On October 1, 2018, the Allegheny Corporation purchased machinery for $323,000.

Question

On October 1, 2018, the Allegheny Corporation purchased machinery for $323,000. The estimated service life of the machinery is 10 years and the estimated residual value is $4,000. The machine is expected to produce 550,000 units during its life. Required: Calculate depreciation for 2018 and 2019 using each of the following methods. Partial-year depreciation is calculated based on the number of months the asset is in service. 1. Straight line. 2. Sum-ofthe-years'-digits 3. Double-declining balance. 4. One hundred fifty percent declining balance. 5. Units of production (units produced in 2018, 29.000; units produced in 2019, 44,0oo)

Explanation / Answer

Requirement 1: Straight Line Method: Numerator Denominator = Annual Depreciation Cost – Residual Value Useful Life = Annual Depreciation $323000-$4000 10 = $31,900 Year Annual Depreciation Fraction of year = Depreciation Expense 2018 $31,900.00 3/12 = $7,975.00 2019 $31,900.00 1 = $31,900.00 Requirement 2: Sum of the year’s digits method: Sum of year’s digits = 10 (10+1) / 2 = 55 Sum of years digits depreciation Depreciable Base X Rate per year X Fraction of year = Depreciation Expense Oct – Dec 2016 $319,000.00 X 10/55 X 3/12 = $14,500.00 Total Depreciation Expense – 2018 $14,500.00 Jan – Sep 2018 $319,000.00 X 10/55 X 9/12 = $43,500.00 Oct – Dec 2019 $319,000.00 X 9/55 X 3/12 = $13,050.00 Total Depreciation Expense – 2019 $56,550.00 Requirement 3: Double Declining Balance: Depreciation rate under Straight Line Method = Depreciation / Cost = 31900 / 319000 = 10% Depreciation rate under double declining method = 10 * 2 = 20% Depreciation for the period End of period Annual Period Beginning of Period Book Value Depreciation Rate Fraction of year Depreciation Expense Accumulated Depreciation Book Value 2018 323000 20% 3/12 16150 16150 306850 2019 306850 20% 1 61370 77520 245480 Requirement 4: 150% of declining balance: Depreciation rate = 10 * 150% = 15% Depreciation for the period End of period Annual Period Beginning of Period Book Value Depreciation Rate Fraction of year Depreciation Expense Accumulated Depreciation Book Value 2018 $323,000 15% 3/12 $80,750 $80,750 $242,250 2019 $242,250 15% 1 $36,338 $117,088 $205,913 Requirement 5: Units of Production: Depreciation per unit of production= Depreciable Value / Expected Production = $319000 / 550000= $0.38 2018 Depreciation Expense Depreciation per unit rate $0.38 Units Produced in 2018 29000 Depreciation in 2018 $11,020 2019 Depreciation Expense Depreciation per unit rate $0.38 Units produced in 2019 44000 Depreciation in 2019 $16,720

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