Question

Depreciation Methods

Gruman Company purchased a machine for $198,000 on January 2, 2016. It made the following estimates:

Service life	5 years or 10,000 hours
Production	180,000 units
Residual value	$ 18,000

In 2016, Gruman uses the machine for 1,700 hours and produces 45,000 units. In 2017, Gruman uses the machine for 1,200 hours and produces 32,000 units. If required, round your final answers to the nearest dollar.

If Gruman used a service life of 8 years or 15,000 hours and a residual value of $9,000 , 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

Straight line method

Depreciation expense = [(Cost of asset - Residual value) / Useful life of asset]

Year	Depreciation expense ($)	Book value ($)
2016	23625 [($198000 - $9000) / 8 years]	174375 ($198000 - $23625)
2017	23625	150750

Sum of the years digit method

Depreciation expense = [(Cost of asset - Residual value) / sum of remaining years] X Remaining years

Year	Depreciation expense ($)	Book value ($)
2016	42000 [($198000 - $9000) / 36 years] X 8 years	156000 ($198000 - $42000)
2017	36750 [($198000 - $9000) / 36 years] X 7 years	119250 ($156000 - $36750)

Double declining balance method

Depreciation expense = (Cost of asset X Straight line depreciation percentage X 2)
Straight line percentage = (1/ 8 years) = 12.5%

Year	Depreciation expense ($)	Book value ($)
2016	49500 ($198000 X 12.5% X 2)	148500 ($198000 - $49500)
2017	37125 ($198000 - $49500) X 12.5% X 2)	111375 ($148500 - 37125)

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