Question

Depreciation Methods Gruman Company purchased a machine for $198,000 on January 2, 2016. It made the following estimates: Service life 5 years or 10,000 hours Production 200,000 units Residual value $20,000 In 2016, Gruman uses the machine for 1,800 hours and produces 44,000 units. In 2017, Gruman uses the machine for 1,500 hours and produces 35,000 units. If required, round your final answer to the nearest dollar. Required: Compute the depreciation for 2016 and 2017 under each of the following methods: Straight-line method 2016 $ 2017 $ Sum-of-the-years'-digits method 2016 $ 2017 $ Double-declining-balance method 2016 $ 2017 $ Activity method based on hours worked 2016 $ 2017 $ Activity method based on units of output 2016 $ 2017 $ For each method, what is the book value of the machine at the end of 2016? At the end of 2017? Straight-line method 2016 $ 2017 $ Sum-of-the-years'-digits method 2016 $ 2017 $ Double-declining-balance method 2016 $ 2017 $ Activity method based on hours worked 2016 $ 2017 $ Activity method based on units of output 2016 $ 2017 $ If Gruman used a service life of 8 years or 15,000 hours and a residual value of $10,000, what would be the effect on the following under the straight-line, sum-of-the-years'-digits, and double-declining-balance depreciation methods? Depreciation expense Straight-line method 2016 $ 2017 $ Sum-of-the-years'-digits method 2016 $ 2017 $ Double-declining-balance method 2016 $ 2017 $ Book value Straight-line method 2016 $ 2017 $ Sum-of-the-years'-digits method 2016 $ 2017 $ Double-declining-balance method 2016 $ 2017 $

Answer 1

Straight line depreciation = (Cost - Salvage Value) / Useful life

= ($198000 - $20000) / 5=

= $35600 each year

Sum of years digit method depreciation = (Cost - Salvage Value) * Remaining useful life/ (Sum of years' digit)

For 2016 = ($198000 - $20000) * 5/(5+4+3+2+1)

= $178000 * 5/15

= $59333

For 2017 = ($198000 - $20000) * 4/(5+4+3+2+1)

= $178000 * 4/15

= $47467

Double declining method depreciation = 2*Straight line rate* Book value at beginning of year

For 2016 = 2*(100%/5) * $198000

= $79200

For 2017 = 2*20%*($198000-$79200)

= $47520

Activity method depreciation = (Cost - Salvage Value) * Activity level/ Total Activity

Based on hours:

For 2016 = ($198000-$20000) * 1800/10000 = $32040

For 2017 = ($198000 - $20000)*1500/10000 = $26700

Based on unist of output:

For 2016 = ($198000-$20000) * 44000/200000 = $39160

For 2017 = ($198000 - $20000)*35000/200000 = $31150

The book values under each of the method are calculated below:

Straight-line method

2016 : $198000 - $35600 = $162400

2017: $162400 - $35600 = $126800

Sum-of-the-years'-digits method

2016: $198000 -  $47467 = 150533

2017 $150533 - 59333 = 91200

Double-declining-balance method

2016 $198000 -79200 = 118800  

2017 $118800 - 47520 = 71280

Activity method based on hours worked

2016 $198000 - 32040 = $165960

2017 $165960 - $26700 = 139260

Activity method based on units of output

2016: $198000 - 39160 = $158840

2017 $158840 -  $31150 = 127690