7. A company purchased equipment for $212,000 on January 1, 2017. It estimates t

Question

7. A company purchased equipment for $212,000 on January 1, 2017. It estimates the useful life as 10 years and the salvage value as $12,000. It also estimates the equipment will produce 40,000 units over its useful life. Assume the equipment produces 3,700 units in 2017 and 4,100 units in 2018.

a. Calculate the depreciation expense for 2017 and 2018 using the straight-line, double-declining balance, and units-of-output methods.

b. Assume that the company in question 7 is using the straight-line depreciation method. Assume it does not have any special deprecation policy. If it purchased the equipment on Sept. 1, 2017, what would be the most reasonable amount of depreciation expense to recognize in 2017 assuming its fiscal year ends on December 31, 2017?

Explanation / Answer

Ans.7a 2017 2018 Straight-line 20000 20000 Double declinig 42400 33920 Units-of-output 18500 20500 *Calculation: 1 Straight line method: Depreciation = (Cost - Salvage value) / life 2017 (212000 - 12000) / 10 20000 2018 (212000 - 12000) / 10 20000 2 Double-declining balance method: Depreciation rate = 2*100/life 2*100/10   = 20% 2017 Cost * Depreciation rate 212000*20% 42400 2018 (Cost - previous dep.)*Rate (212000-42400)*20% 33920 3 Units-of-output method: Depreciation = (Cost - Salvage value) / Total production * actual production 2017 (212000 - 12000) / 40000*3700 18500 2018 (212000 - 12000) / 40000*4100 20500 Ans.7b Depreciation = (Cost - Salvage value) / life * months used (212000 - 12000) / 10 * 4/12 6666.67 The equipment is used for 4 months (1Sep. - 31Dec.)

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