Question

Problem #6
Health Guard Labs, a pharmaceutical company, recently purchased a new pill dispensing machine. The
purchase price was $24,500, the estimated residual value was $10,000, and the estimated useful life is
five years. Additional expenditures during the first year of use were as follows:

Sales tax

Assembly

Maintenance repairs
Replacement parts
New battery to increase energy efficiency

$750
$450
$2,500
$3,600
$670

Instructions:
1. Determine the machine asset value at year end of year one.
2. Create a depreciation schedule for year one and two for the dispensing machine by using
the straight line method.
3. Create a depreciation schedule for year one and two for the dispensing machine by using
the double declining method.

Answer 1

Accounting rule is that all expenses and costs incurred for bringing the asset to its state of intended use will form a part of the cost of the asset.

In this case the costs that will be added are sales tax, assembly, maintenance repairs and replacement parts. The cost of battery to increase energy efficiency does not help the company, in any way, to bring the dispensing machine to its intended use. It will only help the company to save on energy costs.

1. Machine asset value at the end of year 1 = purchase price+ sales tax+ assembly+ maintenance repairs+ replacement parts

= 24,500+750+450+2,500+3,600

= $31,800

2. Depreciation as per straight line method – Total amount to be depreciated = (asset value – residual value)/life = (31,800-10,000)/5 = $4,360 per year.

Depreciation schedule is shown below:

Asset	Price	Salvage Value	Life	Method	Year 1 depreciation	Year 2 depreciation
Pill dispensing machine	31,800.00	10,000.00	5.00	SL	4,360.00	4,360.00

Year	Book value - Start of the period	Depreciation expenses	Accumulated depreciation	Book value - End of the period
1	31,800.00	4,360.00	4,360.00	27,440.00
2	27,440.00	4,360.00	8,720.00	23,080.00

3.

In case of double declining method the annual depreciation rate = 100%/5 years *2 = 20%*2 = 40%. Depreciation schedule is provided below.

Year	Book value - Start of the period	Depreciation expenses @ 40%	Accumulated depreciation	Book value - End of the period
1	31,800.00	12,720.00	12,720.00	19,080.00
2	19,080.00	7,632.00	20,352.00	11,448.00