Question

CONCEPT CHECK for DEPRECIATION Depreciation Methods — Year 1 Cost of machine (purchased Jan 1) 83,000 Salvage value 3,000 Useful life in years 5 Useful life in machine hours 100,000 A. Using the information provided above, calculate this truck’s depreciation for Year 1 and Year 2 using the following methods: Year 1 Year 2 1. Straight-line ________________ _______________ 2. Double-declining balance ________________ _______________ 3. Units of activity ________________ _______________ (Year 1 actual hours is 25,000 hrs) (Year 2 actual hrs is 19,000 hrs) B. Using the Units of activity method (as in (3) above), Calculate the BOOK VALUE of the machine at the end of YEAR 2 _______________. What is the _____________ if the machine is sold at the end of Year 2 for $38,000 ? $ ___________ Gain or Loss C. If the straight-line method was used and the machine had been purchased on October 1 instead of January 1, how much depreciation would have been taken in year 1? $_____________ D. An asset is purchased on May 1, 2007 for $38,000 with a salvage value of $2,000. What will be the depreciation for the first year using straight-line deprecation if the useful life is estimated to be 4 years? _________________ What will be the book value at the end of 2008? _____________

Answer 1

Part A

Depreciation according to straight line method = (cost - salvage value) /estimated life =(83000-3000)/5=16000

Year 1 depreciation = 16000

Year 2 depreciation = 16000

Depreciation according to double declining balance

Depreciation rate = 1/5 *2 =40%

Year 1 depreciation = 83000*40%=33200

Year 2 depreciation = (83000-33200)*40%=19920

Depreciation according units activity method

Depreciation rate per hour=(cost - salvage value) /estimated machine hours =(83000-3000)/100000=0.80 per hour

Year 1 depreciation = 25000*0.80=20000

Year 2 depreciation =19000*0.80=15200

Part B

Book value at end year 2 = cost - accumulated depreciation = 83000-(20000+19200)=43800

If machine is sold at the end year at 38000, there will be loss of 5800 (book value - selling price, 43800-38000=5800 loss)

Part C

Depreciation in year 1 = (83000-3000)/5 *3/12= 4000

Part D

Depreciation for year 2007 = (38000-2000)/4*8/12=6000

Depreciation for year 2008 = 9000

Book value at end of 2008 = cost - accumulated depreciation = 38000-(6000+9000) =23000