Concept explainers
Determine
University Car Wash built a deluxe car wash across the street from campus. The new machines cost $270,000 including installation. The company estimates that the equipment will have a residual value of $24,000. University Car Wash also estimate’s it will use the machine for six sears or about 12,000 total hours.
Required:
Prepare a depreciation schedule for six wars using the following methods:
1. Straight-line.
2. Double-declining-balance.
3. Activity-based.
Actual use per war was as follows:
Year | Hours Used |
1 | 3,100 |
2 | 1,100 |
3 | 1,200 |
4 | 2,800 |
5 | 2,600 |
6 | 1,200 |
1.
To prepare: A depreciation schedule for six years using straight line depreciation method.
Explanation of Solution
Depreciation: Depreciation refers to the reduction in the monetary value of a fixed asset due to its wear and tear or obsolescence. It is a method of distributing the cost of the fixed assets over its estimated useful life. The following is the formula to calculate the depreciation.
Straight-line method:
Under the straight-line method of depreciation, the same amount of depreciation is allocated every year over the estimated useful life of an asset.
- A depreciation schedule for six years using straight line depreciation method. is detremined as follows:
UC Wash | |||||
Year | Depreciable cost (1) | Depreciation rate | Depreciation expense | Accumulated depreciation | Book Value |
1 | 246,000 |
| 41,000 | 41,000 | 239,000 |
2 | 246,000 |
| 41,000 | 82,000 | 188,000 |
3 | 246,000 |
| 41,000 | 123,000 | 147,000 |
4 | 246,000 |
| 41,000 | 164,000 | 106,000 |
5 | 246,000 |
| 41,000 | 205,000 | 65,000 |
6 | 246,000 |
| 41,000 | 246,000 | 24,000 |
Total | 246,000 |
Note:
Determine the depreciable cost:
2.
To prepare: A depreciation schedule for six years using double declining balance depreciation method.
Explanation of Solution
Double-declining-balance method:
It is an accelerated method of depreciation under which the depreciation declines in each successive year until the value of asset becomes zero. Under this method, the book value (original cost less accumulated depreciation) of the long-term asset is decreased by a fixed rate. It is double the rate of the straight-line depreciation.
- A depreciation schedule for six years using double declining balance depreciation method is detremined as follows:
UC Wash | |||||
Year | Beginning book value | Depreciation rate (2) | Depreciation expense | Accumulated depreciation | Book Value |
1 | 270,000 |
| 90,000 | 90,000 | 180,000 |
2 | 180,000 |
| 60,000 | 150,000 | 120,000 |
3 | 120,000 |
| 40,000 | 190,000 | 80,000 |
4 | 80,000 |
| 26,667 | 216,667 | 53,333 |
5 | 53,333 |
| 17,778 | 234,445 | 35,555 |
6 | 35,555 |
| 11,555 | 246,000 | 24,000 |
Total | 246,000 |
Note:
Last year’s amount must reduce the book value to residual value.
3.
To prepare: A depreciation schedule for six years using activity based depreciation method.
Explanation of Solution
Unit-of-activity Method: Under this method of depreciation, the depreciation expense is calculated on the basis of units produced in a year. This method is suitable when a company has fluctuating productive rate. The formula to calculate the depreciation expense under this method is as follows:
- A depreciation schedule for six years using activity based depreciation method is detremined as follows:
UC Wash | |||||
Year | Hours used | Depreciation rate (3) | Depreciation expense | Accumulated depreciation | Book Value |
1 | 3,100 | $20.50 | 63,550 | 63,550 | 206,450 |
2 | 1,100 | $20.50 | 22,550 | 86,100 | 183,900 |
3 | 1,200 | $20.50 | 24,600 | 110,700 | 159,300 |
4 | 2,800 | $20.50 | 57,400 | 168,100 | 101,900 |
5 | 2,600 | $20.50 | 53,300 | 221,440 | 48,600 |
6 | 1,200 | $20.50 | 24,600 | 246,000 | 24,000 |
Total | 246,000 |
Working note:
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Chapter 7 Solutions
Financial Accounting
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