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

(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. 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. But they also tell you this: "Depreciation is taken for the portion of the year the asset is used." I'm assuming that the equipment is used year round. But since it's snow making equipment they may only use it for just a few months during the calendar year. They don't give you any specific information about that though, so I assumed that the equipment is used year round. I'll show you how to calculate the depreciation expense. You'll need to fill in the accumulated depreciation amounts in your table. Original Cost 2,160,000 Salvage Value 90,000 Depreciable Cost 2,070,000 5 690,000 4 552,000 3 414,000 2 276,000 1 138,000 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 - 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 N/A Depreciable Cost 2,160,000 Year 1 864,000 Year 2 518,400 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. S/L 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. But ask your professor if the equipment is supposed to be depreciated over a period of less than a year. If the answer is yes, then all these numbers would change. But I've shown you how to do it so you should be able to make the proper changes to the calculations, if necessary.

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