Muggsy Bogues Company purchased equipment for $258,475 on October 1, 2014. It is
ID: 2474467 • Letter: M
Question
Muggsy Bogues Company purchased equipment for $258,475 on October 1, 2014. It is estimated that the equipment will have a useful life of 8 years and a salvage value of $12,240. Estimated production is 40,700 units and estimated working hours are 19,800. During 2014, Bogues uses the equipment for 540 hours and the equipment produces 1,000 units.
Compute depreciation expense under each of the following methods. Bogues is on a calendar-year basis ending December 31.
a) straight- line method 2014
b) activity method (units of outputs) for 2014
c) activity method (working hours) for 2014
d) sum-of-the-years'-digits method for 2016
e) double-declining-balance method for 2015
Explanation / Answer
(a) SLM
Annual depreciation, 2014 = (Cost - Salvage value) / Useful life = $(258,475 - 12,240) / 8 = $246,235 / 8 = $30,779
(b) Units of output
Depreciation, 2014 = $258,475 x (1,000 / 40,700) = $6,351
(c) Working hours
Depreciation, 2014 = $258,475 x (540 / 19,800) = $7,049
(d) SOYD
Sum-of-years-digits = 8 x 9 / 2 = 36
Depreciation base = Cost - salvage value = $246,235
Depreciation, 2016 = $246,235 x (6 / 36) = $41,039
(e) DDB
SLM depreciation rate = 1 / 8
DDB depreciation rate = 2 / 8 = 1 / 4
Depreciation, 2014 = $258,475 x 1/4 = $64,619
Book value at beginning of 2015 = $(258,475 - 64,619) = $193,856
Depreciation, 2015 = $193,856 x 1/4 = $48,464
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