Ivy Industrial Packing Co purchased a packing machine for $950,000 at the beginn
ID: 2443195 • Letter: I
Question
Ivy Industrial Packing Co purchased a packing machine for $950,000 at the beginning of 2009. The robot has an estimated useful life of four years and an estimated residual value of $70,000. The packing machine, which should last 20,000 hours, was operated 6,000 in 2009; 8,000 hours in 2010; 4,000 hours in 2011; and 2,000 hours in 2012.1. Compute the annual depreciation and carrying value (book value) for the robot for 2009, 2010, 2011, and 2012 assuming the following depreciation methods:
a. Straight-line
b. Units of production
c. Double-declining balance
2. If the packing machine is sold for $400,000 on 12/31/2010, what would be the amount of the gain or loss under each depreciation method?
Explanation / Answer
Ivy Industrial Packing Co purchased a packing machine for $950,000 at the beginning of 2009. The robot has an estimated useful life of four years and an estimated residual value of $70,000. The packing machine, which should last 20,000 hours, was operated 6,000 in 2009; 8,000 hours in 2010; 4,000 hours in 2011; and 2,000 hours in 2012.
Required:
1. Compute the annual depreciation and carrying value (book value) for the robot for 2009, 2010, 2011, and 2012 assuming the following depreciation methods:
a. Straight-line
Straight line depreciation = (cost - residual value)/useful life = (950,000 – 70,000)/4 = 220,000
Year
Beg. Book value
Annual depreciation
Accumulated depreciation
End book value
2009
950,000
220,000
220,000
730,000
2010
730,000
220,000
440,000
510,000
2011
510,000
220,000
660,000
290,000
2012
290,000
220,000
880,000
70,000
b. Units of production
The packing machine, which should last 20,000 hours, was operated 6,000 in 2009; 8,000 hours in 2010; 4,000 hours in 2011; and 2,000 hours in 2012.
depreciation per hour used = (cost – residual value)/total hours of production = (950,000-70,000)/20,000 = $44 per hour.
For 2009: 6,000 hours* $44 = 264,000
For 2010: 8,000 hours* 44 = 352,000
For 2011: 4,000 hours* 44 = 176,000
For 2012: 2,000 hours*44 = 88,000
Year
Beg book value
Annual dpr.
Accumulated dpr.
Ending book value
2009
950,000
264,000
264,000
686,000
2010
686,000
352,000
616,000
334,000
2011
334,000
176,000
792,000
158,000
2012
158,000
88,000
880,000
70,000
c. Double-declining balance
Straight line rate is 100%/4 = 25%. Double declining balance is twice the straight line rate, 25%*2 = 50%. Residual value is not taken into consideration of the calculation, but you do not depreciation below the residual value.
2009: 950,000*0.50 = 475,000
2010: 475,00*0.50 = 237,500
2011: 237,500*0.50 = 118,750
2012: 118,750*0.50 = 59,375, but since book value cannot go below 70,000, the depreciation is 118,750 – 70,000 = 48750
Year
Beg. Book value
Annual dpr
Accumulated dpr
Ending book value
2009
950,000
475,000
475,000
475,000
2010
475,000
237,500
712,500
237,500
2011
237,500
118,750
831,250
118,750
2012
118,750
48,750
880,000
70,000
2. If the packing machine is sold for $400,000 on 12/31/2010, what would be the amount of the gain or loss under each depreciation method?
Straight line: 400,000 – 510,000 = 110,000 Loss
Units of Production: 400,000 - 334,000 = 66,000 gain
Double declining balance: 400,000 – 237,500 = 162,500 gain
Year
Beg. Book value
Annual depreciation
Accumulated depreciation
End book value
2009
950,000
220,000
220,000
730,000
2010
730,000
220,000
440,000
510,000
2011
510,000
220,000
660,000
290,000
2012
290,000
220,000
880,000
70,000
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