Question

On October 1, 2018, the Allegheny Corporation purchased machinery for $224,000. The estimated service life of the machinery is 10 years and the estimated residual value is $4,000. The machine is expected to produce 400,000 units during its life.

Required:
Calculate depreciation for 2018 and 2019 using each of the following methods. Partial-year depreciation is calculated based on the number of months the asset is in service.

1. Straight line.
2. Sum-of-the-years’-digits.
3. Double-declining balance.
4. One hundred fifty percent declining balance.
5. Units of production (units produced in 2018, 20,000; units produced in 2019, 35,000).

Answer 1

Calculation of Depreciation expense for year 2018 and 2019:

1)

Straight line methods:

Straight line Depreciation expense = (Cost of Asset – residual value) / Service life

2018:

= ($224000 - $4000) /10 *3/12 = $220000/10*3/12 = $5500

2019:

= ($224000 - $4000) /10 = $22000

2)

Sum-of-the-year’s digit:

Sum of year digit methods =

(Cost of Asset – residual value)*Number of year remaining at beginning of year / sum of year

Sum of year digit = n (n+1)/2 = 10(10+1)/2 = 55

2018:

= ($224000 - $4000)*10/55*3/12 = $220000*10/55*3/12 = $40000*3/12 = $10000

2019:

= ($224000 - $4000)*10/55*9/12 + ($224000 - $4000)*09/55*3/12 =

= $30000+$9000 = $39000.

3)

Double Declining Balance:

Double declining balance method = Cost of asset*Double declining rate

Double declining rate = 100/Service life*2 = 100/10*2 = 20%

2018:

$224000*20%*3/12 = $44800*3/12 = $11200.

2019:

($224000 - $11200)*20% = $212800*20% = $42560

4)

One hundred fifty percent declining balance:

One hundred fifty percent declining rate = 100/Service life*1.5= 100/10*1.5 = 15%

One hundred fifty percent declining method = Cost of asset* One hundred fifty percent declining rate

2018:

$224000*15%*3/12 = $33600*3/12 = $8400

2019:

($224000 - $8400)*15% = $215600*15% = $32340

5)

Units of Production methods:

Units of production methods =

(Cost of asset – residual value)*units produced in current year/Total production

2018:

= [($224000 - $4000)*20000/400000]*3/12 = [$220000*0.05]*3/12 = $2750

2019:

= ($224000 - $4000)*35000/400000 = $220000*0.0875 = $19250.