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Safari File Edit View History Bookmarks Window Help ezto.mheducation.com G.2: Ch 9 Intro Part 2 Torge Company bough 5.00 points Torge Company bought a machine for $80,000 cash. The estimated useful life was five years and the estimated residual value was $5,000. Assume that the estimated useful life in productive units is 180,000. Units actually produced were 48,000 in year 1 and 54,000 in year 2. Required 1. Determine the appropriate amounts to complete the following schedule. (Do not round intermediate calculations.) Depreciation Expense for Book Value at the End of Year 1 Year 2 Year 2 Year 1 Straight-line Units-of-production Double-declining-balance 2-a. Which method would result in the lowest net income for year 1? Straight-ine Units-of-production 2-b. Which method would result in the lowest net income for year 2? Double-declining-balance Units-of-production Straight-line 27Explanation / Answer
1) Straight Line Method
Depreciation per year = (Cost - residual Value)/Useful Life
= ($80,000 - $5,000)/5 yrs = $15,000 per year
Book Value at the end of year 1 = Cost - Depreciation = $80,000 - $15,000 = $65,000
Book Value at the end of year 2 = Book Value at year 1 end - Depreciation = $65,000 - $15,000 = $50,000
Units of Production
Depreciation expense per unit = (Cost - Residual Value)/Useful life in units
= ($80,000 - $5,000)/180,000 = $0.416666667 per unit
Depreciation for Year 1 = Units produced*Dep per unit
= 48,000 units*$0.416666667 = $20,000
Depreciation for year 2 = Units produced*Dep per unit
= 54,000 units*$0.416666667 = $22,500
Book Value at the end of year 1 = Cost - Depreciation = $80,000 - $20,000 = $60,000
Book Value at the end of year 2 = Book Value at year 1 end - Depreciation = $60,000 - $22,500 = $37,500
Double Declining Balance
Depreciation rate = (1/useful life)*2 = (1/5)*2 = 40%
Depreciation for year 1 = Cost*Depreciation rate = $80,000*40% = $32,000
Book value at year 1 end = Cost - Depreciation
= $80,000 - $32,000 = $48,000
Depreciation for year 2 = Book Value at year 1 end*Dep rate
= $48,000*40% = $19,200
Book value at year 2 end = Book Value at year 1 end - Depreciation
= $48,000 - $19,200 = $28,800
2-a) Highest depreciation expense in year 1 is $32,000 under double declining balance method. Therefore,double declining balance method would result in lowest net income for year 1
2-b) Highest depreciation expense in year 2 is $22,500 under units of production method. Therefore,Units of production method would result in lowest net income for year 2.
Depreciation Expense for Book Value at the end of Method of Depreciation Year 1 Year 2 Year 1 Year 2 Straight Line 15,000 15,000 65,000 50,000 Units of production 20,000 22,500 60,000 37,500 Double-Declining-Balance 32,000 19,200 48,000 28,800Related Questions
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