7. Depreciation computations: change in estimate. Aussie Imports purchased a spe
ID: 2375535 • Letter: 7
Question
7. Depreciation computations: change in estimate. Aussie Imports purchased a specialized piece of machinery for $50,000 on January 1, 20X3. At the time of acquisition, the machine was estimated to have a service life of 5 years (25,000 operating hours) and a residual value of $5,000. During the 5 years of operations (20X3 - 20X7), the machine was used for 5,100, 4,800, 3,200, 6,000, and 5,900 hours, respectively. <?xml:namespace prefix = o ns = "urn:schemas-microsoft-com:office:office" />
Instructions
a. Compute depreciation for 20X3 - 20X7 by using the following methods: straight line, units of output, and double-declining-balance.
b. On January 1, 20X5, management shortened the remaining service life of the machine to 20 months. Assuming use of the straight-line method, compute the company%u2019s depreciation expense for 20X5.
c. Briefly describe what you would have done differently in part (a) if Aussie Imports had paid $47,800 for the machinery rather than $50,000. In addition, assume that the company incurred $800 of freight charges $1,400 for machine setup and testing, and $300 for insurance during the first year of use.
Explanation / Answer
a.
Year
Straight line Method
Units of output
Double declining balance
20X3
$9,000
$9,180
$20,000
20X4
$9,000
$8,640
$12,000
20X5
$9,000
$5,760
$ 7,200
20X6
$9,000
$10,800
$ 4,320
20X7
$9,000
$10,620
$ 1,480
b. Cost of Machine $50,000
Less: Depreciation for 2003 9,000
Depreciation for 2004 9,000 18,000
Book Value on January 1, 20X5 32,000
Less: residual Value 5,000
Depreciable value 27,000 Useful life 20 months Depreciation per month $1,350
Depreciation for 20x5 $16,200 (1,350 x 12)
c. The cost of the machine includes the following:
Cost of Machine paid $47,800
Freight charges 800
Machine set up 1,400
Total cost $50,000
====The cost of machine comes to $50,000, and the same was given in (a) above. Hence the depreciation computed as (a) above will remain same.
Year
Straight line Method
Units of output
Double declining balance
20X3
$9,000
$9,180
$20,000
20X4
$9,000
$8,640
$12,000
20X5
$9,000
$5,760
$ 7,200
20X6
$9,000
$10,800
$ 4,320
20X7
$9,000
$10,620
$ 1,480
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