Swanson & Hiller, Inc., purchased a new machine on September 1 of the current ye
ID: 2412785 • Letter: S
Question
Swanson & Hiller, Inc., purchased a new machine on September 1 of the current year at a cost of $170,000. The machine’s estimated useful life at the time of the purchase was five years, and its residual value was $10,000. The company reports on a calendar year basis. Required:
a-1. Prepare a complete depreciation schedule, beginning with the current year, using the straight-line method. (Assume that the half-year convention is used).
a-2. Prepare a complete depreciation schedule, beginning with the current year, using the 200 percent declining-balance method. (Assume that the half-year convention is used).
a-3. Prepare a complete depreciation schedule, beginning with the current year, using the 150 percent declining-balance, switching to straight-line when that maximizes the expense. (Assume that the half-year convention is used).
b. Which of the three methods computed in part a is most common for financial reporting purposes?
c. Assume that Swanson & Hiller sells the machine on December 31 of the fourth year for $31,500 cash. Compute the resulting gain or loss from this sale under each of the depreciation methods used in part a.
Explanation / Answer
a-1) Straight line depreciation = (Cost - Residual value) / life of asset
Depreciation in the sixth year is upto Aug 31
If the asset is sold on the fouth year for $31500 there will be a loss of $31833.33 ($63,333.33 - $31,500.00)
a-2: 200% Declining balance method:
Straight line depreciation rate = 1/5 = 0.2 = 20%
Declining balance method = 2*20% = 40%
If the asset is sold on the fourth year for $31,500 there will be a loss of $8,452 ($39952 - $31500)
a-3: 150% declining balance method:
Straight line depreciation rate = 1/5 = 0.2 = 20%
Declining balance method = 1.5*20% = 30%
If the asset is sold on the fourth year for $31,500 there will be a loss of $27,892.
b) Straight line method is the most commonly used depreciation method for Financial reporting purposes.
Year Cost Beginning value Depreciation upto 31st Dec Closing value 1 1,70,000.00 1,70,000.00 10,666.67 1,59,333.33 2 1,70,000.00 1,59,333.33 32,000.00 1,27,333.33 3 1,70,000.00 1,27,333.33 32,000.00 95,333.33 4 1,70,000.00 95,333.33 32,000.00 63,333.33 5 1,70,000.00 63,333.33 32,000.00 31,333.33 6 1,70,000.00 31,333.33 21,333.33 10,000.00Related Questions
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