Question

A NEW ELECTRIC SAW FOR CUTTING LUMBER IN A FURNITURE MANUFACTURING PLANT HAS AN INSTALLED COST OF P140,000 AND A 10-YEAR ESTIMATED LIFE. IT WAS PLACED IN SERVICE ON JANUARY 1, 1987. THE PERMISSIBLE SALVAGE VALUE OF THE SAW IS ZERO AT THE END OF 10 YEARS. WHAT WILL BE THE

A.) CUMULATIVE DEPRECIATION COST THROUGH THE 6TH YEAR?

B.) DEPRECIATION COST DURING THE 6TH YEAR?

C.) BOOK VALUE AT THE END OF THE 6TH YEAR?

USE:

A.) STRAIGHT LINE

B.) DECLINING BALANCE METHOD

C.) SINKING FUND, i=8% COMPOUNDED ANUALLY

D.) SUM OF THE YEAR DEPRECIATION METHOD

E.) SERVICE OUTPUT METHOD SUPPOSE

THAT IT WILL BE USED FOR A TOTAL OF 10,000 HOURS OVER A PERIOD OF 10 YEAR IN THE 6TH YEAR OF OPERATION, THE ESTIMATED USAGE IS 800 HOURS AND THE CUMULATIVE USAGE BY THE END OF YEAR 6 SHOULD BE ABOUT 6,400 HOURS.

Answer 1

1. Straight Line method:-

Year	1987	1988	1989	1990	1991	1992
Cost in beginning	140000	126000	112000	98000	84000	70000
Depreciation	14000	14000	14000	14000	14000	14000
BV at end	126000	112000	98000	84000	70000	56000
	Cumulative depreciation		84000
	Depreciation of 6th year		14000
	Book value at end of 6th year	56000

2. Declining Balance Method:-

	Depreciation Rate= 1/ No of years	10%
Year	1987	1988	1989	1990	1991	1992
Cost in beginning	140000	126000	113400	102060	91854	82668.6
Depreciation	14000	12600	11340	10206	9185.4	8266.86
BV at end	126000	113400	102060	91854	82668.6	74401.74
	Cumulative depreciation		65598.26
	Depreciation of 6th year		8266.86
	Book value at end of 6th year		74401.74

3. Sinking Fund Depreciation=

Annual Depreciation= [ (FC -V) (i) ] / [ (1 + i)^(n) -1 ]

= [(140000-0)*(0.08)]/[(1+.08)^10-1]

A = 12943.03

Cumulative depreciation= A[(1 + i)^x - 1] / i

= (12943.03)[(1.08)^6-1]/0.08

= 94949.14

Book value at end of 6th year= 140000-94949.14

= 45050.86

4. Sum of Digits Method:-

	Year	No of year in reversible order	Depc Factor
	1	10	0.181818
	2	9	0.163636
	3	8	0.145455
	4	7	0.127273
	5	6	0.109091
	6	5	0.090909
	7	4	0.072727
	8	3	0.054545
	9	2	0.036364
	10	1	0.018182
		55
	Year	1987	1988	1989	1990	1991	1992
	Cost in beginning	140000	114545.5	95801.65	81866.87	71447.45	63653.18
	Depreciation	25454.54545	18743.8	13934.79	10419.42	7794.267	5786.653
	BV at end	114545.4545	95801.65	81866.87	71447.45	63653.18	57866.53
		Cumulative depreciation		82133.47
		Depreciation of 6th year		5786.653
		Book value at end of 6th year		57866.53

.5. Service output method :-

Depreciation per hour= FC-SV/ Total no of hours

= 140000/10000

=14 per hour

Cumulative depreciation till 6th year= 14*6400

= 102400

Annual depreciation of 6th year= 14*600

= 8400

BV at 6th year= 140000-102400

= 37600