Question

Muggsy Bogues Company purchased equipment for $280,350 on October 1, 2014. It is estimated that the equipment will have a useful life of 8 years and a salvage value of $21,000. Estimated production is 39,900 units and estimated working hours are 20,500. During 2014, Bogues uses the equipment for 520 hours and the equipment produces 1,000 units. Compute depreciation expense under each of the following methods. Bogues is on a calendar-year basis ending December 31.

(a) Straight-line method for 2014 (Round answer to 0 decimal places, e.g. 45,892.) $

(b) Activity method (units of output) for 2014 (Round rate per unit to 2 decimal places, e.g. 5.35 and final answer to 0 decimal places, e.g. 45,892.) $

(c) Activity method (working hours) for 2014 (Round rate per hour to 2 decimal places, e.g. 5.35 and final answer to 0 decimal places, e.g. 45,892.) $

(d) Sum-of-the-years'-digits method for 2016 (Round answer to 0 decimal places, e.g. 45,892.) $

(e) Double-declining-balance method for 2015 (Round answer to 0 decimal places, e.g. 45,892.) $

Answer 1

Muggsy Bogues Company

Method		Depreciation Expense
Straight line method, 2014		$8,105.00
Activity method (units of output, 2014)		$6,500
Activity method (working hours, 2014)		$6,579
sum of digits method, 2016		$37,724
double-decline method, 2015		$65,707

1. Depreciation expense under straight line method for 2014:

Equipment cost = $280,350

Date of purchase – Oct 1, 2014

Useful life = 8 years

Salvage value = $21,000

Depreciation expense = depreciable base x 1/useful life

Depreciable base = cost – salvage value

= 280,350 – 21,000 = $259,350

Annual depreciation expense = 259,350 x 1/8 = $32,419

Depreciation expenses for 3 months of use in 2014, (Oct, Nov and Dec) = 32,419 x 3/12 = $8,105

Hence depreciation expense for 2014 under straight line method = $8,105

1. Depreciation expense under activity method (units):

Depreciation expense = annual units of output x depreciable base/estimated production

Depreciable base = cost – residual value

Equipment cost = $280,350

Salvage value = $21,000

Depreciable base = cost – salvage value

= 280,350 – 21,000 = $259,350

Annual output in units = 1,000

Estimated output = 39,900

Rate per output = $259,350/39,900 = 6.5

Depreciation expense, 2014 = 1,000 x 6.5

Depreciation expense for 2014 = $6,500

1. Depreciation expense under activity method (working hours):

Depreciation expense = annual hours worked x depreciable base/estimated working hours

Depreciable base = cost – residual value

Equipment cost = $280,350

Salvage value = $21,000

Depreciable base = cost – salvage value

= 280,350 – 21,000 = $259,350

Hours worked in 2014 = 520

Total estimated working hours = 20,500

Rate per hour = (259,350/20,500) = 12.65

Depreciation expense = 520 hours x 12.65

Depreciation expense for 2014 = $6,579

1. Sum of the years digits method:

Depreciation expense = depreciable base x n(n+1)/2

N = useful life = 8 years

Depreciable base = cost – salvage value

= $280,350 - $21,000 = $259,350

= 10 (10 +1)/2 =55

Depreciation expense in year 3, 2016 = 259,350 x 8/55 = $37,724

1. Double-declining balance method:

Depreciation expense = cost x 2 x straight line depreciation rate

Cost = $280,350

Straight line depreciation rate = 1/8 = 12.5%

Depreciation rate = 2 x 12.5% = 25%

Depreciation expense for the year 2015 –

Depreciation expense = book value x 25%

Book value = cost – accumulated depreciation

Accumulated depreciation = depreciation expense of 2014

Depreciation expense of 2014 = cost x 25% x 3/12

(the equipment is used for 3 months only in 2014 – October through December)

Depreciation expense, 2014 = 280,350 x 25% x 3/12 = $17,522

Book value in 2015 = 280,350 – 17,522 = $262,828

Depreciation expense 2015 = 262,828 x 25% = $65,707