7. Depreciation computations: change in estimate. Aussie Imports purchased a spe
ID: 2446691 • 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. 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 15 months. Assuming use of the straight-line method, compute the company’s 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)
Using straight line method of depreciation:
Depreciation = Asset value – Residual value/Useful life
= 50,000-5,000/5
= 9,000
Each year depreciation is $9,000.
Units of output method:
Depreciation = Hours used for the year/Total year *Asset value
Year
Opening asset value
Depreciation
Closing balance
2003
50,000
10,200
39,800
2004
39,800
9,600
30,200
2005
30,200
6,400
23,800
2006
23,800
12,000
11,800
2007
11,800
11,800
-
Using double declining method of depreciation:
Year
Opening asset value
Depreciation
Closing balance
2003
50,000
18,000
32,000
2004
32,000
11,520
20,480
2005
20,480
7,372.80
13,107
2006
13,107
4,718.59
8,389
2007
8,389
3,019.90
5,369
Year
Opening asset value
Depreciation
Closing balance
2003
50,000
10,200
39,800
2004
39,800
9,600
30,200
2005
30,200
6,400
23,800
2006
23,800
12,000
11,800
2007
11,800
11,800
-
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