Roche Bay Mining Company buys special drills for $640,000 each. Each drill can e

ID: 2547790 • Letter: R

Question

Roche Bay Mining Company buys special drills for $640,000 each. Each drill can extract about 150,000 tons of ore, after which it has a $40,000 residual value. Roche Bay bought one such drill in early January 20X1. Projected tonnage figures for the drill are 70,000 tons in 20X1, 45,000 tons in 20X2, and 35,000 tons in 20X3. The drill is scheduled for sale at the end of the third year at the $40,000 residual value. Roche Bay is considering units-of-production, straight-line, or DDB depreciation for the drill. Compute depreciation for each year under each of the three methods.

Explanation / Answer

1.Depreciation Under Stright Line Method

Depreciation = ( Cost of the drills – Salvage Value ) / Usefull Life

= ( $ 6,40,000 - $ 40,000 ) / 3 Years

= $ 2,00,000 year

Depreciation Year 1 = $ 2,00,000

Depreciation Year 2 = $ 2,00,000

Depreciation Year 3 = $ 2,00,000

2.Depreciation Under Units of Production Method

Depreciation = [(Cost of Drills - Residual Value) / Estimated Total Production] x Actual Production

Depreciation Year 1 = [ ($ 640000 - $ 40000) / 150000 Tons ] x 70000 Tons

= $ 2,80,000

Depreciation Year 2 = [ ($ 640000 - $ 40000) / 150000 Tons ] x 45000 Tons

= $ 1,80,000

Depreciation Year 3 = [ ($ 640000 - $ 40000) / 150000 Tons ] x 35000 Tons

= $ 1,40,000

Depreciation Year 1 = $ 2,80,000

Depreciation Year 2 = $ 1,80,000

Depreciation Year 3 = $ $ 1,40,000

3.Depreciation Under DDB Method

Year

Book Value Begining

Double Declining Depreciation = 2 x SL Depreciation Rate x Book Value Begining

Net Book Value End

$ 640000

$ 426667

$ 213333

$ 142222

$ 71111

$ 31111 (B/f)

$ 40000

***Stright Line Rate = 1/3 = 33.33%

Depreciation Year 1 = $ 4,26,667

Depreciation Year 2 = $ 1,42,222

Depreciation Year 3 = $ 31,111