Question

5. Stegman Company purchased a machine on January 2 for its business for $243,000. The machine has an expected useful life of 5 years and an expected salvage value of $9,000. The company expects to use the machine for 1,400 hours in the first year, 2,000 hours in the second year, 1,600 hours in the third year, 1,450 hours in the fourth year, and 1,200 hours in the final year. Calculate the annual depreciation expense for each of the five years using each of the following depreciation methods:

a. Straight-line

b. Double-declining balance

c. Sum-of-the-years digit

d. Units-of-production (assume that actual usage equals expected usage)

Answer 1

(a)-Depreciation expense under Straight-line method

Depreciation Expense under Straight-Line Method = [(Cost – Residual Value) / Useful life]

Year 1 = $46,800 [($243,000 - $9,000) / 5 Years]

Year 2 = $46,800 [($243,000 - $9,000) / 5 Years]

Year 3 = $46,800 [($243,000 - $9,000) / 5 Years]

Year 4 = $46,800 [($243,000 - $9,000) / 5 Years]

Year 5 = $46,800 [($243,000 - $9,000) / 5 Years]

(b)-Depreciation expense under Double-declining balance method

Year 1 = $97,200

Year 2 = $58,320

Year 3 = $34,992

Year 4 = $20,995

Year 5 = $ 22,493

Depreciation under Double Declining Balance = Beginning Balance x 2 x Straight Line Depreciation Rate

Depreciation Rate = 2 (1/Useful Life)

= 2 x (1/5)

= 0.40 or 40%

Annual Depreciation Expense using Double Declining Balance

Year	Book Value at the beginning	Depreciation rate	Annual depreciation expense [Book Value at the beginning x Depreciation rate]	Book value at the end
1	243,000	0.40	97,200	145,800
2	145,800	0.40	58,320	87,480
3	87,480	0.40	34,992	52,488
4	52,488	0.40	20,995	31,493
5	31,493	0.40	22,493	9,000

(c)-Depreciation expense under Sum-of-the-years digit method

Depreciation under Sum of Years Digits Method = [Cost – Salvage Value] x Years Fraction

Year 1 = $78,000 [($243,000 - $9,000) x 5/15]

Year 2 = $62,400 [($243,000 - $9,000) x 4/15]

Year 3 = $46,800 [($243,000 - $9,000) x 3/15]

Year 4 = $31,200 [($243,000 - $9,000) x 2/15]

Year 5 = $15,600 [($243,000 - $9,000) x 1/15]

(d)-Depreciation expense under Units-of-production method

Depreciation under Units-of-production method = [(Cost – Residual Value) x (Actual hours / Total hours)]

Year 1 = $42,824 [($243,000 - $9,000) x (1,400 / 7,650)]

Year 2 = $61,176 [($243,000 - $9,000) x (2,000 / 7,650)]

Year 3 = $48,941 [($243,000 - $9,000) x (1,600 / 7,650)]

Year 4 = $44,353 [($243,000 - $9,000) x (1,450 / 7,650)]

Year 5 = $36,706 [($243,000 - $9,000) x (1,200 / 7,650)]