Comparison of Depreciation Methods lohn Marry Inc. purchased a new molding machi
ID: 2391719 • Letter: C
Question
Comparison of Depreciation Methods lohn Marry Inc. purchased a new molding machine for $360,500 at the beginning of year 1. Th e assembly machine has an estimated residual value of $30,000 and an estimated useful life of six years. The assembly machine is expected to last 10,000 hours. It was used 1,800 hours in year 1, 2,000 in year 2, 2,500 in year 3, 1,500 in year 4, 1,200 in year 5, and 1,000 in year 6. REQUIRED 1. Compute the annual depreciation and carrying value for the new assembly machine for each of the six years (round to the nearest dollar where necessary) under each of the follow- ing methods: (a) straight-line, (b) production, and (c) double-declining-balance 2. If the assembly machine is sold for $250,000 after year 3, what would be the amount of gain or loss under each method? (Note: Round depreciation rate to two decimal places) 3. Do the three methods differ in their effect on the company's profitability? Do they differ in their effect on the company's operating cash flows? Explain 4. On the supplied blank general journal make the appropriate entry to reflect the sale of the machine using the straight line method as stated in Requirement #2. No date is necessary. Provide a brief explanation. You must answer all four questions.Explanation / Answer
Straight Line Depreciation
A
Cost
$ 360,500.00
B
Residual Value
$ 30,000.00
C=A - B
Depreciable base
$ 330,500.00
D
Life [in years]
6
E=C/D
Annual SLM depreciation
$ 55,083.33
Year
Book Value
Depreciation expense
Ending Book Value
Accumulated Depreciation
1
$ 360,500.00
$ 55,083.33
$ 305,416.67
$ 55,083.33
2
$ 305,416.67
$ 55,083.33
$ 250,333.33
$ 110,166.67
3
$ 250,333.33
$ 55,083.33
$ 195,250.00
$ 165,250.00
4
$ 195,250.00
$ 55,083.33
$ 140,166.67
$ 220,333.33
5
$ 140,166.67
$ 55,083.33
$ 85,083.33
$ 275,416.67
6
$ 85,083.33
$ 55,083.33
$ 30,000.00
$ 330,500.00
Production
A
Cost
$ 360,500.00
B
Residual Value
$ 30,000.00
C=A - B
Depreciable base
$ 330,500.00
D
Usage
10000
E
Depreciation per …..
33.05
Year
Book Value
Usage
Depreciation expense
Ending Book Value
Accumulated Depreciation
1
$ 360,500.00
1800
$ 59,490.00
$ 301,010.00
$ 59,490.00
2
$ 301,010.00
2000
$ 66,100.00
$ 234,910.00
$ 125,590.00
3
$ 234,910.00
2500
$ 82,625.00
$ 152,285.00
$ 208,215.00
4
$ 152,285.00
1500
$ 49,575.00
$ 102,710.00
$ 257,790.00
5
$ 102,710.00
1200
$ 39,660.00
$ 63,050.00
$ 297,450.00
6
$ 63,050.00
1000
$ 33,050.00
$ 30,000.00
$ 330,500.00
Double Declining Method
A
Cost
$ 360,500.00
B
Residual Value
$ 30,000.00
C=A - B
Depreciable base
$ 330,500.00
D
Life [in years]
6
E=C/D
Annual SLM depreciation
$ 55,083.33
F=E/C
SLM Rate
16.67%
G=F x 2
DDB Rate
33.33%
Year
Beginning Book Value
Depreciation rate
Depreciation expense
Ending Book Value
Accumulated Depreciation
1
$ 360,500.00
33.33%
$ 120,166.67
$ 240,333.33
$ 120,166.67
2
$ 240,333.33
33.33%
$ 80,111.11
$ 160,222.22
$ 200,277.78
3
$ 160,222.22
33.33%
$ 53,407.41
$ 106,814.81
$ 253,685.19
4
$ 106,814.81
33.33%
$ 35,604.94
$ 71,209.88
$ 289,290.12
5
$ 71,209.88
33.33%
$ 23,736.63
$ 47,473.25
$ 313,026.75
6
$ 47,473.25
33.33%
$ 15,824.42
$ 31,648.83
$ 328,851.17
Part 2
Straight line method
Production units method
Double declining method
Closing Value of Asset at end of year 3
$ 195,250.00
$ 152,285.00
$ 106,814.81
Sales Value
$ 250,000.00
$ 250,000.00
$ 250,000.00
Gain on sale
$ 54,750.00
$ 97,715.00
$ 143,185.19
Part 3
Yes , Each method has different effect on the profitability of the company
Double declining method gives more expense to record in beginning years and less expense in later years, Straight line method equally distributes cost of assets as gives equal amount of depreciation expense in all years, lastly production units method provides a reasonable distribution of use of assets and depreciation charges.
Operating Cash flows remains the same in all cases. Depreciation is a non cash expense so it has no effect on Operating cash flows.
Part 4
Journal entry to record sale of asset
Accounts and Explanations
Debit
Credit
Cash
$ 250,000.00
Machinery
$ 195,250.00
Gain on sale of Machinery
$ 54,750.00
(being machinery Sold)
Straight Line Depreciation
A
Cost
$ 360,500.00
B
Residual Value
$ 30,000.00
C=A - B
Depreciable base
$ 330,500.00
D
Life [in years]
6
E=C/D
Annual SLM depreciation
$ 55,083.33
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