Question

Please show your works! Thanks swanson & Hiller, Inc., purchased a new machine on September 1 of the current year at a cost of $149,000. The machine’s estimated useful life at the time of the purchase was five years, and its residual value was $9,000. The company reports on a calendar year basis.

Required: a-1. Prepare a complete depreciation schedule, beginning with the current year, using the straight-line method. (Assume that the half-year convention is used).

a-2. Prepare a complete depreciation schedule, beginning with the current year, using the 200 percent declining-balance method. (Assume that the half-year convention is used).

a-3. Prepare a complete depreciation schedule, beginning with the current year, using the 150 percent declining-balance, switching to straight-line when that maximizes the expense. (Assume that the half-year convention is used).

b. Which of the three methods computed in part a is most common for financial reporting purposes?

c. Assume that Swanson & Hiller sells the machine on December 31 of the fourth year for $29,500 cash. Compute the resulting gain or loss from this sale under each of the depreciation methods used in part a.

Answer 1

A - 1)

Striaght Line Method of Depreciation
Period	Beginning Value	Depreciation	Ending Value
Year 1	149,000	14,000	135,000
Year 2	135,000	28,000	107,000
Year 3	107,000	28,000	79,000
Year 4	79,000	28,000	51,000
Year 5	51,000	28,000	23,000
Year 6	23,000	14,000	9,000

Cost = 149000

Salvage Value = 9000

Depreciation base = cost - salvage = 149000 - 9000 = 140000

Annual Depreciation = Depreciation Base / Useful Life = 140000 / 5 = 28000

In Year 1 will use half year conversion. Remaining on this year balance amount will write off year 6 . 6 months each.

A - 2)

Double Declining 200% Method
Period	Beginning Value	Depreciation	Ending Value
Year 1	149,000	29,800	119,200
Year 2	119,200	47,680	71,520
Year 3	71,520	28,608	42,912
Year 4	42,912	17,165	25,747
Year 5	25,747	10,299	15,448
Year 6	15,448	6,179	9,269
Year 7	9,269	269	9,000

Here, Depreciation charge will 40% yearly on Begining Value.

Under Striaght Line method charge will 20% (5 year use ful life. Yearly 20% will write off full 100% depreciation)

In first year half year conversion used . So Depreciation will be Book Value x 40% x 1/2

Then its going on till year six by the formula of Begining Value x 40%

In year 7 - Will be adjusted salvage value. Asset cannot record under its salvage value.

A - 3 )

Double Declining 150% Method
Period	Beginning Value	Depreciation	Ending Value
Year 1	149,000	22,350	126,650
Year 2	126,650	37,995	88,655
Year 3	88,655	28,000	60,655
Year 4	60,655	28,000	32,655
Year 5	32,655	23,655	9,000

Here depreciation charge is Striaght Line rate x 1.5 = 20 x 1.5 = 30%

In Year first half year conversion is used. Deprecaition is Begining Value x 30 x 1/2

In Year 2 - 30% of begining value for full year

In 3rd year will convert to Straight line method . Because under DDB 150% method depreciation will be less than the yearly deprecaition under staright line . The yearly depreciation in striaght line is 28000. Under DDB 150% method the depreciation will be 26597 (Begining value x 30%). So this is the time to change the method.

In Year 5, depreciation will adjust with salvage value. The asset cant record less than its book value.

B -

If revenue management expecting that equal revenue on asset useful life then Striaght line method is suitable. The GAAP also recommending . This is the simplest method for calculating depreciation.

The double declining balance method will in first year lower revenue and will give more revenue in the years to come.

Many companies may using DDB method in starting year and converting to straight line method.

C-

Sale Value - 29500

Year 4 end Value (Stright Line) = 51000 (Here booked profit)

Year 4 end Value (DDB 200) = 25747 (Here book Loss)

Year 4 end Value (DDB 150) = 32655 (Here book Profit)

Profit on Striaght Line Method = 51000 - 29500 = 21500 (Gain on sale)

Loss on DDB 200 = 25743 - 29500 = - 3743 (Loss on sale)

Profit on DDB 150 = 32655 - 29500 = 3155 ( Gain on Sale)

if sale done above book value its booked gain. if sale done below the book value it booked loss