Question

Part 1

Vann Company purchases a $250,000 machine on May 31, 2014. The machine has an estimated residual value of $30,000 and an estimated service life of 5 years or 20,000 hours. The actual usage of this machine over its life is as follows:

Year	Hours
2014	3,600
2015	4,600
2016	5,000
2017	3,800
2018	3,000

Required:

Compute depreciation expense for the entire useful life of the machine (show me each year’s expense and related detailed computations) using each of the following methods:

1. Straight-line method
2. Double-declining-balance method
3. Activity-based method (hours)

Answer 1

	May31,2014	Machinery purchase	250000
		Residual Value	30000
		Service life (Years)	5
		Service life (Hours)	20000
	Actual Usage
	Year	Hours
	2014	3600
	2015	4600
	2016	5000
	2017	3800
	2018	3000
	Straight Line basis	In this method, depreciation is evenly spread across the life of assets.
	Depreciation =	The total cost of assets – Salvage or residual value/useful life
		(250000 – 30,000)/5
		44000
	Depreciation charged for each year is $44,000 per year.
	Double-declining-balance method	In this method, depreciation is charging on the double rate.
	Calculation of rate	1/service life
		1/ 5 years
		20%
	Double decline rate	Rate * 2
		40%
	Depreciation for the 1st year
	**Depreciation = (cost of assets – salvage vaule) * Double decline rate
Year	Assets cost at beg	Depreciation**	Assets cost at end(Beg amount – Depreciation)
1	250000	100000	150000
2	150000	60000	90000
3	90000	36000	54000
4	54000	21600	32400
5	32400	***2400	30000
*** Last year depreciation should be balancing figure as at the end we would receive residual value.
	Activity-based methods	In this method, depreciation is charged on the basis of activity performed
	Actual Usage
	Depreciation = (Total cost of assets – Salvage value)/ total service life hour * Actual hour
	Year	Hours	Depreciation
	2014	3600	39600	220000/20000*3600
	2015	4600	50600	220000/20000*4600
	2016	5000	55000	220000/20000*5000
	2017	3800	41800	220000/20000*3800
	2018	3000	33000	220000/20000*3000
		20000