Question

In recent years, Pharoah Company has purchased three machines. Because of frequent employee turnover in the accounting department, a different accountant was in charge of selecting the depreciation method for each machine, and various methods have been used. Information concerning the machines is summarized in the table below.

Machine
Acquired
Cost
Salvage
Value
Useful Life
(in years)
Depreciation
Method
1
Jan. 1, 2015       $135,500       $35,500       10       Straight-line
2
July 1, 2016       81,500       10,200       5       Declining-balance
3
Nov. 1, 2016       77,600       7,600       6       Units-of-activity

For the declining-balance method, Pharoah Company uses the double-declining rate. For the units-of-activity method, total machine hours are expected to be 35,000. Actual hours of use in the first 3 years were: 2016, 710; 2017, 5,000; and 2018, 6,400.

  
Compute the amount of accumulated depreciation on each machine at December 31, 2018.

MACHINE 1
MACHINE 2
MACHINE 3
Accumulated Depreciation at December 31
$enter a dollar amount
39800
$enter a dollar amount
58028
$enter a dollar amount
53380

  
If machine 2 was purchased on April 1 instead of July 1, what would be the depreciation expense for this machine in 2016? In 2017?

2016
2017
Depreciation Expense
$enter a dollar amount
$enter a dollar amount

Answer 1

Pharoah Company

1. Computation of accumulated depreciation on each machine as on Dec 31, 2018:

Machine 1 –

Straight line depreciation –

Annual Depreciation expense = (135,500 – 35,500) x 1/10 = $10,000

Accumulated depreciation, 4 years (Jan 1, 2015 – Dec 31, 2018) = 10,000 x 4 = $40,000

Machine 2 –

Declining balance method-

Depreciation expense= cost or book value x 2 x straight line depreciation rate

Depreciation rate = 2 x 1/5 = 40%

Depreciation 2016 (6 months) = 81,500 x 40% x 6/12 = $16,300

Depreciation 2017 = (81,500 – 16,300) x 40% = 26,080

Depreciation 2018 = (81,500 – 16,300 – 26,080)x 40% = 39,120 x 40% = 15,648

Accumulated depreciation = 16,300 + 26,080 + 15,648 = $58,028

Machine 3 –

Depreciation expense = annual usage in hours x depreciation rate per unit

Depreciation rate = depreciable base /estimated total hours

Depreciable base = cost – salvage value = 77,600 – 7,600 = $70,000

Depreciation rate = 70,000/35,000hours = $2 per hour

Depreciation 2016 = 710 hours x $2= $1,420

Depreciation 2017 = 5,000 hours x $2 = $10,000

Depreciation 2018 = 6,400 hours x $2 =$12,800

Accumulated depreciation = 1,420 + 10,000 + 12,800 = $24,220

1. Depreciation expense on machine 2 –

Depreciation expense = cost or book value x 2 x straight line depreciation rate

Depreciation rate = 2 x 1/5 = 40%

Depreciation 2016 (9 months, Apr 1 – Dec 31) = 81,500 x 40% x 9/12 = $24,500

Depreciation 2017 = (81,500 – 24,500) x 40% = 57,000 x 40% = $22,800