No. Account Titles and Explanation Debit Credit Calculate the amount of deprecia

Question

No.

Account Titles and Explanation

Debit

Credit

Calculate the amount of depreciation expense that Thao should record for Machine B each year of its useful life under the following assumptions. (Round answers to 0 decimal places, e.g. $2,125. Round cost per unit to 2 decimal place, e.g. 1.25.)

2014

2015

2016

2017

On January 1, 2014, Thao Company purchased the following two machines for use in its production process.

Machine A: The cash price of this machine was $39,400. Related expenditures included: sales tax $2,300, shipping costs $100, insurance during shipping $100, installation and testing costs $70, and $130 of oil and lubricants to be used with the machinery during its first year of operations. Thao estimates that the useful life of the machine is 5 years with a $5,800 salvage value remaining at the end of that time period. Assume that the straight-line method of depreciation is used. Machine B: The recorded cost of this machine was $142,400. Thao estimates that the useful life of the machine is 4 years with a $8,900 salvage value remaining at the end of that time period.

Explanation / Answer

For calculating the depreciation 3 important items are required. They are as follows:

                        (i)   Historical cost or other amount in place of historical cost like re-valued amount.

                        (ii) Estimated useful life of depreciable asset

                        (iii) Estimated residual/scrap value of depreciable assets.

Historical cost is the total cost spent for acquisition, installation and commissioning as well as for addition or improvement of the depreciable asset. It also includes all normal and reasonable expenditures made to get the asset in place and ready for its intended use. Financing charges are not included in the historical cost.

Machine A:

Cash Price - $ 39,400 and Related expenditures are

Sales Tax - $ 2,300

Shipping Costs - $ 100

Insurance during shipping - $ 100

Installation and testing costs - $ 70

Oil and Lubricants - $ 130

Hence the historical cost is $39,400 + $2,300 + $100 + $100 + $70 + $130 = $42,100

Estimated useful life is 5 years and the salvage value is $5,800. Using Straight-line method, depreciation is calculated as follows:

Depreciation = (Historical cost – Salvage value)/ Estimated useful life

                            = ($42,100 - $5,800)/5 = $7,260

As the Machine is purchased on Jan 1st, 2014 $7,260 will be the depreciation for the year 2014.

No

Account Titles and Explanation

Debit

Credit

1

Machine A A/c Dr.

$42,100

To Bank A/c

$42,100

(Purchase of Machine A)

2

Depreciation A/c Dr.

$7,260

To Accumulated Depreciation A/c

$7,260

(Depreciation for the year)

Payment for the purchase of machinery is assumed to be paid by check and credited to bank account. Depreciation will not be reduced directly from the cost of the fixed asset. It will be credited to a separate account called accumulated depreciation until the asset is sold or fully depreciated.

Machine B

Depreciation = (Historical cost – Salvage value)/ Estimated useful life

Here, Historical cost is $ 142,400, Salvage value is $ 8,900 and useful life is 4 years.

Depreciation = ($142,400 - $8,900)/4 = $33,375

Hence depreciation is $33,375 for each year during its useful life.

2. Declining-balance method is a method of depreciation where the depreciation is calculated at a specific rate on the depreciable basis.

Depreciable basis is the cost of the asset minus accumulated depreciation.

Rate of depreciation is given as twice the straight-line depreciation rate. Useful life of the asset is 4 years. That means under straight-line method the depreciation rate is 25% (i.e.100%/4). So for declining method it will be 50%

Under Declining-balance method, salvage value is not considered at the first year of depreciation. However, in the last year of useful life depreciation will be limited to the salvage value.

Now let us see the calculation using this method.

For 2014 Depreciable basis and cost of the asset will be same as it is the first year

Depreciation = Depreciable basis * Rate of depreciation = $142,400 * 50% = $71,200

For 2015, Depreciable basis = Cost of asset – Accumulated depreciation = $142,400 - $ 71,200 = $71,200

Depreciation = Depreciable basis * Rate of depreciation = $71,200 * 50% = $35,600

For 2016, Depreciable basis = Cost of asset – Accumulated depreciation = $142,400 – ($ 71,200 + $35,600) = $142,400 - $106,800 = $35,600

Depreciation = Depreciable basis * Rate of depreciation = $35,600 * 50% = $17,800

For 2017, Depreciable basis = Cost of asset – Accumulated depreciation = $142,400 – ($ 71,200 + $35,600 + 17,800) = $142,400 - $124,600 = $17,800

Depreciation = Depreciable basis * Rate of depreciation = $17,800 * 50% = $8,900

After providing depreciation for 2017, the cost of asset will be $142,400 – ($ 71,200 + $35,600 + 17,800 + 8,900) = $142,400 - $133,500 = $8,900. This is equal to salvage value. If it is less than the salvage value, then we have to adjust the depreciation for 2017, for the difference in salvage value.

3. Units-of-activity depreciation is a method of depreciation where the cost of the asset net of salvage value will be allocated over the estimated units to be produced. Under this method, the amount of depreciation will not change whether the asset is purchased at the beginning of the year or at the end of the year. The factors required to calculate depreciation method are

Cost of the asset, Salvage value, estimated production units and units produced during the year.

For Machine B, Cost of the asset is $ 142,400, salvage value is $ 8,900 and estimated production units are 118,740.

Cost per unit = (Cost of the asset – Salvage value) / Estimated production units

= ($142,400 - $8,900) / 118,740 = $1.12 (Rounded off to 2 decimals)

Depreciation per year = Units produced during the year * Cost per unit

2014 Depreciation = 42,900 * 1.12 = $48,048

2015 Depreciation = 33,120 * 1.12 =$37,094 (Rounded off to 0 decimal)

2016 Depreciation = 24,660 * 1.12 = $27,619 (Rounded off to 0 decimal)

2017 Depreciation = 18,060 * 1.12 = $20,227 (Rounded off to 0 decimal)

Thus to summarize, depreciation under each method for Machine B will be as below:

2014

2015

2016

2017

Straight-line method

$33,375

$33,375

$33,375

$33,375

Declining-balance method

$71,200

$35,600

$17,800

$8,900

Units-of-activity method

$48,048

$37,094

$27,619

$20,227

No

Account Titles and Explanation

Debit

Credit

1

Machine A A/c Dr.

$42,100

To Bank A/c

$42,100

(Purchase of Machine A)

2

Depreciation A/c Dr.

$7,260

To Accumulated Depreciation A/c

$7,260

(Depreciation for the year)

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