Question

On May 1, 2017, Hobart Mfg. Co. purchased a drill press at a cost of $36,000. The drill press is expected to last 10 years and have a residual value of $6,000. During its 10-year life, the equipment is expected to produce 500,000 units of product. In 2017, 2018 and 2019, 25,000 75,000 and 84,000 units, respectively, were produced.

REQUIRED: (Show Your Work)

(a) Compute depreciation for 2017 and 2018, assuming the straight-line method is used.

(b) Compute depreciation for 2017, 2018, 2019 and 2020, assuming the double-declining-balance method is used.

(c) Compute depreciation for 2017, 2018, 2019 and 2020, assuming the sum-of-the-years'-digits method is used.

(d) Compute depreciation for 2017, 2018, and 2019, assuming the units-of-production method is used.

Answer 1

Solution:

Part a –

Depreciation expense to be charged using the straight line for 2015 and 2016

Straight Line Method

Straight line method is a method of calculating depreciation of an asset.

Under this method depreciation is calculated by dividing depreciable asset value by estimated useful life.

Depreciable Asset Value = Cost of Asset – Salvage Value

In this method, depreciation for each year remains same.

Mathematically,

Annual Depreciation = (Cost of Asset $36,000 – Salvage Value 6,000) / Useful life 10

= $3,000

Depreciation Expenses for 2017 (for 8 months) = $3,000*8/12 = $2,000

Depreciation Expenses for 2018 = $3,000

Part b –

Depreciation expense to be charged using the Double Declining Method

It is a method of depreciation used by the companies when they want to quickly depreciate an asset.

The asset will depreciate much faster under this method than straight-line because we double the percentage that would be depreciated each year under straight-line.

Salvage value is not subtracted from Cost of Asset when depreciation is calculated by using this method.

The formula for double declining balance is:

Annual depreciation = Book Value * 100% / life * 2

Calculate the percentage that should be used first.

Percentage = 100% / Useful Life x 2 = 100% / 10 x 2 = 20%

Once the percentage is calculated, it is the same for the rest of the asset’s life.

Year	DDB Depreciation for the period			End of Period
	Beginning of period book value	Depreciation Rate	Depreciation Expenses	Accumulated Depreciation	Book Value
2017	36,000	20%	7,200	7,200	28,800
2018	28,800	20%	5,760	12,960	23,040
2019	23,040	20%	4,608	17,568	18,432
2020	18,432	20%	3,686	21,254	14,746

Part c- Depreciation Expense using sum of digit method

Annual Depreciation = Depreciation Amount of Asset x Remaining Useful Life / Sum of Digit of Years

Sum of Digit of Years = 10+9+8+7+6+5+4+3+2+1 = 55

Sum of Year Digit Method of Depreciation
Year	Depreciable Amount	Remaining Useful life	Depreciation Expense
	(A)	(B)	(A*B/Total of B)
2017	$30,000	10	$5,455 (30000*10/55)
2018	$30,000	9	$4,909 (30000*9/55)
2019	$30,000	8	$4,364 (30000*8/55)
2020	$30,000	7	$3,818 (30000*7/55)

Part d - Depreciation expense to be charged using the units of production method

Under the Units of Production method of depreciation, depreciation is charged according to the actual usage of the asset. Higher depreciation is charged when there is higher activity and less is charged when there is low level of operation. Zero depreciation is charged when the asset is idle for the whole period.

Estimated use of Asset during life = 500,000 Units

Depreciable Cost of Asset = Cost of Asset – Salvage Value = $36,000 – 6,000 = 30,000

Under the units of production method, the Depreciation Cost of Asset of $30,000 is divided by estimated production during the life of asset 500,000 Units , resulting in depreciation of $0.06 per unit

Units of Production Method
Year	Number of Units Produced	Depreciation Rate per hour	Annual Depreciation Expenses
2017	25000	$0.06	$1,500
2018	75000	$0.06	$4,500
2019	84000	$0.06	$5,040

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