Please explain how to get each number! Will rate!! P11-1 (LO2) EXCEL GROUPWORK (
ID: 2566259 • Letter: P
Question
Please explain how to get each number! Will rate!!
P11-1 (LO2) EXCEL GROUPWORK (Depreciation for Partial Period-SL, SYD, and DDB) Alladin Company purchased Machine #201 on May 1, 2017 The following information relating to Machine #201 was gathered at the end of May. Price Credit terms Freight-in Preparation and installation costs Labor costs during regular production operations $85,000 2/10, n/30 $ 800 3,800 $10,500 It is expected that the machine could be used for 10 years, after which the salvage value would be zero. Alladin intends to use the machine for only 8 years, however, after which it expects to be able to sell it for $1,500. The invoice for Machine #201 was paid May 5,2017. Alladin uses the calendar year as the basis for the preparation of financialstatements.Explanation / Answer
Alladin Company
Depreciation expense =depreciable base x 1/estimated useful life
Depreciable base = cost – residual value
Cost = purchase price + freight-in costs + installation costs = $83,300 + $800 +$3,800 =$87,900
Residual value = $1,500
Depreciable base = $87,900 - $1,500 = $86,400
Useful life = 8 years
Depreciation expense for 2017 = $86,400 x 1/8years = $10,800
However, the asset is bought on May 1st, hence the depreciation expense on the asset is for the period May 1 – Dec 31.
Depreciation expense for the year 2017 = $10,800 x 8/12 =$7,200
Note: Since the asset is purchased on credit terms of 2/10, n/30 and Alladin paid for the asset within the 10 days time, the cost is reduced by cash discount of 2%. Hence, the asset value = $85,000 – 85,000 x 2% =$83,300.
The freight-in and installation costs are capitalized as these costs are incurred to make the asset operational.
Under straight line depreciation method, the depreciation expense would remain constant throughout the useful life of the asset. Hence, depreciation expense for the year 2017 and other periods throughout the estimate life o f the asset is $10,800.
Depreciation rate for sum of the years’ digits method is calculated using the formula, n(n+1)/2 x depreciable base
= [8 (8+1)]/2 =36
Depreciable base = $86,400
Depreciation for the year 2018 = $86,400 x 7/36 =$16,800
C Computation of the depreciation expense for the years indicated using the double-declining balance method for 2018:
Depreciation expense = cost x 2 x depreciation rate under straight line method
Depreciation rate = 2 x 1/8 = 25%
Depreciation for 2017 (8/12 months x 25% x $87,900) =$14,650
The machine was bought on May 1 (May 1 to Dec 31), so depreciation is for the period of 8 months only.
Book value at the beginning of 2018 = cost – accumulated depreciation
= 87,900 - $14,650 =$73,250
Depreciation expense for 2018 x 25% (book value multiplied by rate of depreciation)
2018 depreciation = $$18,313
B. Kate can opt to apply the Activity Method, as other accelerated depreciation methods would provide more depreciation in the earlier years (unlike straight line method). Straight line method however does not indicate reduced utilization during the early years, assuming higher production peak in the subsequent years to provide tax benefit.