Question

On 11/1/X1 JacobCo Inc. hired an external engineering firm to design a new production line to produce a new fishing lure product line. The design of the new production line was completed on 11/28/X1 and JacobCo. Inc. received an invoice from the engineering firm in amount of $225,000. Construction started on a new production line on 12/8/X1 and was completed on 12/31/X1. The total construction cost of the new production line was $895,000. Interest expense from 11/1/X1 when the project was started to 12/31/X1 when it was completed amounted to $43,000 in total. Of that total interest expense $4,200 was attributable to the new production line.

The production line had an estimated engineering physical life of eight years. It is estimated that the production line could be scrapped and have a salvage value of approximately $30,000 at the end of that time.

The marketing department estimated that the new fishing lure product line would provide revenues to JacobCo. Inc. for the next five years. At the end of that time period the fishing lure product line will be discontinued and the production line will be scrapped and will sold for $10,000. The marketing department also estimates that the total number of fishing lures that will be sold over the next five years will be 500,000 units. The production line started into operation on 1/1/X2.

Required: Calculate depreciation for 12/31/X2 and 12/31/X3 and make the required journal entries using :

A. Straight line depreciation.

B. 200% double declining balance.

C. Units of Production assuming that 102,500 lures were produced in the year ending 12/31/X2 and 91,000 lures were produced in the year ending 12/31/X3.

            

DATE	ACCOUNT	DR	CR

Answer 1

Solution )

Cost of design of the new production line = $ 225,000

Total construction cost of the new production line = $ 895,000

Total interest expenses attributable to the new production line = $ 4,200

Total cost of new production line = (225,000 + 895,000 + 4,200)

= $ 1,124,200

Calculation of Depreciation by Using :

A. Straight Line Depreciation Method :

Estimated Physical life of new production line = 8 Years

Scrap/Salvage Value = $ 30,000

Depreciation = (Total Cost of New Production line - Scrap/Salvage Value) / Estimated Physical Life

= (1,124,200 - 30,000) / 8

= $ 136,775

Depreciation charged $136,775 per year up to 8 year.

B. 200% Double Declining Balance Method :

Estimated no of years to produced revenue = 5 Years

Scrap/ Salvage Value = $10,000

Depreciation = (1,124,200 - 10,000) / 5

= $ 222,840

Rate of Depreciation = $ 222,840 x 100 / 1,114,200

= 20%

Note : Under 200% double declining balance method rate of depreciation is just double of Straight Line Method and in begning of year depreciation charged is heigher then later years. So in this case rate of Depreciation is 40 % i.e. (20%x 2 = 40%).

Depreciation as on 12/31/x2 = 1,124,200 x 40% = $ 449,680

Depreciation as on 12/31/x3 = (1,124,200 - 449,680 ) x 40% = $ 269,808

C. Units of Production Method :

Total number of fishing lures that will be sold over the next five years = 500,000 units

Units Produced in the year ending 12/31/X2 = 102,500 Units

Units Produced in the year ending 12/31/X3 = 91,000 Units

Depreciation in the year ending 12/31/X2 = (1,124,200 x 102,500) / 500,000

= $ 230,461

Depreciation in the year ending 12/31/X2 = (1,124,200 x 91,000) / 500,000

= $ 204,604.40

DATE	ACCOUNT/PARTICULARS	DR. (Amount in $)	CR. (Amount in $)
	A. Straight line depreciation
12/31/X2	Depreciation Account Dr.	136,775
	To New Production Line Assets A/c		136,775
	(Being Depreciation charged to assets)
12/31/X3	Depreciation Account Dr.	136,775
	To New Production Line Assets A/c		136,775
	(Being Depreciation charged to assets)
	B. 200% double declining balance :
12/31/X2	Depreciation Account Dr.	449,680
	To New Production Line Assets A/c		449,680
	(Being Depreciation charged to assets)
12/31/X3	Depreciation Account Dr.	269,808
	To New Production Line Assets A/c		269,808
	(Being Depreciation charged to assets)
	C. Units of Production Method :
12/31/X2	Depreciation Account Dr.	230,461
	To New Production Line Assets A/c		230,461
	(Being Depreciation charged to assets)
12/31/X3	Depreciation Account Dr.	204,604.40
	To New Production Line Assets A/c		204,604.40
	(Being Depreciation charged to assets)