On January 1 of the current year, Reynoso Manufacturing Company purchased a meta
ID: 2334433 • Letter: O
Question
On January 1 of the current year, Reynoso Manufacturing Company purchased a metal cutting and polishing machine at a cost of $3,880,000. The installation and delivery costs amounted to $220,000. The firm expects the machine to be productive for a total of five years and expects a residual value of $420,000 at the end of theasset's useful life.
Requirements:
Prepare the depreciation schedules for the machine assuming that the following methods were used (each case is independent):
1.
Straight-line method
2.
Double-declining balance method (DDB) (Reduce the depreciation expense in the last year to the necessary amount to arrive at an ending book value equal to the scrap value.)
1.
Straight-line method
2.
Double-declining balance method (DDB) (Reduce the depreciation expense in the last year to the necessary amount to arrive at an ending book value equal to the scrap value.)
Explanation / Answer
CALCULATION OF THE DEPRECIATION AS PER STRAIGHT LINE METHOD FOR MACHINE Purchase Cost of Machine 38,80,000 Add: Installation and Delivery Cost 2,20,000 Depreciated Value 41,00,000 Less: Salvage Value 4,20,000 Net Value for Depreciation 36,80,000 Usefule life of the Assets 5 years Depreciation per year = Value for Depreciation / 5 years = 7,36,000 Total Depreciation for the per year 7,36,000 CALCULATION OF THE DEPRECIATION AS PER DOUBLE DECLINE METHOD FOR MACHINE C Purchase Cost of Machine inluding installation 41,00,000 Useful Life = 5 years Depreciation per year = 8,20,000 (Purchase price / Useful life) Rate of Depreciation = Rate of Depreciation = (1 / 5 Years ) 0.20 or 20.00% (Depreication / Purchase price ) Double decline deprection rate = 20% * 2 = 40.0% Depreciation for the year 1 = Purchase Value (Including installantion and delivery Cost) = 41,00,000 Rate of Depreciation = 40.00% = 16,40,000 Closing Value of year 1 24,60,000 Opening Balance of the year 2 24,60,000 Depreciation @ 40% 9,84,000 Closing Value of year 2 14,76,000 Opening Balance of the year 3 14,76,000 Depreciation @ 40% 5,90,400 Closing Value of year 3 8,85,600 Opening Balance of the year 4 8,85,600 Depreciation @ 40% 3,54,240 Closing Value of year 4 5,31,360 Opening Balance of the year 5 5,31,360 Depreciation @ 40% ($ 531,360 - $ 420,000) 1,11,360 Closing Value of year 5 4,20,000 DEPRECIATION SCHEDULE AS PER STRAIGHT LINE METHOD Years Purchase Cost (Including installation and delivery Cost) Depreciation Accumulated Depreciation Closing Value Year 1 41,00,000 7,36,000 7,36,000 33,64,000 Year 2 - 7,36,000 14,72,000 26,28,000 Year 3 7,36,000 22,08,000 18,92,000 Year 4 7,36,000 29,44,000 11,56,000 Year 5 7,36,000 36,80,000 4,20,000 DEPRECIATION SCHEDULE AS PER REDUCING BALANCE METHOD Years Purchase Cost (Including installation and delivery Cost) Depreciation Accumulated Depreciation Closing Value Year 1 41,00,000 16,40,000 16,40,000 24,60,000 Year 2 - 9,84,000 26,24,000 14,76,000 Year 3 5,90,400 32,14,400 8,85,600 Year 4 3,54,240 35,68,640 5,31,360 Year 5 1,11,360 36,80,000 4,20,000
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