QUESTION 5 A. Cortana Company purchased machinery on June 1, 2016 for $89 000. I

Question

QUESTION 5 A. Cortana Company purchased machinery on June 1, 2016 for $89 000. It provided the following data 15 MARKS Estimated Residual Value $5 000 Estimated Service Life-7 years Estimated Total Work Hours-42 000 hours Estimated Total Production- 525 000 units Machine Usage (2016)-6 000 hrs (2017)-5 500 hrs Machine Production (2016)-55 000 units (2017)-48 000 units Cortana Company uses a fractional-year policy to the ncarest full month and is financial year ends December 31. Required: Calculate the depreciation espense for the year cndin 31, 2016 and 2017 using the 19 marks) following methodo Straight-line Units ofoutput sum of the years,digits , ii) K ,40 ble declining balance Cost- use

Explanation / Answer

Cost = $89,000 Useful life = 7 yrs Residual Value = $5000 Total units to beproduced = 525000 units No of units in yr 1 = 55000 units No of units in yr 2 = 48000 units 1 Straight Line Method Dep Depreciation as per SLM mthod = (Cost of the crane - residual Value)/useful life =[89000-5000]/7yrs =$ 12000/year Year 2016 = $12000*7months(june-dec)/12months =$7000 Year 2017 = $12000 2 Unit of production Depreciation cost per unit = (Cost of the asset - residual Value)/total no of units to be produced =(89000-5000)/525000 $0.16 /unit Deprciation for year 2016 = depreciation per unit * total no of units produced in yr 1 =$0.16*55000 =$8800 Deprciation for year 2017 = depreciation per unit * total no of units produced in yr =$0.16*48000 =$7680 3 Sum of digits for 7 years = 1+2+3+4+5+6+7 =28 Depreciation fr 2016 = (89000-5000)*1/28 =$3000 Depreciation fr 2017 = (89000-5000)*2/28 =$6000 4 Double Declining balance method Depreciation factor is equal to 2 since it is double declining Dep rate using SLM =100%/useful life = 100%/7 = 14.29% Depreciation Rate = Depreciation Factor x Straight-Line Depreciation Percent =2*14.29% = 28.58% Depreciation for a 2016 = Depreciation Rate x Book Value at Beginning of the Period =28.58%*89000 25436.2 $ Depreciation for a 2017 = Depreciation Rate x Book Value at Beginning of the Period =28.58%*(89000-25436) 18166.59 $

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