Question

Swanson & Hiller, Inc., purchased a new machine on September 1 of the current year at a cost of $108,000. The machine’s estimated useful life at the time of the purchase was five years, and its residual value was $8,000. The company reports on a calendar year basis.

Required:
a-1. Prepare a complete depreciation schedule, beginning with the current year, using the straight-line method. (Assume that the half-year convention is used).

a-2. Prepare a complete depreciation schedule, beginning with the current year, using the 200 percent declining-balance method. (Assume that the half-year convention is used).

a-3. Prepare a complete depreciation schedule, beginning with the current year, using the 150 percent declining-balance, switching to straight-line when that maximizes the expense. (Assume that the half-year convention is used).

b. Which of the three methods computed in part a is most common for financial reporting purposes?

c. Assume that Swanson & Hiller sells the machine on December 31 of the fourth year for $29,000 cash. Compute the resulting gain or loss from this sale under each of the depreciation methods used in part a.

Answer 1

a-1. Straight line method:

Depreciation expense = Purchase cost of asset - residual value / estimated useful life

= $108,000 -$8,000 / 5

= $20,000

Year	Depreciation	Accumulated depreciation
1( for 6 months)	$10,000	$10,000
2	20,000	30,000
3	20,000	50,000
4	20,000	70,000
5	20,000	90,000
6 (for 6 months)	10,000	100,000
Total	$100,000

a-2. 200% declining balance method:

Depreciation rate = 100 / 5 years * 200% = 40%

Year	Book value at the start of the year	Depreciation rate	Depreciation	Accumulated depreciation	Book value at the end of the year
1( for 6 months)	$108,000	20%	$21,600	$21,600	$86,400
2	86,400	40%	34,560	56,160	51,840
3.	51,840	40%	20,736	76,896	31,104
4	31,104	40%	12,442	89,338	18,662
5	18,662	40%	7,465	96,803	11,197
6(for 6 months)	11,197	20%	3,197 ($100,000-$96,803)	100,000	8,000

In year 6, depreciation expense is calculated as difference between total depreciable value and Accumulated depreciation at the end of year 5.

a-3 150% declining balance method:

Depreciation rate = 100 / 5 years * 150% = 30%

Year	Book value at the start of the year	Depreciation rate	Depreciation	Accumulated depreciation	Book value at the end of the year
1( for 6 months)	$108,000	15%	$16,200	$16,200	$91,800
2	$91,800	30%	27,540	43,740	64,260
3.	64,260	30%	19,278	63,018	44,982
4	44,982	30%	13,495	76,513	31,487
5	31,487	Straight line method *	11,743	88,256	19,744
6	19,744	Straight line method	11,744	100,000	8,000

* Switch to straight line method from year 5 , Depreciation expense  calculated as (31,487 - 8,000 / 2) for both the remaining years

b. Straight line method of depreciation is the most common for financial reporting purposes out of the three methods.

c. Gain or( loss) from sale of machine = Sale value - Book value after depreciation ( cost of machine - accumulated depreciation)

Straight line method = $29,000 - 38,000 (108,000 - 70,000)

= $(9,000)

200% declining balance method = $29,000 - 18,662 (108,000 - 89,338)

= $10,338

150% declining balance method = $29,000 - 31,487 (108,000 -76,513)

= $(2,487)

hope you got the answer, please comment for any clarification

Thankyou and all the best for future

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