Question

Required information Skip to question [The following information applies to the questions displayed below.] Nicole’s Getaway Spa (NGS) purchased a hydrotherapy tub system to add to the wellness programs at NGS. The machine was purchased at the beginning of the year at a cost of $7,000. The estimated useful life was five years and the residual value was $500. Assume that the estimated productive life of the machine is 13,000 hours. Expected annual production was year 1, 3,100 hours; year 2, 2,500 hours; year 3, 3,400 hours; year 4, 2,200 hours; and year 5, 1,800 hours.

Required: Complete a depreciation schedule for each of the alternative methods.

Straight-line.

Units-of-production.

Double-declining-balance.

Answer 1

1. DEPRECIATION

1.A. Straight-line depreciation:

It is the simplest method of calculating depreciation and believes that the asset's value depreciates equally every year.

Depreciation per year = (Cost of asset - salvage value) / number of useful life years.

Depreciation for Year 1 : (7000 - 500) / 5 = $1300

Depreciation for Year 2: (7000 - 500) / 5 = $1300

Depreciation for Year 3 : (7000 - 500) / 5 = $1300

Depreciation for Year 4 : (7000 - 500) / 5 = $1300

Depreciation for Year 5 : (7000 - 500) / 5 = $1300

1. B. Units of Production/ Activity based depreciation:

Activity based depreciation is whereby an asset is depreciated based on the asset’s activity such as the number of hours worked or the number of units produced, during a particular period of time. Activity based depreciation per year is calculated as:

[(Cost - Salvage value) x activity performed during the period] / Total estimated life activity of the asset

Year 1 Depreciation : (7000-500) x (3100 / 13000) = $1550

Year 2 Depreciation : (7000-500) x (2500 / 13000) = $1250

Year 3 Depreciation : (7000-500) x (3400 / 13000) = $1700

Year 4 Depreciation : (7000-500) x (2200 / 13000) = $1100

Year 5 Depreciation : (7000-500) x (1800 / 13000) = $900

1.C. Double-declining balance Method:

This is where the asset's value is depreciated at twice the rate than the straight line method. The depreciation amounts would be higher in the early years of the asset's life and gradually reduce towards the end. Hence, it does not mean that the depreciation amount would be higher than the straight line basis.

Straight Line depreciation per year = 1/5* x 100 = 20%

*as it is useful for five years

Hence double-depreciation value = 20% x 2 = 40%

It is calculated as depreciation rate x book value of asset at the beginning of the period

OR (Cost of Asset - Accumulation Depreciation) x Depreciation rate

Depreciation for Year 1 : 7000 x 40% = $2800

Accumulated Depreciation : $2800

Depreciation for Year 2 : (7000 - 2800) x 40% = $1680

Accumulated Depreciation: $2800 + $1680 = $4480

Depreciation for Year 3 : (7000 - $4480) x 40% = $1008

Accumulated Depreciation: $4480 + $1008 = $5488

Depreciation for Year 4 : (7000 - $5488) x 40% = $605

Accumulated Depreciation: $5488 + $605 = $6093

Depreciation for Year 5 : (7000 - $6093) x 40% = $363