Muggsy Bogues Company purchased equipment for $278,940 on October 1, 2014. It is
ID: 2476330 • Letter: M
Question
Muggsy Bogues Company purchased equipment for $278,940 on October 1, 2014. It is estimated that the equipment will have a useful life of 8 years and a salvage value of $25,440. Estimated production is 39,000 units and estimated working hours are 20,500. During 2014, Bogues uses the equipment for 560 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 for 2014
(b) Activity method (units of output) 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
Answer (a)
Straight Line Method =
Depreciable Value
Life
Purchase Cost
$ 2,78,940.00
Salvage Value
$ 25,440.00
Depreciable Value
$ 2,53,500.00
Life
8 Year
Depreciation per year
$ 31,687.50
Since asset is purchased on 1st Oct, so charged
6 months dep. In 2014
6 month depreciation =
$ 15,843.75
Answer (b)
Activity method (units of output) =
Depreciable Value
Estimated Production
Estimated Production =
39,000 units
Activity method (units of output) =
$ 6.50 per unit
In 2014, 1000 units are produce, hence depreciation = 1000 X 6.50 = $ 6500
Answer (c)
Activity method (Working Hours) =
Depreciable Value
Estimated Hours
Estimated Production =
20,500 Hours
Activity method (Working Hours) =
$ 12.36 per hour
In 2014, 560 hours are used, hence depreciation = 560 X 12.36 = $ 6920
Answer (d)
Sum of the Years' Digits Depreciation =
SYD =
n(n + 1)
2
Where n = estimated useful life
SYD =
8(8 + 1)
= 36
2
Year
Remaining Life
SYD
Applicable %
Annual Dep.
2014
8
8/36
22%
$ 56,333.33
2015
7
7/36
19%
$ 49,291.67
2016
6
6/36
17%
$ 42,250.00
2017
5
5/36
14%
$ 35,208.33
2018
4
4/36
11%
$ 28,166.67
2019
3
3/36
8%
$ 21,125.00
2020
2
2/9
6%
$ 14,083.33
2021
1
1/36
3%
$ 7,041.67
Total
36
100%
$ 2,53,500.00
For year 2016, depreciation will be $ 42,250.00
Answer (e)
To calculate depreciation under the double declining method, multiply the book value at the beginning of the fiscal year by a multiple of the straight-line rate of depreciation. The double declining balance formula is:
Double-declining balance (ceases when the book value = the estimated salvage value)
2 × Straight-line depreciation rate × Book value at the beginning of the year
Answer (a)
Straight Line Method =
Depreciable Value
Life
Purchase Cost
$ 2,78,940.00
Salvage Value
$ 25,440.00
Depreciable Value
$ 2,53,500.00
Life
8 Year
Depreciation per year
$ 31,687.50
Since asset is purchased on 1st Oct, so charged
6 months dep. In 2014
6 month depreciation =
$ 15,843.75
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