Question

Sheffield Company purchased Machine #201 on May 1, 2017. The following information relating to Machine #201 was gathered at the end of May. Price $96,900 Credit terms 2/10, n/30 Freight-in $ 912 Preparation and installation costs $ 4,332 Labor costs during regular production operations $11,970 It is expected that the machine could be used for 10 years, after which the salvage value would be zero. Sheffield intends to use the machine for only 8 years, however, after which it expects to be able to sell it for $1,710. The invoice for Machine #201 was paid May 5, 2017. Sheffield uses the calendar year as the basis for the preparation of financial statements. Compute the depreciation expense for the years indicated using the following methods.

Depreciation Expense (1) Straight-line method for 2017 $ (2) Sum-of-the-years'-digits method for 2018 $ (3) Double-declining-balance method for 2017 $ Suppose Kate Crow, the president of Sheffield, tells you that because the company is a new organization, she expects it will be several years before production and sales reach optimum levels. She asks you to recommend a depreciation method that will allocate less of the company’s depreciation expense to the early years and more to later years of the assets' lives. What method would you recommend?

Answer 1

Answer.

1. Straight Line Method

Straight line method of depreciation spreads out the cost of the asset over the entire useful life of an asset.

The formula is-

Annual Depreciation Expense = Cost of the asset - Salvage/ Estimated Useful Life

Cost of asset $96,900

Installation Cost $ 4,332

Freight    $ 912

Depreciable Value $102,144

Life of the asset 8 years

Annual Depreciation Expense $12,768

Deprecaition for 8 months $8,512

2. Sum of Years Digit method

A business detemines that an asset is used up more quickly in early years so it decides to use the sum of years digit method of depreciation.

a) Calculate the sum of years digit in an asset useful life

Sum of year's digit = 8+7+6+5+4+3+2+1

= 36

b) Depreciable amount =102144 $

c) Undepreciated useful life = 7 as it has to be calculated for the year 2018

d) Amount of depreciation

=7/36 X 102144

=$19,861

3. Double declining Method

Sometimes businesses want to write off an asset even more quickly than they can use the SYD depreciation calculation because they believe the assets lose usefulness faster. In this case they use a method called double-declining balance.

The formula of the depreciation factor= 2 X 1/Estimated Useful Life

= 2 X 1/8

=0.25 OR 25%

Depreciation = 102144 X 0.25

=$ 25536