Question

On January 3, 2016, B.W. Soffer Inc. paid $224,000 for a computer system. In addition to the basic purchase price, the company paid a setup fee of $6,200, $6,700 sales tax, and $3,100 for special installation. Management estimates that the computer will remain in service for five years and have a residual value of $15,000. The computer will process 50,000 documents the first year, decreasing annually by 5,000 during each of the next four years (that is, 45,000 documents in 2017, 40,000 documents in 2018, and so on). In trying to decide which depreciation method to use, the company president has requested a depreciation schedule for each of three depreciation methods (straight-line, units-of-production, and double-diminishing-balance).

Answer 1

Depreciation schedule under different methods
Particulars	2016	2017	2018	2019	2020
Depreciation as per Straight line method	45,000	45,000	45,000	45,000	45,000
Depreciation as per units of production method	56,250	50,625	45,000	39,375	33,750
Depreciation as double diminishing balance method	96,000	57,600	34,560	20,736	12,442
Calculation of cost of computer system
Purchase Price	224,000
Set-up fee	6,200
Sales tax	6,700
Special installation	3,100
Cost of computer system	240,000
Useful life	5 years
Residual value	15,000
Depreciation as per straight line method
Depreciation as per SLM = (Cost - Residual Value)/Useful life
Cost	240,000
Residual Value	15,000
Useful life	5 years
Annual Depreciation = (240,000 - 15,000)/5	45,000
Depreciation as per units of production method
Depreciation as per units of production method =	(Cost - Residual Value)	x Units per year
	Estimated total units produced
Particulars	2016	2017	2018	2019	2020
Cost	240,000	240,000	240,000	240,000	240,000
Residual Value	15,000	15,000	15,000	15,000	15,000
Units per year	50,000	45,000	40,000	35,000	30,000
Estimated units produced in the useful life	200,000	200,000	200,000	200,000	200,000
(50,000 + 45,000 + 40,000 + 35,000 + 30,000)
Depreciation as per units of production method	56,250	50,625	45,000	39,375	33,750
Depreciation as double diminishing balance method
Annual Depreciation as per SLM	45,000
Depreciable value of asset (240,000 - 15,000)	225,000
Rate of depreciation under SLM (45,000/225,000)	20%
Rate of depreciation under DDB method (20% x 2)	40%
Particulars	2016	2017	2018	2019	2020
Cost/Opening Balance of asset	240,000	144,000	86,400	51,840	31,104
Rate of Depreciation	40%	40%	40%	40%	40%
Depreciation as per DDB method (40% of Opening Balance)	96,000	57,600	34,560	20,736	12,442
Closing Balance of asset (Opening Balance - Depreciation)	144,000	86,400	51,840	31,104	18,662