Question

Nicole’s Getaway Spa (NGS) purchased a hydrotherapy tub system to add to the wellness programs at NGS. The machine was purchased at the beginning of the year at a cost of $9,500. The estimated useful life was five years and the residual value was $500. Assume that the estimated productive life of the machine is 10,000 hours. Expected annual production was year 1, 2,200 hours; year 2, 2,300 hours; year 3, 2,400 hours; year 4, 2,100 hours; and year 5, 1,000 hours.

Assume NGS sold the hydrotherapy tub system for $2,850 at the end of year 3.The following amounts were forecast for year 3: Sales Revenues $43,000; Cost of Goods Sold $34,000; Other Operating Expenses $4,300; and Interest Expense $900. Create an income statement for year 3 for each of the different depreciation methods, ending at Income before Income Tax Expense. (Don't forget to include a loss or gain on disposal for each method.).

Answer 1

Nicole’s Getaway Spa (NGS) purchased	Amnt$	Amnt$
The Machine was purchased at start of the year Cost $		9,500
The estimated useful life at 5 Year		500
Net Asset value after salvage		9,000
Number of year useful		5
Yearly Depreciation amount ($9000/5 year)		1,800

Under Straight Line depreciation - Depreciation amount $ 1800
Year	Depreciation$	Accumulated Depreciation$	Book Value $	Working for Book value $	Working for Accumulated Dep $
Purchase			9,500
1	1,800	1,800	7,700	($9500-$1800)	1,800
2	1,800	3,600	5,900	($7700-$1800)	($1800+$1800)
3	1,800	5,400	4,100	(5900-$1800)	($3600+$1800)
4	1,800	7,200	2,300	($4100-$1800)	($5400+$1800)
5	1,800	9,000	500	($2300-$1800)	($7200+$1800)

Second Method - Double Declining Depreciation= 40% -Formula used =2/n == n Number of year =5 Year

Second Method - Double Declining Depreciation
Year	Depreciation$	Accumulated Depreciation$	Book Value $	Working for Book value $	Working for Accumulated Dep $
Purchase			9,500
1	3,800	3,800	5,700	($9500-$3800)	3,800
2	2,280	6,080	3,420	($5700-$2280)	($3800+$2280)
3	1,368	7,448	2,052	($3420-$1368)	($6080+$1368)
4	821	8,269	1,231	($2052-$821)	($7448+$821)
5	492	8,761	739	($1231-$492)	($8269+$492)

Third Method
Number of Unit Production Method	Amnt$
The Machine was purchased at start of the year Cost $	9,500
The estimated useful life at 5 Year	500
Net Asset value after salvage	9,000
Estimated productive life Machine Hr	10,000
rate $ / Unit ( $9000/10000 Hrs)	0.90

	Year	Depreciation$	Accumulated Depreciation$	Book Value $	Working for Book value $	Working for Accumulated Dep $
	Purchase			9,500
Number of Hr-2200 hr *0.9	1	1,980	1,980	7,520	($9500-$1980)	1,980
Number of Hr-2300 hr *0.9	2	2,070	4,050	5,450	($7520-$2070)	(1980+$2070)
Number of Hr-2400 hr *0.9	3	2,160	6,210	3,290	($5450-$2160)	($4050+$2160)
Number of Hr-2100 hr *0.9	4	1,890	8,100	1,400	($3290-$1890)	($6210+$1890)
Number of Hr-1000 hr *0.9	5	900	9,000	500	($1400-$900)	($8100+$900)

Straight Line
year 3 Book Value ( as above) $	4100
Details	Debit$	Credit$
cash	2850
Loss on sale of Asset ( PNL )	1250		Balancing No.
Asset		4100
Double decline Method
year 3 Book Value ( as above) $	2052
cash	2850
Asset		2052
Profit on sale of Asset ( PNL )		798	Balancing No.
Unit production method
year 3 Book Value ( as above) $	3290
cash	2850
Loss on sale of Asset ( PNL )	440		Bal No.
Asset		3290

	Income Statement
	Straight Line $	Double Decline $	Unit Production $
Revenue	43,000	43,000	43,000
Less
Cost of goods sold	34,000	34,000	34,000
Operating Exp	4,300	4,300	4,300
Interest Expenses	900	900	900
Depreciation ( as above)-on 3rd Year( above Dep table	1,800	1,368	2,160
Gain /Loss on sale of Asset	1,250	-798	440
Profit before Tax	750	3,230	1,200