On October 1, 2013, the Allegheny Corporation purchased machinery for $278,000.

Question

On October 1, 2013, the Allegheny Corporation purchased machinery for $278,000. The estimated service life of the machinery is 10 years anc the estimated residual value is $3,000. The machine s expected to produce 550,000 units during its life. Required: Calculate depreciation for 2013 and 2014 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-of-the-years' digits. 3. Double-declining balance.

Explanation / Answer

In the above formula, depreciable base is the difference between cost and salvage value of the asset and sum of the years' digits is the sum of the series:

1, 2, 3, ... , n ; where n is the useful life of the asset in years.

Sum of the years' digits can be calculated more conveniently using the following formula:

SUm of the year = 10(11)/2

=55

Depreciation of 2013 = 275,000

275,000 * 10/55

= 50,000 *.25 = 12,500

Depreciation for 2014 = 275,000 * 10/55 * .75 = 37,500

+

275,000 * 9/55 * .25 = 11,250

= 48,750

Double declining method

= Depreciation rate * 2

= 10% * 2 = 20%

20 % * 275000 *.25 = 13,750

2014

20 % * (275,000 -13,750)

= 52,250

Value          278,000 Residual value              3,000 Depreciable base          275,000 Per year depreciation straight line            27,500 2013        6,875.00 2014 27500

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