In recent years, Farr Company has purchased three machines. Because of frequent

Question

In recent years, Farr Company has purchased three machines. Because of frequent employee turnover in the accounting department, a different accountant was in charge of selecting the depreciation method for each machine, and various methods have been used. Information concerning the machines is summarized in the table below. For the declining-balance method, Farr Company uses the double-declining rate. For the units-of-activity method, total machine hours are expected to be 34,000. Actual hours of use in the first 3 years were: 2013, 820; 2014, 4,160; and 2015, 5,500.Compute the amount of accumulated depreciation on each machine at December 31, 2015.

Explanation / Answer

Machine 1: Straight-line Depreciation Method

Cost of machine = $120,000

Salvage value = $14,000

Cost of depreciable asset = $120,000 - $14,000 = $106,000

Useful life = 10 years

Depreciation rate = 1/10 = 10%

Annual Depreciation = Cost of depreciable asset X Depreciation rate = $106,000 X 10% = $10,600

Accumulated Depreciation at December 31, 2015 = $10,600

Note: Depreciation amount is same for all the years under straight line method.

Machine 2: Declining-balance Depreciation Method

Cost of machine = $92,000

Salvage value = $12,100

Useful life = 5 years

Straight-line depreciation rate = 1/5 = 20%

Double declining depreciation rate = 2 x 20% = 40% per year

In this method, Depreciation = Book value X Depreciaion rate

Book value = Cost - Accumulated Depreciation

Accumulated Depreciation at December 31, 2013 = $92,000 X 40% X 6/12 = $18,400

Here, the depreciation is calculated for 6 months as the machine 2 is acquired on July 1.

Accumulated Depreciation at December 31, 2014 = ($92,000 - $18,400) X 40% X 12/12 = $18,400

Accumulated Depreciation at December 31, 2015 = ($92,000 - $18,400 - $29,440) X 40% X 12/12 = $17,664

Machine 3: Units-of-Activity

Cost of machine = $85,720

Salvage value = $7,520

Cost of depreciable asset = $85,720 - $7,520 = $78,200

Useful life = 7 years

Total machine hours expected = 34,000

Actual hours used in 2013 = 820

Actual hours used in 2014 = 4,160

Actual hours used in 2015 = 5,500

Depreciation = (Actual hours used/Expected hours) X Cost of depreciable asset

Accumulated Depreciation at December 31, 2013 = (820/34,000) X $78,200 = $1,886

Accumulated Depreciation at December 31, 2014 = (4,160/34,000) X $78,200 = $9,568

Accumulated Depreciation at December 31, 2015 = (5,500/34,000) X $78,200 = $12,650

Machine 1 ($) Machine 2 ($) Machine 3 ($) Accumulated Depreciation at December 31, 2015 10,600 17,664 12,650

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