Concept explainers
1(A)
Methods of 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 three methods of depreciation are:
- 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.
- Units-of-activity method: In this method of depreciation, the amount of depreciation is charged based on the unit of production each year.
- Double-declining balance method (Accelerated method): In this method of depreciation, the diminishing value of the asset is taken into consideration for determining the depreciation for the succeeding years.
To determine: the amount of depreciation for four years ending December 31 by straight-line method.
1(A)
Explanation of Solution
Determinethe amount of depreciation for four years ending December 31 by straight-line method.
Year 1:
Cost of the equipment= $108,000
Residual value of the equipment = $7,200
Estimated Useful life of the equipment = 3 years
Number of months equipment used =3 months (October 1-December 31)
Year 2:
Cost of the equipment= $108,000
Residual value of the equipment = $7,200
Estimated Useful life of the equipment = 3 years
Number of months equipment used =12 months (January 1-Deccember 31)
Year 3:
Cost of the equipment= $108,000
Residual value of the equipment = $7,200
Estimated Useful life of the equipment = 3 years
Number of months equipment used =12 months (January 1-Deccember 31)
Year 4:
Cost of the equipment= $108,000
Residual value of the equipment = $7,200
Estimated Useful life of the equipment = 3 years
Number of months equipment used =9 months (January 1-September 30)
Therefore, the amount of depreciation ending December 31 by straight-line method for Year 1 is $8,400, Year 2: $33,600, Year 3: $33,600, and Year 4: $25,200.
(B)
the amount of depreciation for four years ending December 31 by units-of-activity method.
(B)
Explanation of Solution
Determinethe amount of depreciation for four years ending December 31 by units-of-activity method.
Year | Number of Hours (A) | Depreciation Expense (A×B) | |
Year 1 | 1,350 | $8.40 | $11,340 |
Year 2 | 4,200 | $8.40 | $35,280 |
Year 4 | 3,650 | $8.40 | $30,660 |
Year 4 | 2,800 | $8.40 | $23,520 |
Table (1)
Working note:
Determinethe depreciable rate of the equipment.
Cost of the equipment= $108,000
Residual value of the equipment = $7,200
Estimated Useful life of the equipment = 12,000 operating hours.
Therefore, the amounts of depreciation for three years ending December 31 by units-of-activity method are Year 1: $11,340, Year 2: $35,280, Year 3: $30,660, and Year 4: $23,520.
(C)
the amount of depreciation for four years ending December 31 by double-declining-balance method.
(C)
Explanation of Solution
:
Determinethe amount of depreciation for four years ending December 31 by double-declining-balance method.
Year 1:
Cost of the equipment= $108,000
Estimated Useful life of the equipment = 3 years
Number of months equipment used =3 months (October 1-December 31)
Year 2:
Cost of the equipment= $108,000
Estimated Useful life of the equipment = 3 years
Number of months equipment used =12 months (January 1-December 31)
Year 3:
Cost of the equipment= $108,000
Accumulated Depreciation=
Estimated Useful life of the equipment = 3 years
Number of months equipment used =12 months (January 1-December 31)
Year 4:
Notes:
Accumulated depreciation is the sum total of the previous years’ depreciation expense.
The depreciation expense should not exceed the residual value of $7,200. Thus, it should be adjusted to make the book value of the equipment (cost less accumulated depreciation) equal to its residual value. Thus, the depreciation expense for Year 4 would be
Therefore, the amounts of depreciation for four years ending December 31 by double-declining-balance method are Year 1: $18,000, Year 2: $60,000, Year 3: $20,000, and Year 4: $2,800
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Chapter 9 Solutions
Financial & Managerial Accounting
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