2. Kelm Company purchased a new machine on October 1, 2011, at a cost of $120,00

Question

2. Kelm Company purchased a new machine on October 1, 2011, at a cost of $120,000.The
company estimated that the machine will have a salvage value of $12,000. The machine is
expected to be used for 10,000 working hours during its 5-year life.

Instructions:

Compute the depreciation expense under the following methods for the year indicated.

(a) Straight-line for 2011.

(b) Units-of-activity for 2011, assuming machine usage was 1,700 hours.

(c) Declining-balance using double the straight-line rate for 2011 and 2012.

Explanation / Answer

With DDB depreciation calculations you typically ignore the salvage value. So for the first full year, the entry would be: $120,000 / 5 X 2 = $48,000 But that would be for a full year. Since they only used the machine for 3 months in 2010 the depreciation recorded in 2010 would be: $48,000 / 4 = $12,000 In 2011, they would record the remaining $36,000 depreciation from the first year, plus one-fourth of this calculation: ($120,000 - $48,000) / 5 X 2 = $28,800 $28,800 / 4 = $7,200 $36,000 + $7,200 = $43,200 So in 2010 the depreciation recorded is $12,000 In 2011 you record $43,200

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