Question

EXPLAIN STEP PLEASE

Depreciation Methods

Gruman Company purchased a machine for $220,000 on January 2, 2016. It made the following estimates:

Service life	5 years or 10,000 hours
Production	200,000 units
Residual value	$20,000

In 2016, Gruman uses the machine for 1,800 hours and produces 44,000 units. In 2017, Gruman uses the machine for 1,500 hours and produces 35,000 units. If required, round your final answers to the nearest dollar.

Required:

Compute the depreciation for 2016 and 2017 under each of the following methods:

Straight-line method

2016	$
2017	$

Sum-of-the-years'-digits method

2016	$
2017	$

Double-declining-balance method

2016	$
2017	$

Activity method based on hours worked

2016	$
2017	$

Activity method based on units of output

2016	$
2017	$

For each method, what is the book value of the machine at the end of 2016? At the end of 2017?

Straight-line method

2016	$
2017	$

Sum-of-the-years'-digits method

2016	$
2017	$

Double-declining-balance method

2016	$
2017	$

Activity method based on hours worked

2016	$
2017	$

Activity method based on units of output

2016	$
2017	$

If Gruman used a service life of 8 years or 15,000 hours and a residual value of $10,000, what would be the effect on the following under the straight-line, sum-of-the-years'-digits, and double-declining-balance depreciation methods?

Depreciation expense

Straight-line method

2016	$
2017	$

Sum-of-the-years'-digits method

2016	$
2017	$

Double-declining-balance method

2016	$
2017	$

Book value

Straight-line method

2016	$
2017	$

Sum-of-the-years'-digits method

2016	$
2017	$

Double-declining-balance method

2016	$
2017	$

Answer 1

Answer 1.
Straight Line Method
Depreciation expense per annum = (Cost - Salvage Value) / Life of Assets
Depreciation expense per annum = ($220,000 - $20,000)/ 5 Years
Depreciation expense per annum = $200,000 / 5 Years = $40,000 per annum
Depreciation Expense:
2016	40,000.00
2017	40,000.00
Sum-of-the-years-digits Method
SYD for 5 Years = n(n+1)/2 = 5 (5+1)/2 = 15
Depreciation Expense:
2016 = 5/15 X ($220,000 - $20,000) = $66,666.67 or say $66,667 (Approx.)
2017 = 4/15 X ($220,000 - $20,000) = $53,333.33 or say $53,333 (Approx.)
Double Declining Balance Method
Rate of Dep. Under DDBM = 2 X 20% (Rate of Dep. Under Straight Line Method)
Rate of Dep. Under DDBM = 40%
Depreciation Expense:
2016 = $220,000 X 40% = $88,000
2017 = ($220,000 - $88,000) X 40% = $52,800
Activity method based on hours worked
Depreciation Rate per Hour = ($220,000 - $20,000) / 10,000 Hrs
Depreciation Rate per Hour = $20 per hour
Depreciation Expense:
2016 = 1,800 Hrs X $20 = $36,000
2017 = 1,500 Hrs X $20 = $30,000
Activity method based on units of output
Depreciation Rate per Unit = ($220,000 - $20,000) / 200,000 Units
Depreciation Rate per Unit = $1 per Unit
2016 = 44,000 Units X $1 = $44,000
2017 = 35,000 Units X $1 = $35,000
Answer 2.
	Straight Line Method		Sum-of-the-years-digits Method		Double Declining Balance Method		Activity method based on hours worked		Activity method based on units of output
	Dep. Exp.	Book Value	Dep. Exp.	Book Value	Dep. Exp.	Book Value	Dep. Exp.	Book Value	Dep. Exp.	Book Value
2016	40,000.00	180,000.00	66,667.00	153,333.00	88,000.00	132,000.00	36,000.00	184,000.00	44,000.00	176,000.00
2017	40,000.00	140,000.00	53,333.00	100,000.00	52,800.00	79,200.00	30,000.00	154,000.00	35,000.00	141,000.00
Answer 3.
Straight Line Method
Depreciation expense per annum = (Cost - Salvage Value) / Life of Assets
Depreciation expense per annum = ($220,000 - $10,000)/ 8 Years
Depreciation expense per annum = $210,000 / 5 Years = $26,250 per annum
Depreciation Expense:
2016	26,250.00
2017	26,250.00
Sum-of-the-years-digits Method
SYD for 8 Years = n(n+1)/2 = 8 (8+1)/2 = 36
Depreciation Expense:
2016 = 8/36 X ($220,000 - $10,000) = $46,666.67 or say $46,667 (Approx.)
2017 = 7/36 X ($220,000 - $10,000) = $40,833.33 or say $40,833 (Approx.)
Double Declining Balance Method
Rate of Dep. Under DDBM = 2 X 12.50% (Rate of Dep. Under Straight Line Method)
Rate of Dep. Under DDBM = 25%
Depreciation Expense:
2016 = $220,000 X 25% = $55,000
2017 = ($220,000 - $55,000) X 25% = $41,250
Answer 4.
	Straight Line Method		Sum-of-the-years-digits Method		Double Declining Balance Method
	Dep. Exp.	Book Value	Dep. Exp.	Book Value	Dep. Exp.	Book Value
2016	26,250.00	193,750.00	46,667.00	173,333.00	55,000.00	165,000.00
2017	26,250.00	167,500.00	40,833.00	132,500.00	41,250.00	123,750.00