Problem 11-2 The cost of equipment purchased by Kingbird, Inc., on June 1, 2017,
ID: 2577884 • Letter: P
Question
Problem 11-2
The cost of equipment purchased by Kingbird, Inc., on June 1, 2017, is $95,230. It is estimated that the machine will have a $5,350 salvage value at the end of its service life. Its service life is estimated at 7 years, its total working hours are estimated at 44,940, and its total production is estimated at 561,750 units. During 2017, the machine was operated 6,420 hours and produced 58,850 units. During 2018, the machine was operated 5,885 hours and produced 51,360 units.
Compute depreciation expense on the machine for the year ending December 31, 2017, and the year ending December 31, 2018, using the following methods. (Round depreciation per unit to 2 decimal places, e.g. 15.25 and final answers to 0 decimal places, e.g. 45,892.)
2017
2018
2017
2018
(a) Straight-line $ $ (b) Units-of-output $ $ (c) Working hours $ $ (d) Sum-of-the-years'-digits $ $ (e) Double-declining-balance (twice the straight-line rate) $ $Explanation / Answer
11-2
Equipment Value = $95,230
Months Put to Use = 7 Months = 7/12 of Year
A)Straight Line Method = (Cost – Residual value)/ Life of Asset
2017 = $(95,230 – 5,350)/ 7 Years = $12,840 x 7 ÷ 12 = $7,490
2018 = $12,840
Activity Method = Depreciation is calculated as per unit-of-activity as a factor rather than passage of time. Also, Salvage Value is Considered.
B)Depreciation (Units-of Output) = $(95,230 – 5,350)/ 561,750 Units = $0.16 p. u.
2017 = 58,850 Units x $0.16 p. u. = $9,416
2018 = 51,360 Units x $0.16 p. u. = $8,218
C)Depreciation (Working Hours) = $(95,230 – 5,350)/ 44,940 Hours = $2 p. u.
2017 = 6,420 Hours x $2 p. u. = $12,840
2018 = 5,885 Hours x $2 p. u. = $11,770
D)Sum-of-the-Years’-Digit =
7 + 6 + 5 + 4 + 3 + 2 + 1 = 28 or n(n+1)/ 2 = 7(8)/2 = 56/2 = 28
2017 = $(95,230 – 5,350) x 7/28 = 22,470 x 7/12 = $13,108
2018 = $89,880 x 7/28 x 5/12 + $89,880 x 6/28 x 7/12 = $11,235
E)Double – Declining Method = Constant rate as per SLM will be 14.285%.
Hence, DDB Rate will be 28.57% (1/7 x 2).
Depreciation = 2017 = $95,230 x 28.57% x 7 ÷ 12 = $15,871
Depreciation = 2018 = $(95,230 – 15,871) x 28.57% = $22,673