or the purchase price of new machinery on an income e purchase of a new machine

ID: 326350 • Letter: O

Question

or the purchase price of new machinery on an income e purchase of a new machine affect the income statement? 1. Why are there no entries f statement? How does th The next two problems provide a closer look at Straight Line versus Double Declining Balance depreciation. In these problems, assume all machinery is brought at the first of the year. 2. Machine Cost Useful Life Tractor A Tractor B Combine 50,000 60,000 84,000 Salvage Value 20,000 0 0 Assume you own the machinery above. Calculate annual depreciation using the straight-line method. a. Tractor A Tractor B Combine Year 1 20,000 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 DOO

Explanation / Answer

Depreciation calculation using the Straight Line Method

Year

Tractor A

Tractor B

Tractor C

Year 1

44000

48000

71996

Year 2

38000

36000

59992

Year 3

32000

24000

47998

Year 4

26000

12000

35984

Year 5

20000

(salvage value)

23980

Year 6

11976

Year 7

For Tractor A:

Depreciable value = cost of the machine – salvage value

Depreciable value = 50000 – 20000 = 30000

Hence we calculate the per year depreciation of Tractor A as:

Depreciation rate = (1/ useful life) * 100 = (1/ 5) * 100 = 20%

Thus value of Tractor A depreciates at the rate of 20% per year.

Hence yearly depreciation:

Tractor A= Depreciable Value * depreciation rate = 30000 * 20% = 6000 hence the depreciation in 5 years will be at the rate of 6000 per year.

Likewise for Tractor B:

Depreciable value = 60000 (no salvage value)

Depreciation rate = (1/ 5) *100 = 20%

Tractor B depreciation= 60000 *20% = 12000 per year

For Tractor C:

Depreciable value = 84000

Rate of depreciation = (1/ 7) * 100 = 14.29%

Tractor C depreciation = 84000 * 14.29%= 12004 per annum