Question

P11-1 Alladin Company purchased Machine #201 on May 1, 2017. The following information relating to Machine #201 was gathered at the end of May.

Price = $85,000

Credit terms = 2/10, n/30

Freight-in = $800

Preparation & installation costs = $3,800

Labor costs during regular production operations = $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 financial statements.

(a) Compute the depreciation expense for the years indicated using the following methods.

1) Straight-line method for 2017.

2) Sum-of-the-years' digits method for 2018.

3) Double-declining-balance method for 2017.

Please show work.

(b) Suppose Kate Crow, the president of Alladin, tells you that because the company is a new organization, she expects it will be several years before production and sales reach optimum levels. She asks you to recommend a depreciation method that will allocate less of the company’s depreciation expense to the early years and more to later years of the asset's lives.

What method would you recommend? Please explain.

Answer 1

ANSWER : Cost of Purchase:
Price	85000
Freight-in	800
Installation costs	3800
Less: Discount	1700
Purchase cost	87900
a
1
Annual Straight line depreciation = (Purchase cost-Salvage value)/Useful life
Annual Straight line depreciation=(87900-1500)/8=			10800
Straight Line Depreciation for 2017= 10800/12*8=			7200
2
Sum of years' digits = 8*(8+1)/2=		36
Sum of the Years' digits method Depreciation for 2018 = (87900-1500)/36*8/12*4+(87900-1500)/36*7/12*8=							17600
3
Double Declining balance rate =10800/(87900-1500)*2=			25%
Double Declining balance Depreciation for 2017 = 87900*25%/12*8=				14650