demonstration problem chapter 6 – exercise 13 depreciation calculation methods accounting what the...
TRANSCRIPT
Demonstration Problem
Chapter 6 – Exercise 13
Depreciation Calculation Methods
AccountingWhat the Numbers Mean 10e
Problem Definition
Millco, Inc., acquired a machine that cost $400,000 early
in 2013. The machine is expected to last for eight years,
and its estimated salvage value at the end of its life is
$60,000.
Problem Definition
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?
Problem Solution
a. Amount to be depreciated =
Cost – Salvage Value
Annual depreciation expense =
Amount to be depreciated /
Useful Life
Problem Solution
a. Amount to be depreciated =
Cost – Salvage Value
Annual depreciation expense =
Amount to be depreciated / Useful Life
Annual depreciation expense =
Problem Solution
a. Amount to be depreciated =
Cost – Salvage Value
Annual depreciation expense =
Amount to be depreciated / Useful Life
Annual depreciation expense =
($400,000 - $60,000) / 8 =
Problem Solution
a. Amount to be depreciated = Cost – Salvage Value Annual depreciation expense = Amount to be depreciated / Useful Life Annual depreciation expense = ($400,000 - $60,000) / 8 = $42,500 per year
Problem Solution
a. Amount to be depreciated =
Cost – Salvage Value
Annual depreciation expense =
Amount to be depreciated / Useful Life
Annual depreciation expense =
($400,000 - $60,000) / 8 = $42,500 per year
After 5 years, accumulated depreciation =
Problem Solution
a. Amount to be depreciated =
Cost – Salvage Value
Annual depreciation expense =
Amount to be depreciated / Useful Life
Annual depreciation expense =
($400,000 - $60,000) / 8 = $42,500 per year
After 5 years, accumulated depreciation =
$42,500 * 5 years =
Problem Solution
a. Amount to be depreciated =
Cost – Salvage Value
Annual depreciation expense =
Amount to be depreciated / Useful Life
Annual depreciation expense =
($400,000 - $60,000) / 8 = $42,500 per year
After 5 years, accumulated depreciation =
$42,500 * 5 years = $212,500
Problem Definition
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?
Problem Solution
b. Straight-line rate = 1/8 = 12.5%.
Double-declining rate = 12.5% * 2 = 25%
At End of Year
Net Book Value Depreciation Accumulated Net Book
Year at Beginning of Year Expense Depreciation Value
Solution approach: Set up columns to gather the data needed to calculate the depreciation expense, accumulated depreciation, and net book value at the beginning and end of each year.
Problem Solution
b. Straight-line rate = 1/8 = 12.5%.
Double-declining rate = 12.5% * 2 = 25%
At End of Year
Net Book Value Depreciation Accumulated Net Book
Year at Beginning of Year Expense Depreciation Value
1 $400,000
The Net Book Value at the Beginning of Year One is equal to the purchase price of the asset.
Problem Solution
b. Straight-line rate = 1/8 = 12.5%.
Double-declining rate = 12.5% * 2 = 25%
At End of Year
Net Book Value Depreciation Accumulated Net Book
Year at Beginning of Year Expense Depreciation Value
1 $400,000 $400,000 * 25% = $100,000
Depreciation expense = Net Book Value at Beginning of Year * Double-declining rate.
Problem Solution
b. Straight-line rate = 1/8 = 12.5%.
Double-declining rate = 12.5% * 2 = 25%
At End of Year
Net Book Value Depreciation Accumulated Net Book
Year at Beginning of Year Expense Depreciation Value
1 $400,000 $400,000 * 25% = $100,000 $100,000
Accumulated depreciation = The sum of the depreciation expense of all prior years.
Problem Solution
b. Straight-line rate = 1/8 = 12.5%.
Double-declining rate = 12.5% * 2 = 25%
At End of Year
Net Book Value Depreciation Accumulated Net Book
Year at Beginning of Year Expense Depreciation Value
1 $400,000 $400,000 * 25% = $100,000 $100,000 $300,000
Net Book Value at the End of Year = Cost of the Asset (or $400,000) – Accumulated Depreciation
Problem Solution
b. Straight-line rate = 1/8 = 12.5%.
Double-declining rate = 12.5% * 2 = 25%
At End of Year
Net Book Value Depreciation Accumulated Net Book
Year at Beginning of Year Expense Depreciation Value
1 $400,000 $400,000 * 25% = $100,000 $100,000 $300,000
2 300,000
Net Book Value at Beginning of Year Two = Net Book Value at End of Year One
Problem Solution
b. Straight-line rate = 1/8 = 12.5%.
Double-declining rate = 12.5% * 2 = 25%
At End of Year
Net Book Value Depreciation Accumulated Net Book
Year at Beginning of Year Expense Depreciation Value
1 $400,000 $400,000 * 25% = $100,000 $100,000 $300,000
2 300,000 300,000 * 25% = 75,000
Depreciation Expense = Net Book Value at Beginning of Year * Double-declining date
Problem Solution
b. Straight-line rate = 1/8 = 12.5%.
Double-declining rate = 12.5% * 2 = 25%
At End of Year
Net Book Value Depreciation Accumulated Net Book
Year at Beginning of Year Expense Depreciation Value
1 $400,000 $400,000 * 25% = $100,000 $100,000 $300,000
2 300,000 300,000 * 25% = 75,000 175,000
Accumulated depreciation = The sum of the depreciation expense of all prior years = $100,000 + $75,000 = $175,000
Problem Solution
b. Straight-line rate = 1/8 = 12.5%.
Double-declining rate = 12.5% * 2 = 25%
At End of Year
Net Book Value Depreciation Accumulated Net Book
Year at Beginning of Year Expense Depreciation Value
1 $400,000 $400,000 * 25% = $100,000 $100,000 $300,000
2 300,000 300,000 * 25% = 75,000 175,000 225,000
Net Book Value at the End of Year = Cost of the Asset (or $400,000) – Accumulated Depreciation
Problem Solution
b. Straight-line rate = 1/8 = 12.5%.
Double-declining rate = 12.5% * 2 = 25%
At End of Year
Net Book Value Depreciation Accumulated Net Book
Year at Beginning of Year Expense Depreciation Value
1 $400,000 $400,000 * 25% = $100,000 $100,000 $300,000
2 300,000 300,000 * 25% = 75,000 175,000 225,000
3 225,000 225,000 * 25% = 56,250 231,250 168,750
Depreciation expense for the third year of the asset’s life = $56,250.
Problem Definition
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?
Problem Solution
c. Net book value = Cost – Accumulated depreciation
After 8 years, the asset will have been fully depreciated to its estimated salvage value of $60,000 under each method.
Problem Solution
c. Net book value = Cost – Accumulated depreciation
After 8 years, the asset will have been fully depreciated to its estimated salvage value of $60,000 under each method.
Accumulated depreciation will be $340,000, and net book value will be $60,000.
$400,000 - $340,000 = $60,000