Question

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Please show all the calculation. Problem 9-4A a-b (Part Level Submission) Pharoah Company purchased equipment on...

Please show all the calculation.

Problem 9-4A a-b (Part Level Submission)

Pharoah Company purchased equipment on March 27, 2018, at a cost of $312,000. Management is contemplating the merits of using the diminishing-balance or units-of-production method of depreciation instead of the straight-line method, which it currently uses for other equipment. The new equipment has an estimated residual value of $8,000 and an estimated useful life of either four years or 80,000 units. Demand for the products produced by the equipment is sporadic so the equipment will be used more in some years than in others. Assume the equipment produces the following number of units each year: 14,200 units in 2018; 20,000 units in 2019; 20,800 units in 2020; 20,000 units in 2021; and 5,000 units in 2022. Pharoah has a December year end.

Year Units-of-Production Depreciation
Expense
Accumulated
Depreciation
Carrying
Amount


Straight-line method:

Double-diminishing-balance method:

Units-of-production method:

Q2

Pharoah Enterprises purchased equipment on March 15, 2018, for $81,910. The company also paid the following amounts: $470 for freight charges; $219 for insurance while the equipment was in transit; $1,707 for a one-year insurance policy; $2,212 to train employees to use the new equipment; and $3,041 for testing and installation. The equipment was ready for use on April 1, but the company did not start using it until May 1.

Pharoah has estimated the equipment will have a 10-year useful life with no residual value. It expects to consume the equipment’s future economic benefits evenly over the useful life. The company has a December 31 year end.

Cost of the equipment
=

Solutions

Expert Solution

Q1:
Straight-line method:
Depreciation rate=One year/Useful life=1/4=0.25=25%
Depreciable cost=Cost-Residaul value=312000-8000=$ 304000
Straight-line depreciation schedule
Date Asset cost Depreciation rate Depreciable cost Depreciation expense Accumulated depreciation Carrying amount
March 27,2018 312000 312000
December 31,2018 (for 9 months) 25% 304000 57000 57000 255000
(304000*25%*9/12)
December 31,2019 25% 304000 76000 133000 179000
December 31,2020 25% 304000 76000 209000 103000
December 31,2021 25% 304000 76000 285000 27000
December 31,2022 (for 3 months) 25% 304000 19000 304000 8000
(304000*25%*3/12)
Depreciation expense=Depreciable cost*Depreciation rate
Asset book value=Cost-Accumulated depreciation
Accumulated depreciation=Depreciation expense till date
Double-diminishing-balance method:
DDB rate=SL depreciation rate*DDB rate multiplier=25%*2=50%
Date Asset cost DDB rate Asset book value Depreciation expense Accumulated depreciation Asset book value
March 27,2018 312000 312000
December 31,2018 (for 9 months) 50% 312000 117000 117000 195000
(312000*50%*9/12)
December 31,2019 50% 195000 97500 214500 97500
December 31,2020 50% 97500 48750 263250 48750
December 31,2021 50% 48750 24375 287625 24375
December 31,2022 (for 3 months) 50% 24375 3047 290672 21328
(24375*50%*3/12)
Depreciation expense=Asset book value*Depreciation rate
Units-of-production method:
Depreciation expense per unit=Depreciable cost/Total unit output=304000/80000=$ 3.8 per unit
Units of production depreciation schedule:
Date Asset cost Depreciation per unit Number of units Depreciation expense Accumulated depreciation Asset book value
January 2,2018 312000 312000
December 31,2018 3.8 14200 53960 53960 258040
December 31,2019 3.8 20000 76000 129960 182040
December 31,2020 3.8 20800 79040 209000 103000
December 31,2021 3.8 20000 76000 285000 27000
December 31,2022 3.8 5000 19000 304000 8000
Depreciation expense=Depreciation per unit*Depreciation rate
Q2:
Cost of the equipment:
$
Purchase price 81910
Freight charges 470
Transit insurance 219
Employee training 2212
Testing and installation 3041

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