p163 Gaub Corporation purchased a machine at a total cost of $400,000. As the ac
ID: 2593564 • Letter: P
Question
p163 Gaub Corporation purchased a machine at a total cost of $400,000. As the accountant for the company you estimated a useful lif $50,000. The president of th on income over the next seven years.(Assume the computer is used 4,000 hours the first year and that e of seven years or 25,000 hours of operation, with a salvage value of e company wants to know what impact this capital expenditure will have it s usage increases 10 percent in each succeeding year.) ired: A. Prepare a schedule showing the depreciation expense and year-end carrying value of the asset for each of the next four years under each of the following methods of depreciation: 1. Straight-line method 2. Units-of-production method 3. Double-declining-balance method Why would management select one method over another? B.Explanation / Answer
A) 1) Depreciation under straight line method = (Cost-Salvage value)/useful life = ($400,000-$50,000)/7 years
= $50,000
Depreciation Schedule for the next four years under Straight Line method (Amount in $)
2) Use of machine per hour = (400,000-50,000)/25,000 = $14 per hour
Depreciation Schedule for the next four years under unit of production method (Amount in $)
3) Depreciation rate for double declining balance = 1/7*2 = 0.2857 is double the straight line rate
Depreciation Schedule for the next four years under Double declining balance method (Amount in $)
B) Management would select one method of depreciation which is most suitable for the company and which reports the depreciation expense as per matching concept and thus report true and fair profits of the company. From the three methods available for depreciation, the suitable method is units of production method because the company's usage of machine is increasing by 10% in each succeeding year. Thus the depreciation calculated as per units of production method is more accurate than other two methods.
Year Opening Balance (a) Depreciation expense (b) Carrying Value at the end (a-b) 1 400,000 50,000 350,000 2 350,000 50,000 300,000 3 300,000 50,000 250,000 4 250,000 50,000 200,000Related Questions
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