Question

Problem 3

The Flynn Corporation began operations on September 1, 20x3. On that date, equipment costing $84,000 was purchased. Flynn estimated that the equipment’s useful life would be seven years and have a residual value of $24,500. Flynn also estimated that the equipment could be used for about 10,000 hours. It was used for 800 hours in 20x3 and 1,700 hours in 20x4.

Required –

Calculate depreciation expense for 20x3 and 20x4 under each of the following methods:

1. a) Straight-line method.

2. b) Units of production method

3. c) Diminishing balance method at a rate of 30%. Calculate depreciation expense in

   20x7 also.

Answer 1

Answer-a)- The depreciation expense for 20x3 = $2833.

The depreciation expense for 20x4 = $8500.

Explanation- Straight line Method-

= Cost of asset- Salvage value of asset/No. of useful life (years)

=($84000-$24500)/7 years

=$59500/7 years

= $8500

Year 20x3 depreciation expense =( $8500*4 months)/12 months

= $2833

Year 20x4 depreciation expense = $8500

b)- The depreciation expense for 20x3 = $4760.

The depreciation expense for 20x4 = $10115.

Explanation- Units of production method:-Annual depreciation expense per unit- Machine B

=Cost – salvage /Total units

=($84000-$24500)/10000 hours

=$5.95 per hour

Depreciation expense in year 20x3= Depreciation expense per hour* Hours used

                                                =$5.95 per hour *800 hours

                                                 =$4760

Depreciation expense in year 20x4= Depreciation expense per hour* Hours used

                                                =$5.95 per hour *1700 hours

                                                 =$10115

c)- The depreciation expense for 20x3 = $8400.

The depreciation expense for 20x4 = $22680.

The depreciation expense for 20x7 = $1431.

Explanation-Diminishing balance method – Cost of equipment*Depreciation rate

Year 20x3 = ($84000*30%)*4 months/12 months

= ($25200*4 months)/12 months

= $8400

Book value at the end of year 20x3 = $84000-$8400 = $75600

Year 20x4 Depreciation expense = $75600*30%= $22680

Book value at the end of year 20x4 = $75600-$22680 =$52920

Year 20x5 Depreciation expense = $52920*30%= $15876

Book value at the end of year 20x5 = $52920-$15876 =$37044

Year 20x6 Depreciation expense = $37044*30%= $11113

Book value at the end of year 20x6 = $37044-$11113 =$25931

Year 20x7 Depreciation expense = $25931-$24500 =$1431