Question

Chapter 11 Operational Assets: Utilization and Impairment

Jackson Company purchased a new piece of equipment on July 1, 2018 at a cost of $36,000. The equipment has an estimated useful life of 10 years and an estimated residual value of $6,000. During its ten-year useful life, the equipment is expected to produce 500,000 units. The equipment actually produced the following number of units: 2018, 25,000; 2019, 84,000; and 2020, 90,000.

(a) Calculate depreciation expense for 2018, 2019, and 2020 assuming Jackson uses sum-of-the-years’-digits depreciation.

(b) Calculate depreciation expense for 2018, 2019, and 2020 assuming Jackson uses double-declining balance depreciation.

Answer 1

Answer

Total Cost of the Truck = $36,000

Salvage Value = $6,000

Useful Life = 10 Years

Sum of the Year digit Method

Depreciable Value = $30,000 (36,000 – 6,000)

Depreciation = Fraction * Depreciable Value

Sum of Digits = (10 + 9 + 8 + … + 2 + 1) = 55

Depreciation for 2018

6 months i.e. from July to December

= 10/55 * 6/12 months * $30,000

Depreciation for first year = $2727.27

Depreciation for 2019

6 months from 1^st year (i.e. from Jan, 19 to June, 19) + 6 Months of Second Year (July, 19 to December, 19)

= (10/55 * 6/12 months * $30,000) + (9/55 * 6/12 months * $30,000)

= 5,181.82

Depreciation for 2019 = $5,181.82

Depreciation for 2020

6 months from 2nd year (i.e. from Jan, 20 to June, 20) + 6 Months of Second Year (July, 20 to December, 20)

= (9/55 * 6/12 months * $30,000) + (8/55 * 6/12 months * $30,000)

= 4,636.36

Depreciation for 2020 = $4,636.36

Double Declining Balance

Straight line depreciation rate = 1/useful life

= 1/10 years

= 10%

Depreciation rate = 2 * Straight line depreciation rate

= 2 * 10%

Depreciation rate = 20%

Depreciation = Book Value * Depreciation Rate

Depreciation for 2018

Book value at starting of first year = 36,000

Depreciation = 36,000 * 20% * 6/12 months

Depreciation for 2018 = $3,600

Depreciation for 2019

Book value at starting of first year = 32,400 (36,000 – 3,600)

Depreciation = 32,400 * 20%

Depreciation for 2019 = $6,480

Depreciation for 2020

Book value at starting of first year = 25,920 (32,400 – 6,480)

Depreciation = 25,920 * 20%

Depreciation for 2020 = $5,184