Millco, Inc., acquired a machine that cost $600,000 early in 2016. The machine i
ID: 2331169 • Letter: M
Question
Millco, Inc., acquired a machine that cost $600,000 early in 2016. The machine is expected to last for eighth years, and its estimated salvage value at the end of its life is $80,000. Required: a. Using straight-line depreciation, calculate the depreciation expense to be recognized in the first year of the machine's life and calculate the accumulated depreciation after the fifth year of the machine's life.b. Using declining-balance depreciation at twice the straight-line rate, calculate the depreciation expense for the third year of the machine's life.
c. What will be the net book value of the machine at the end of its eighth year of use before it is disposed of, under each depreciation method?
Millco, Inc., acquired a machine that cost $600,000 early in 2016. The machine is expected to last for eighth years, and its estimated salvage value at the end of its life is $80,000. Required: a. Using straight-line depreciation, calculate the depreciation expense to be recognized in the first year of the machine's life and calculate the accumulated depreciation after the fifth year of the machine's life.
b. Using declining-balance depreciation at twice the straight-line rate, calculate the depreciation expense for the third year of the machine's life.
c. What will be the net book value of the machine at the end of its eighth year of use before it is disposed of, under each depreciation method?
Millco, Inc., acquired a machine that cost $600,000 early in 2016. The machine is expected to last for eighth years, and its estimated salvage value at the end of its life is $80,000. Required: a. Using straight-line depreciation, calculate the depreciation expense to be recognized in the first year of the machine's life and calculate the accumulated depreciation after the fifth year of the machine's life.
b. Using declining-balance depreciation at twice the straight-line rate, calculate the depreciation expense for the third year of the machine's life.
c. What will be the net book value of the machine at the end of its eighth year of use before it is disposed of, under each depreciation method?
Explanation / Answer
Working note no 1 for Straight Line Depreciation
A
Cost
$ 600,000.00
B
Residual Value
$ 80,000.00
C=A - B
Depreciable base
$ 520,000.00
D
Life [in years]
8
E=C/D
Annual SLM depreciation
$ 65,000.00
Year
Book Value
Depreciation expense
Ending Book Value
Accumulated Depreciation
1
$ 600,000.00
$ 65,000.00
$ 535,000.00
$ 65,000.00
2
$ 535,000.00
$ 65,000.00
$ 470,000.00
$ 130,000.00
3
$ 470,000.00
$ 65,000.00
$ 405,000.00
$ 195,000.00
4
$ 405,000.00
$ 65,000.00
$ 340,000.00
$ 260,000.00
5
$ 340,000.00
$ 65,000.00
$ 275,000.00
$ 325,000.00
6
$ 275,000.00
$ 65,000.00
$ 210,000.00
$ 390,000.00
7
$ 210,000.00
$ 65,000.00
$ 145,000.00
$ 455,000.00
8
$ 145,000.00
$ 65,000.00
$ 80,000.00
$ 520,000.00
Working Note no 2 for Double Declining Balance method
A
Cost
$ 600,000.00
B
Residual Value
$ 80,000.00
C=A - B
Depreciable base
$ 520,000.00
D
Life [in years]
8
E=C/D
Annual SLM depreciation
$ 65,000.00
F=E/C
SLM Rate
12.50%
G=F x 2
DDB Rate
25.00%
Year
Beginning Book Value
Depreciation rate
Depreciation expense
Ending Book Value
Accumulated Depreciation
1
$ 600,000.00
25.00%
$ 150,000.00
$ 450,000.00
$ 150,000.00
2
$ 450,000.00
25.00%
$ 112,500.00
$ 337,500.00
$ 262,500.00
3
$ 337,500.00
25.00%
$ 84,375.00
$ 253,125.00
$ 346,875.00
4
$ 253,125.00
25.00%
$ 63,281.25
$ 189,843.75
$ 410,156.25
5
$ 189,843.75
25.00%
$ 47,460.94
$ 142,382.81
$ 457,617.19
6
$ 142,382.81
25.00%
$ 35,595.70
$ 106,787.11
$ 493,212.89
7
$ 106,787.11
25.00%
$ 26,696.78
$ 80,090.33
$ 519,909.67
8
$ 80,090.33
25.00%
$ 90.33*
$ 80,000.00
$ 520,000.00
*In year 8 Depreciation will be an amount which makes book value to be equal to Residual value.
Answers
Requirement a)
Depreciation expense (Using SLM) to be recognized in Year 1 = $ 65000. (See working note 1)
Accumulated depreciation after 5TH year of Machine’s Life (Using SLM) = $ 325,000. (See working note 1)
Requirement b)
Depreciation Expense for the Third year of Depreciation (Using DDB) = $84,375. (See working note 2)
Requirement c)
The book value under both methods will be equal to salvage value of the asset that is $ 80,000.
At the end of 8th year the life of asset will be complete and all the depreciation associated with the asset will be equal to Cost minus Salvage value of Asset and Book value will be nothing more than salvage value. See the working note 1 and 2 for better understanding.
SLM
DDB
Cost
$ 600,000.00
$ 600,000.00
Total Accumulated depreciation
$ 520,000.00
$ 520,000.00
Book Value
$ 80,000.00
$ 80,000.00
A
Cost
$ 600,000.00
B
Residual Value
$ 80,000.00
C=A - B
Depreciable base
$ 520,000.00
D
Life [in years]
8
E=C/D
Annual SLM depreciation
$ 65,000.00