,200

Year 5 = 52,800*5 = $264,000

2)

Unit production method = ( Cost - Salvage value)*(Actual output/ estimated output)

Year 1 = (360,000 - 96,000)*(100,000/660,000)

= $40,000

Year 2 = (360,000 - 96,000)*(130,000/660,000)

= $52,000

Accumulated depreciation = $92,000

Year 3 = (360,000 - 96,000)*(150,000/660,000)

= $60,000

Accumulated depreciation = $152,000

Year 4 = (360,000 - 96,000)*(160,000/660,000)

= $64,000

Accumulated depreciation = $216,000

Year 5= (360,000 - 96,000)*(120,000/660,000)

= $48,000

Accumulated depreciation = $264,000

3)

Depreciation rate = 1/useful life

= 1/5

= 20%

Double declining depreciation rate

= 2*20%

= 40%

Year 1 = 360,000*40% = $144,000

Book value = 360,000 - 144,000= $216,000

Year 2 = 216,000*40% = $86,400

Book value = 216,000 - 86,400 = $129,600

Accumulated depreciation = $230,400

Year 3 = 129,600*40% = $51,840

Book value = 129,600 - 33,600 = $96,000

The depreciation will be maximum upto the salvage value

Therefore accumulated depreciation = 230,400 + 33,600

= $264,000.

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