Problem 11-1 Tamarisk Company purchased Machine #201 on May 1, 2017. The followi
ID: 2527745 • Letter: P
Question
Problem 11-1
Tamarisk Company purchased Machine #201 on May 1, 2017. The following information relating to Machine #201 was gathered at the end of May.
It is expected that the machine could be used for 10 years, after which the salvage value would be zero. Tamarisk intends to use the machine for only 8 years, however, after which it expects to be able to sell it for $1,590. The invoice for Machine #201 was paid May 5, 2017. Tamarisk uses the calendar year as the basis for the preparation of financial statements.
Compute the depreciation expense for the years indicated using the following methods.
The answer is not 14,480. I need help with the sum-of-the-years'-digits method for 2018.
Price $90,100 Credit terms 2/10, n/30 Freight-in $ 848 Preparation and installation costs $ 4,028 Labor costs during regular production operations $11,130Explanation / Answer
Assumption - 1: Company is following Sum of years' digit method since 2017
Cost of Machine = Price less Discount @ 2%
= 90100 - (90100*2%)
= 90100 - 1802
= $88298.
Total value of Machine = $(88298 + 848 + 4028)
= $93174.
Useful Life = 8 years
Salvage value = $1590
Depreciable Value = $(93174 - 1590) = $ 91584
Sum of years = n(n+1)/2 = 8(9+1)/2 = 36
Depreciation for 1st year = (Depreciable Value*remaining useful life)/ Total sum of years
= $(91584 * 8)/36 = $20352
Depreciation for 2nd year = (Depreciable Value*remaining useful life)/ Total sum of years
= $(91584 * 7)/36 = $17808
Depreciation for 2018 = (Depn of 1st year * 4/12) + (Depn of 2nd year * 8/12) {since machine was purchased on 1st May 2017}
= $ (20352*4/12) + (17808*8/12)
= $ 18656.
Assumption - 2: Company has changed its method of depreciation from Straight line to Sum of years' digit method in the year 2018
Cost of Machine = Price less Discount @ 2%
= 90100 - (90100*2%)
= 90100 - 1802
= $88298.
Total value of Machine = $(88298 + 848 + 4028)
= $93174.
Useful Life = 8 years
Salvage value = $1590
Depriciation of 2017 using Straight Line Method (for 8 months) = $7632
Calculation of Depreciation under Sum of Year's Digit Method for 2018
Value of Machine as on 1st January 2018 = $(93174 - 7632) = $85542
Depreciable Value as on 1st January 2018 = $(85542-1590) = $83952
Remaining Useful Life = 7years and 4 months = 7.33 years
Sum of years = n(n+1)/2 = 7.33(7.33+1)/2 = 30.53
Depreciation for 2018 = (Depreciable Value*remaining useful life)/ Total sum of years
= $(83952*7.33)/30.53
= $ 20156.18
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