Cheetah Copy purchased a new copy machine. The new machine cost $120,000 includi

Question

Cheetah Copy purchased a new copy machine. The new machine cost $120,000 including installation. The company estimates the equipment will have a residual value of $30,000. Cheetah Copy also estimates it will use the machine for four years or about 8,000 total hours. Actual use per year was as follows:

Year Hours Used
1 2,500
2 2,200
3 1,900
4 2,000




Prepare a depreciation schedule for four years using the straight-line method.

  Allocation base - Depreciation Rate -  Depreciation Expense -  Accumulated Depreciation  - Book Value
1
2
3
4

  Total



Please show work so i can understand how to do it,

Thanks

Explanation / Answer

First, the number of hours per year is extraneous information used in other methods for computing depreciation. It is not relavent to computing depreciation under the straight line method, so ignore it. The straight line method allocates depreciation expense evenly over the useful life of the asset. In this case, four years. First, take the historical cost of the asset minus the residual value to determine the total depreciation amount.

$120,000-$30,000 = $90,000

Now divide the total depreciation amount by the expected useful life of the asset or allocation base to arrive at your annual depreciation expense.   

$90,000 / 4 years = $22,500 depreciation expense per year.

The accumluated depreciation account tracks the total amount the asset has been depreciated. It's known as a contra asset account because it has a normal credit balance. The net book value = historical cost - accumulated depreciation. At the end of 4 years the net book value will equal the residual value.

Here is a chart showing the breakdown at the end of each year.

Historical Cost     Dep. Expense   Accumulated Dep.*  Residual Value

Year 1: $120,000      $22,500        ($22,500)                   $97,500

Year 2: $120,000      $22,500        ($45,000)                   $75,000

Year 3: $120,000      $22,500        ($67,500)                   $52,500

Year 4: $120,000       $22,500        ($90,000)                  $30,000

*Note that parenthesis indicate a credit balance

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