On July 1, 2010, Sparks Company purchased for $2,160,000 snow-making equipment h

Question

On July 1, 2010, Sparks Company purchased for $2,160,000 snow-making equipment having an estimated useful life of 5 years with an estimated salvage value of $90,000. Depreciation is taken for the portion of the year the asset is used.

Instructions
(a) Complete the form below by determining the depreciation expense and year-end book values for 2010 and 2011 using the
1. sum-of-the-years'-digits method.
2. double-declining balance method.
Sum-of-the-Years'-Digits Method                       2010                                        2011
Equipment                                                        $2,160,000                                $2,160,000
Less: Accumulated Depreciation                          ________                                      ________
Year-End Book Value                                          __________                                 _________
Depreciation Expense for the Year                     ___________                              __________
Double-Declining Balance Method
Equipment                                                        $2,160,000                                $2,160,000
Less: Accumulated Depreciation                        ___________                             __________
Year-End Book Value                                         ___________                             ___________
Depreciation Expense for the Year                     ___________                            ___________

(b) Assume the company had used straight-line depreciation during 2010 and 2011. During 2012, the company determined that the equipment would be useful to the company for only one more year beyond 2012. Salvage value is estimated at $120,000. Compute the amount of depreciation expense for the 2012 income statement.

Explanation / Answer

Explanation:

1. sum-of-the-years'-digits method:

This is a bit of a trick question, as you need to adjust for the fact that the depreciation for the period ending 12/31/2010 will be for only half a year.(Because the asset is purched in July 1, 2010)

Original Cost = 2,160,000
Salvage Value = 90,000
Depreciable Cost = 2,070,000

Depreciation for 2010 = 5/15 x 20,70,000 = 690,000

For 2010; half a year of depreciation through 12/31/2010 would be (690,000 /2) = $345,000

For 2011, you take the second half of the first full year (the $345,000 calculated above, plus half of the second full year (552,000 / 2) = $276,000. The full amount recorded for 2011 would therefore be $345,000 + $276,000 = $621,000

The Total accumulated depreciation at the end of 2011 would be (345,000 + $621,000) = $966,000

2. double-declining balance method:

Same issue on adjusting for just 6 months of depreciation expense through 12/31/2010:
Original Cost = 2,160,000
Salvage Value = Not required
Depreciable Cost 2,160,000
Depreciation for 2010 = 40% of 2,160,000 = $864,000

For 2010; half a year of depreciation through 12/31/2010 would be (864,000 /2) = $432,000

For 2011, you take the second half of the first full year (the $432,000 calculated above, plus half of the second full year (518,400 / 2) = $259,200. The full amount recorded for 2011 would therefore be $432,000 + $259,200 = $691,200

Total accumulated depreciation at the end of 2011 would be (432,000 + $691,200) = $1,123,200

(b) Assume the company had used straight-line depreciation during 2010 and 2011. During 2012, the company determined that the equipment would be useful to the company for only one more year beyond 2012. Salvage value is estimated at $120,000. Compute the amount of depreciation expense for the 2012 income statement.

Straight Line depreciation would have been $2,070,000 / 5 = $414,000 per year.

At the end of 2011, the Net Book Value would have been $2,070,000 - ($414,000 / 2) - $414,000 = $1,449,000

That amount, less the new Salvage value of $120,000 tells you that the new depreciable value at the end of 2011 is ($1,449,000 - $120,000) $1,329,000. Since there are now just two years left in the life of the asset, the depreciation expense for 2012 (and also for 2013) would be ($1,329,000 / 2) = $664,500.

Sum-of-the-Years'-Digits Method 2010    2011 Equipment $2,160,000      $2,160,000      Less: Accumulated Depreciation $345,000 $621,000 Year-End Book Value $1,815,000 $1,539,000 Depreciation Expense for the Year $345000 $267,000 Double-Declining Balance Method 2010 2011 Equipment $2,160,000 $2,160,000 Less: Accumulated Depreciation $432,000 $691,200 Year-End Book Value $1,728,000 $1,468,800 Depreciation Expense for the Year $432,000 $259,200

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