A company purchased a new crane for $360,500 at the beginning of year 1. The cra

Question

A company purchased a new crane for $360,500 at the beginning of year 1. The crane has an estimated residual value of $35,000 and a useful life of 6 years. The crane is expected to last 10,000 hours. It was used 1,800 hours in year 1; 2,000 hours in year 2; 2,500 hours in year 3; 1500 hours in year 4; 1200 hours in year 5 and 1,000 hours in year 6.

1.) Compute the annual depreciation and carrying value for the new crane for each of the 6 years (round to the nearest whole dollar) under each of the following methods: (a) straight-line (b) production and (c) double-declining balence.

2.) Prepare the adjusting entry that would be made each year to record the depreciation calculated under the straight-line method.

3.) Show the balence sheet presentation for the crane after the adjusting entry in year 2 using straight-line method.

4.) What conclusions can you draw from the patterns of yearly depreciation and carring value in 1?

Explanation / Answer

1.) (a) straight-line - First lets calculate the depreciation per yer under straight-line

straight-line depreciation = Asset - Salvage value / Years of life in years

Or { Asset - Salvage Value } x 1 / Years of life in years

Now applying the yearly Depreciation accumulating year on year we have the below

(c) double-declining balence. - Here we apply double the rate of depreciation as compared to straight line and we do not consider the salvage value in the beginning year because at the end years we depreciate to adjust the salvage value because Book value should not go below salvage

(b) production - Here the entire unita of usage is proportionate as shown below

Depreciation =[ Number of Units / Total units in life ]   x [ Cost - Salvage Value ]

2.) Prepare the adjusting entry that would be made each year to record the depreciation calculated under the straight-line method.

3.) Show the balence sheet presentation for the crane after the adjusting entry in year 2 using straight-line method.

4.) What conclusions can you draw from the patterns of yearly depreciation and carring value in 1?

It shows that Straight Line is the most easiest way to apply depreciation in equal parts all through the years giving us an consistent estmate of the deprecition expense however Double Declining can be useful if the firm wants to expense out the Purchase cost at the earliest and may not and on the other hand production method is for actual output which can be considered best on looking at it however at times the depreciation causes even without output beccause of Time and changing technology

a Cost 360500 b residual value 35000 c Period in years 6 d Depreciation rate ( 1 / c ) 16.67% D Depreciation per year ( a-b) x d 54250

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