Question

Swanson & Hiller, Inc., purchased a new machine on September 1 of the current year at a cost of $170,000. The machine’s estimated useful life at the time of the purchase was five years, and its residual value was $10,000. 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 $31,500 cash. Compute the resulting gain or loss from this sale under each of the depreciation methods used in part a.

Answer 1

a-1) Straight line depreciation = (Cost - Residual value) / life of asset

Year	Cost	Beginning value	Depreciation upto 31st Dec	Closing value
1	1,70,000.00	1,70,000.00	10,666.67	1,59,333.33
2	1,70,000.00	1,59,333.33	32,000.00	1,27,333.33
3	1,70,000.00	1,27,333.33	32,000.00	95,333.33
4	1,70,000.00	95,333.33	32,000.00	63,333.33
5	1,70,000.00	63,333.33	32,000.00	31,333.33
6	1,70,000.00	31,333.33	21,333.33	10,000.00

Depreciation in the sixth year is upto Aug 31

If the asset is sold on the fouth year for $31500 there will be a loss of $31833.33 ($63,333.33 - $31,500.00)

a-2: 200% Declining balance method:

Straight line depreciation rate = 1/5 = 0.2 = 20%

Declining balance method = 2*20% = 40%

Year	Cost	Beginning value	Depreciation upto 31st Dec	Closing value
1	1,70,000.00	1,70,000.00	21,333.33	1,48,666.67
2	1,70,000.00	1,48,666.67	55,466.67	93,200.00
3	1,70,000.00	93,200.00	33,280.00	59,920.00
4	1,70,000.00	59,920.00	19,968.00	39,952.00
5	1,70,000.00	39,952.00	11,980.80	27,971.20
6	1,70,000.00	27,971.20	4,792.32	23,178.88

If the asset is sold on the fourth year for $31,500 there will be a loss of $8,452 ($39952 - $31500)

a-3: 150% declining balance method:

Straight line depreciation rate = 1/5 = 0.2 = 20%

Declining balance method = 1.5*20% = 30%

Year	Cost	Beginning value	Depreciation upto 31st Dec	Closing value
1	1,70,000.00	1,70,000.00	16,000.00	1,54,000.00
2	1,70,000.00	1,54,000.00	43,200.00	1,10,800.00
3	1,70,000.00	1,10,800.00	30,240.00	80,560.00
4	1,70,000.00	80,560.00	21,168.00	59,392.00
5	1,70,000.00	59,392.00	14,817.60	44,574.40
6	1,70,000.00	44,574.40	6,914.88	37,659.52

If the asset is sold on the fourth year for $31,500 there will be a loss of $27,892.

b) Straight line method is the most commonly used depreciation method for Financial reporting purposes.