On January 1, 2015, a machine was purchased for $108,000. The machine has an est

Question

On January 1, 2015, a machine was purchased for $108,000. The machine has an estimated salvage value of $7,200 and an estimated useful life of 5 years. The machine can operate for 120,000 hours before it needs to be replaced. The company closed its books on December 31 and operates the machine as follows: 2015, 24,000 hrs; 2016, 30,000 hrs; 2017, 18,000 hrs; 2018, 36,000 hrs; and 2019, 12,000 hrs. Compute the annual depreciation charges over the machine’s life assuming a fiscal year-end of September 30. Compute the annual depreciation charges over the asset’s life applying each of the following methods. (Round answers to 0 decimal places, e.g. 45,892.) Straight-line Method, Sum-of-the-years'-digits method, and Double-declining-balance method for 2015, 2016, 2017, 2018, 2019, 2020

Explanation / Answer

Please note that Depreciation is a method of systematically allocating the historical cost of the tangible asset in the respective periods.

Straight line method : Depreciation expense is a constant amount

Purchase cost : 108,000 Salvage value : 7,200 Useful life : 5 years

Straight line amount per year : Depreciable base/useful life = (108000-7200)/5 = $20,160

30th Sept 2015 = $ 15,120 ( $20160*9/12)

30th Sept 2016,2017,2018,2019 : $ 20160

30th Sept 2020 : $5040 ($20160*3/12)

Sum of the years digits Method : This multiplies the deprecaition base by a declining fraction. We would need to prop

The total of the years is = 1+2+3+4+5 =15 .

30 th Sept 2015 : (100800/15*5) * 9/12 = $25200

30 th Sept 2016 : (100800/15*5)*3/12 + (100800/15*4)*9/12 = $ 28,560

30 th Sept 2017 : (100800/15*4)*3/12 + (100800/15*3)*9/12 = $21,840

30 th Sept 2018 : (100800/15*3)*3/12 + (100800/15*2)*9/12 =$ 15,120

30 th Sept 2019 : (100800/15*2)*3/12 + (100800/15*1)*9/12 = $8,400

30 th Sept 2020 : (100800/15*1)*3/12 = $ 1,680

Double Declining balance :

Strainght line rate : $20,160/$100800 * 100 = 20%

Hence double declining rate = 40%

This is applied on the purchase price of the machine. But the asset is not depreciated below the salvage value.

Year Carrying DDB Depreciation Accumulated Carrying amount at Proportionate Dec year end Amount Rate Exp Depreciation the end of the year Sep ending balance 2015 108000 40% 43200 43200 64800 32400 2016 64800 40% 25920 25920 38880 30240 2017 38880 40% 15552 15552 23328 18144 2018 23328 40% 9331.2 9331.2 13996.8 10886.4 2019 13996.8 40% 5598.72 5598.72 8398.08 6531.84 2020 1399.68 99601.92 99601.92

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