Question

On January 2, 2010, Sayre Company purchased a machine for $45,000. The machine has a five-year estimated useful life and a $5,000 estimated residual value. In addition, the company expects to use the machine 250,000 hours. Assuming that the machine was used 40,000 and 45,000 hours during 2010 and 2011, respectively, complete the following chart.

	Depreciation Expense 1st Year	Depreciation Expense 2nd Year	Accumulated Depreciation	Net Book Value
Straight-Line     Method
Declining Balance Method

Answer 1

Straight Line Method:

Purchase Price = $ 45000, Residual Value = $ 5000 and Estimated Life = 5 years

Depreciation Expense in Year 1 = (Purchase Price - Residual Value) / Estimated Life = (45000 - 5000) / 5 = $ 8000

Depreciation Expense in Year 2 = (45000 - 5000) / 5 = $ 8000

Accumulated Depreciation = (Depreciation Expense in Year 1 + Depreciation Expense in Year 2) = (8000 + 8000) = $ 16000

Net Book Value = Purchase Price - Accumulated Depreciation = 45000 - 16000 = $ 29000

Declining Balance Method:

Purchase Price = $ 45000, Total Machin Hours = 250000

Usage in Year 1 = 40000 hours

Depreciation % for Year 1 = Based on Uasge hours of Year 1 = (40000 / 250000) x 100 = 16%

Depreciation Expense in Year 1 = [Book Value at the beginning of Year 1 - Residual Value] x Depreciation Rate (in %) = [45000 - 5000] x 0.16 = $ 6400

Net Book Value at the end of Year 1 (Beginning of Year 2) = 45000 - 6400 = $ 38600

Usage in Year 2 = 45000

Depreciation % for Year 2 = (45000 / 250000) x 100 = 18 %

Depreciation Expense in Year 2 = [Book Value at the beginning of Year 2 - Residual Value] x Depreciation Rate (in %) = [38600 - 5000] x 0.18 = $ 6048

Net Book Value at the end of Year 2 = 38600 - 6048 = $ 32552

Accumulated Depreciation = Depreciation Expense in Year 1 + Depreciation Expense in Year 2 = 6400 + 6048 = $ 12448