Question

On May 5, 2009, Lloyd purchased a machine for $84,000. The estimated life of the machine was 10 years,

with an estimated residual value of $10,000. The service life in terms of “output” is estimated at 8,000 hours

of operation. SHOW ALL WORKING

1. Refer to the above data. Assume Lloyd uses straight-line depreciation with the half-year convention. Depreciation expense to be recognized in 2009 (the year of purchase) is: a. $7,400. b $8,400. c $3,700.d Some other amount.

2. Refer to the data above. Assume Lloyd uses 200%-declining-balance depreciation with the half-year convention. Depreciation expense to be recognized in 2010 (the second year of ownership) is:

a $8,400.b $13,120. c $15,120. d Some other amount.

3 Refer to the data above. Assume Lloyd uses 150%-declining-balance depreciation with the half-year convention. Depreciation expense to be recognized in 2009 (the year of purchase) is:

a $8,400. b $6,300. c $12,600. d Some other amount.

4 Refer to the data above. Assume Lloyd uses the units-of-output method and that the machine was in operation for 1,000 hours in 2009 and 1,800 hours in 2010. The book value of the machine at December 31,2010 is:

a $48,100. b $58,100. c $25,900. d Some other amount

Answer 1

Part 1-Straight-Line method
Annual Depreciation =($84,000 - $10,000) / 10 Years =$7,400
Depreciation for 2009(as per half year convention) =$7,400 / 2 =$3,700
So Option C is answer
Part 2-200% Declining Balance
Deprecation rate as per 200% Declining Balance =(1 / 10 Years)*2 =20%
Annual Depreciation expense =$84,000*20% =$16,800
Depreciation for 2009(as per half year convention) =$16,800 / 2 =$8,400
Book Value of Asset as on Dec 31,2009 =$84,000 - $8,400 =$75,600
Depreciation expense for 2010 =$75,600*20% =$15,120
So Option C is answer
Part 3-150% Declining Balance
Deprecation rate as per 200% Declining Balance =(1 / 10 Years)*1.5 =15%
Annual Depreciation expense =$84,000*15% =$12,600
Depreciation for 2009(as per half year convention) =$12,600 / 2 =$6,300
So Option B is answer
Part 4-Units of Output method
Depreciation per machine hour =($84,000 - $10,000) / 8,000 hours =$9.25 hours
Depreciation for 2009 =$9.25*1000 hrs =$9,250
Depreciation for 2010 =$9.25*1800 hrs =$16,650
Book value at end of 2010 =$84,000 - $9,250 - $16,650 =$58,100
So Option B is answer