(Calculation of depreciation; three methods) On January 1, 2016, SugarBear Compa
ID: 2548496 • Letter: #
Question
(Calculation of depreciation; three methods)
On January 1, 2016, SugarBear Company acquired equipment costing $150,000, which will be depreciated on the assumption that the equipment will be useful for five years and have a residual value of $12,000. The estimated output from this equipment is as follows: 2016—15,000 units; 2017—24,000 units; 2018—30,000 units; 2019—28,000 units; 2020—18,000 units. The company is now considering possible methods of depreciation for this asset.
Required
a. Calculate what the depreciation expense would be for each year of the asset's life, if the company chooses:
i.The straight-line method
ii.The units-of-production method
iii.The double-diminishing-balance method
b. Briefly discuss the criteria that a company should consider when selecting a depreciation method.
Explanation / Answer
a) i) The straight-line method
Depreciation under straight line method = (Cost of Equipment - Residual Value)/Useful life
= ($150,000 - $12,000)/5 yrs = $27,600 per year
Therefore depreciation for year 2016 to 2020 will be $27,600.
ii) The units-of-production method
Total estimated output in units = 2016+2017+2018+2019+2020
= 15,000+24,000+30,000+28,000+18,000 = 115,000 units
Depreciation per unit of output = ($150,000 - $12,000)/115,000 units = $1.20 per unit
Calculation of Depreciation expense for each year (Amounts in $)
iii) Depreciation rate under double diminishing balance method = (1/useful life)*2*100 = 1/5*2*100 = 40%
Calculation of Depreciation for each year (Amounts in $)
b) If the asset produces measurable units, then the units of production method should be used which allocates depreciation on a per unit basis each period. This method allocates more depreciation expense to periods of heavier use and less expense to periods of lighter use. As the equipment given in this case also produces output in units, the units of production method should be use for calculating depreciation expense.
Year Estimated Output (A) Depreciation per unit (B) Total Depreciation (A*B) 2016 15,000 1.20 18,000 2017 24,000 1.20 28,800 2018 30,000 1.20 36,000 2019 28,000 1.20 33,600 2020 18,000 1.20 21,600Related Questions
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