On August 3, Cinco Construction purchased special-purpose equipment at a cost of

Question

On August 3, Cinco Construction purchased special-purpose equipment at a cost of $8,729,700. The useful life of the equipment was estimated to be 8 years, with an estimated residual value of $99,620.

a. Compute the depreciation expense to be recognized each calendar year for financial reporting purposes under the straight-line depreciation method (half-year convention). (Adjust year 9 depreciation, if necessary, so that the total depreciation expense equals depreciable value of the asset. Do not round intermediate calculations and round your final answers to the nearest whole number.)

b. Compute the depreciation expense to be recognized each calendar year for financial reporting purposes under the 200 percent declining-balance method (half-year convention) with a switch to straight-line when it will maximize depreciation expense. (Adjust year 9 depreciation, if necessary, so that the total depreciation expense equals depreciable value of the asset. Do not round intermediate calculations and round your final answers to the nearest whole number.

Explanation / Answer

a.) Under Straight Line Depreciation Method :

percentage of depreciation = 100% / 8 = 12.5 %

Since Machine was bought in august , depreciation for the first year = (8,729,700-99620) * 12.5% *5/12

= 449,483

since half year convention = Depreciation per half year = ( 8729400-99620) *12.5% *6/12

= 539,380

therefore per annum depreciation = 539,380* 2 =1,078,760

therefore depreciation till 8th year = 449,483 + ( 1,078,760 * 7)

= 8,000,803

Depreciation for 9th year to equal depreciation expense to depreciation value of the asset = 8,630,080- 8,000,803

= 629,277

Therefore depreciation for the first year = 4,49,483

depreciation per annum till 8th year = 1.078,760

Depreciation for 9th year = 629,277

b.) Depreciation expense under 200 percent declining balance method :

Depreciation % = 100%/8 = 12.5% * 200 percent = 25%

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