Question

The following information relates to Hawkrigg Corporation’s purchase of equipment on 15 June 20X7: Invoice price ..................... $ 210,000 Discount for early payment (if paid by 30 June)....... $ 1,050 Shipping costs..................... $ 2,000 Installation ...................... $ 1,500 Testing ........................ $ 3,000 The equipment was installed and tested during the week of 22 June 20X7. Hawkrigg paid the invoice price on 1 July 20X7. The equipment was ready for use on 30 June and put into production on 3 July 20X7. Hawkrigg management uses straight- line depreciation for the company’s equipment and expects to use the asset for six years. he estimated residual value is zero. Their fiscal year end is 31 December. Required: 1. What is the book value of the equipment after installation? 2. Compute depreciation expense for 20X7, using the straight- line method, under each of the following assumptions: a. Exact, to the closest month b. Full first- year convention c. Half- year convention 3. Calculate depreciation expense for both 20X7 and 20X8 under each of the methods in requirement (2), using double- declining balance ( DDB) depreciation.

Answer 1

1. Book Value of Machinery after Installation

Any expenses incurred for bringing the asset to its current location should also be capitalised. In this case, the book value of the asset will be:

Invoice Price: $210,000

Add: Testing, Shipping and Installation costs $6,500

Book Value of the Asset - $217,500

Note: Discount on invoice price of $1,050 is not considered as the payment is made after June 30th i.e payment is made on July 1st.

2a. Depreciation exact to the closest month

The asset was ready to use on June 30th (second half of June). The closest month is July 1st. The Depreciation expense for 2017 will be for 6 months.

Depreciation for 1 year = $217,500/6Years = $36,250

Depreciation for 6 months = 18,125

2b. First Full year convention

Depreciation for 1 year = $217,500/6Years = $36,250

2c. Half Year convention

Depreciation for 6 months = 18,125

3. Double Declining Balance (DDB)

Double declining balance formula - 2 X Straight Line Depreciation per year

Depreciation under DDB = 2 X 36,250 = 72,500