Question

KLM Company purchased a Mixer Machine on January 2, 2008, for $14,500. The Mixer was expected to have a useful life of five (5) years and a residual value of $1,000. The company engineers estimated that the Mixer would have a useful life of 7,500 hours. It was used 1,500 hours in 2008, 2625 hours in 2009, 2250 hours in 2010, 750 hours in 2011, and 375 hours in 2012. KLM Company's year end is December 31. Required:

1. Compute the depreciation expense and carrying value for 2008 to 2012, using the following methods: (a) Straight-Line, (b) Production, (c) Double-Declining-Balance.

2. Prepare the adjusting entry to record the depreciation for 2008 that you that you calculated in 1(a), 1(b), and 1(c). (Three separate independent entries.)

3. Show Accumulated Depreciation Account (in T Account form) using all three (3) methods mentioned in 2 from 2008 to 2012. (Three separate independent accounts.)

4. Show the Balance Sheet presentation for the Mixer Machine after the entries in 2, under all three methods, on December 31, 2008. (Three separate independent presentations.)

5. Show the Balance Sheet presentation for the Mixer Machine after the entries in 2, under all three methods, on December 31, 2012. (Three separate independent presentations.)

6. What conclusions can you draw from the patterns of yearly depreciation? Please answer this question as well , please.

Answer 1

1. Straight Line method uses same rate of depreciation throughout the life of an asset until the carrying value comes equal to Zero or Residual value. In this question the rate is 1/5 = 20% and the same rate is used and thus the amount of depreciation is also same for all the years.

2. Units of production method take into consideration some factor as a base as in this question labor hour is the base and the cost less residual value is divided by the base(Total) and the respective labor hours of the year is the multiplied to get the depreciation amount. This method charges depreciation as per the amount of actual use.The depreciating can be fluctuating.

3. Double declining method uses double the rate of straight line method i.e. 20 * 2 = 40% and it is calculated on the book value of each year unlike SLM that is calculated always on cost less residual value. And therefore the depreciation goes on decreasing year on year. This method assumes that the asset is used more in initial year and thus more depreciation is to be charged.

Note: In case of any clarification, please do comment. Thank you.