Question

At the beginning of the year, Central Connecticut bought a new digital, photographic telescope for the Copernican Observatory at a cost of $250,000. Transportation and installation costs to get the telescope delivered and functioning in the observatory amounted to $30,000. The equipment’s estimated useful life is 4 years and the salvage value is $20,000.

#1.

1. Straight-Line Method

Using the Straight Line Method, calculate the depreciation expense and book value of the telescope that would be recorded at the end of each of the 4 years of its useful life.

2. Double Declining Balance Method

Using the Double Declining Balance Method, calculate the depreciation expense and book value of the telescope that would be recorded at the end of each of the 4 years of its useful life.

3. Units of Production Method

Using the Units of Production Method, calculate the depreciation expense and book value of the telescope that would be recorded in each of the 4 years of its useful life.

The estimated photographs expected from the photographic telescope over its useful life is 40,000.

The actual number of photographs taken each year is:

Year 1             10,000 photos

Year 2             5,000 photos

Year 3             10,000 photos

Year 4             15,000 photos

#3.   Calculate the gain or loss for each of the 3 depreciation methods if the university sells the telescope at the end of the third year for $95,000.

Answer 1

Cost of photographic telescope	$ 250,000
Transportation and installation costs	$    30,000
Salvage value	$    20,000
Useful life	4	years

Straight-Line Method

Calculation of depreciation per year as per Straight-Line Method

=(Cost of photographic telescope+Transportation and installation costs-Salvage value)/Useful life

=(250000+30000-20000)/4

$          65,000 Per year

Cost of photographic telescope	$        250,000
Transportation and installation costs	$          30,000
total Cost of photographic telescope	$        280,000

	value at beginning of the year	Depreciation	value at end of the year
year 1	$        280,000	$        65,000	$        215,000
year 2	$        215,000	$        65,000	$        150,000
year 3	$        150,000	$        65,000	$          85,000
year 4	$          85,000	$        65,000	$          20,000

Double Declining Balance Method

Calculation of depreciation rate per year as per Straight-Line Method

={(Cost of photographic telescope+Transportation and installation costs)/Useful life}/total Cost of photographic telescope*100*2

={(250000+30000)/4}/280000*100*2

50%

	value at beginning of the year	Depreciation	value at end of the year
year 1	$        280,000	$     140,000	$        140,000
year 2	$        140,000	$        70,000	$          70,000
year 3	$          70,000	$        35,000	$          35,000
year 4	$          35,000	$        15,000	$          20,000

Units of Production Method

Calculation of depreciation per unit

The estimated photographs expected from the photographic telescope over its useful life

40000 Units

Depreciation per Unit

(total Cost of photographic telescope-Salvage value)/The estimated photographs expected from the photographic telescope over its useful life

(280000-20000)/40000

$               6.50 Per Unit

Year 1	10,000	photos
Year 2	5,000	photos
Year 3	10,000	photos
Year 4	15,000	photos

value at beginning of the year	Depreciation	value at end of the year
$        280,000	$        65,000	$        215,000
$        215,000	$        32,500	$        182,500
$        182,500	$        65,000	$        117,500
$        117,500	$        97,500	$          20,000

Calculate the gain or loss for each of the 3 depreciation methods if the university sells the telescope at the end of the third year for $95,000.

1	Straight-Line Method		2	Double Declining Balance Method		3	Units of Production Method
	Value at the end of year 3	$          85,000		Value at the end of year 3	$        35,000		Value at the end of year 3	$ 117,500
	Selling price	$95,000.00		Selling price	$95,000		Selling price	$95,000
	Profit/(loss)	$10,000.00		Profit/(loss)	$60,000		Profit/(loss)	($22,500)