A high-speed multiple-bit drill press costing $1,080,000 has an estimated salvag
ID: 2538530 • Letter: A
Question
A high-speed multiple-bit drill press costing $1,080,000 has an estimated salvage value of $90,000 and a life of ten years. What is the annual depreciation for each of the first two full years under the following depreciation methods?
Units of production (activity) method (lifetime output is estimated at 110,000 units; the press produced 12,000 units in year one and 18,000 in year two):
Double-declining-balance method:
Year one, $______________.
Year two, $______________.
Units of production (activity) method (lifetime output is estimated at 110,000 units; the press produced 12,000 units in year one and 18,000 in year two):
Year one, $______________.
Year two, $______________.
Sum-of-the-years'-digits method:
Year one, $______________.
Year two, $______________.
Straight-line depreciation method:
Year one, $______________.
Year two, $______________.
Explanation / Answer
Answer:
Double Declining Balance Method:
Double Declining Depreciation Rate = 2 * Straight Line Depreciation Rate
Straight Line Depreciation Rate = 1 / Useful Life
Straight Line Depreciation Rate = 1 / 10 = 10%
Double Declining Depreciation Rate = 2 * 10% = 20%
Depreciation, Year 1 = $1,080,000 * 20%
Depreciation, Year 1 = $216,000
Depreciation, Year 2 = ($1,080,000 - $216,000) * 20%
Depreciation, Year 2 = $172,800
Units of Production (Activity) Method:
Depreciation per Unit = (Cost - Salvage Value) / Estimated Output in Lifetime
Depreciation per Unit = ($1,080,000 - $90,000) / 110,000
Depreciation per Unit = 990,000 / 110,000
Depreciation per Unit = $9
Depreciation, Year 1 = 12,000 * $9
Depreciation, Year 1 = $108,000
Depreciation, Year 2 = 18,000 * $9
Depreciation, Year 2 = $162,000
Sum of the Years’ Digit Method:
Sum of the years’ digit = 10 * (10+1) / 2 = 55
Depreciation = Depreciable Cost * Depreciation Factor
Depreciable Cost = $1,080,000 - $90,000 = $990,000
Depreciation, Year 1 = $990,000 * 10/55
Depreciation, Year 1 = $180,000
Depreciation, Year 2 = $990,000 * 9 /55
Depreciation, Year 2 = $162,000
Straight Line Depreciation Method:
Depreciation per Year = (Cost – Salvage Value) / Useful Life
Depreciation, Year 1 = ($1,080,000 - $90,000) / 10
Depreciation, Year 1 = $99,000
Depreciation, Year 2 = ($1,080,000 - $90,000) / 10
Depreciation, Year 2 = $99,000
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