At the beginning of the year, Chemical Control Corporation bought three used mac
ID: 2373489 • Letter: A
Question
At the beginning of the year, Chemical Control Corporation bought three used machines from Radial Compression Incorporated. The machines immediately were overhauled, installed, and started operating. Because the machines were different, each was recorded separately in the accounts.
A
Give the journal entry to record depreciation expense at the end of year 1, assuming the following (Do not round intermediate calculations.Round your answer to the nearest dollar amount. Omit the "$" sign in your response):
Estimates
At the beginning of the year, Chemical Control Corporation bought three used machines from Radial Compression Incorporated. The machines immediately were overhauled, installed, and started operating. Because the machines were different, each was recorded separately in the accounts.
Explanation / Answer
Straight line method depreciates cost evenly through out the useful life of the fixed asset. Straight line depreciation is calculated as follows:
Depreciation per annum = (Cost - Residual Value) / Useful Life
Where:
An asset has a useful life of 3 years.
Cost of the asset is $2,000.
Residual Value is $500.
Annual Depreciation cost will be $500 = (2000 - 500) / 3years
Straight line depreciation method is appropriate where economic benefits from the asset are expected to be realized evenly during its useful life. It is also convenient where no reliable estimate can be made regarding the pattern of economic benefits over an asset's useful life.
Units of Production Depreciation Method, also known as Units of Activity and Units of Usage Method of Depreciation, calculates depreciation on the basis of expected output or usage.
For example, a machine may be depreciated on the basis of output produced during a period in proportion to its total expected production capacity. Therefore, useful life of an asset under Units of Production Method is stated in terms of production output or usage rather than years of service.
Depreciation per annum = (Cost - Residual Value) / Useful Life
The Formula for calculation of depreciation under Units of Production Method is as follows:
Where:
Oil PLC installs a crude oil processing plant costing $12 million with an estimated capacity to process 50 million barrels of crude oil during its entire life. Production during the first year of operation is 2 million barrels. Expected residual value of the processing plant is $2 million.
Depreciation charge for the first year is calculated as follows:
Depreciation Expense = ($12 - $2m) x 2 / 50 = $0.4 million
Plastic LTD purchases a steel mould costing $1 million to be used in the production of plastic glasses. The mould could be used in 8 production batches after which it will have a scrap value of $.2 million. During the first year, the company manufactures 2 batches of glasses.
Depreciation charge for the year is calculated as follows:
Depreciation Expense = ($1 - $0.2m) x 2 / 8 = $0.2 million
Units of Production Method may be appropriate where there is a high correlation between activity of an asset and its physical wear and tear. As no depreciation under this method is charged when an asset remains idle, it is not appropriate for depreciating assets that suffer a significant decrease in their earning potential with the passage of time for reasons such as technological obsolescence.
It is a depreciation method in which the depreciation rate is applied double to that in straight line method. The depreciation in this method is charged on the complete purchase price of asset rather than the net of salvage value price in straight line method. In other words we can say that double declining depreciation method uses double the rate of straight line method.
It is a common form of accelerated depreciation also known as 200 times declining balance method. Accelerated means that the depreciation amount in the beginning will be greater than the rate taken out with straight line method. The main purpose is to charge greater depreciation in the beginning useful life years but gradually the depreciation amount decreases. It does not mean that since the amount is greater in the beginning years the depreciation charged through out the useful life will be greater than the straight line method.
For example an asset is purchased at a cost of $100,000 having no salvage values and a useful life of ten years. The depreciation lets suppose is 10% for straight line method so, with the double declining method the rate will become 20%. Since there is no depreciation in the first year the depreciation will be calculated as $100000*10%=$20,000. The book value now becomes $100,000-$20000= $80000 so for the 2nd year depreciation by double declining method will become $80000*20%=$16000.
The process carries on till the end of useful life. The accumulated depreciation for the two years will become $20,000+$16000 and the book value will be the accumulated depreciation minus the book value for one year. The main idea is to depreciate the asset value steeply through the early years of useful life due to which the depreciation expenses become large in the early years and small in the remaining years.
As it is clear that the depreciation amount is decreased in the 2nd year which is going to decrease further through out the life. Few people during useful life of the asset switches to straight line method, others stick to the original method depending on the case.
Stage of Completion % = Value of Work Certified as complete x 100 Total Expected Production or UsageRelated Questions
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