Q2 Alladin Company purchased Machine #201 on May 1, 2017. The following informat
ID: 2564120 • Letter: Q
Question
Q2 Alladin Company purchased Machine #201 on May 1, 2017. The following information relating to Machine #201 was gathered at the end of May. Price 425,000 $2,000 $8,300 $14500 costs Prep and installation costs Labor costs during regular production operations Alladin intends to use the machine only $7,800 10 years, howeve after which it expects to be able to sell it for May 1, 2016. Alladin uses the calendar year as the basis for the preparation of financial statements. The invoice for Machine #201 was paid (1) Compute the depreciation expense for the years indicated using the straight-line method for 2017. (Round to the nearest dollar.) (2) Compute the depreciation expense for the years indicated using the sum-of-years'-d gits method for 2018. (Round to the nearest dollar.) (3) Compute the depreciation expense for the years indicated using the double-declining balance method for 2018. (Round to the nearest dollar.)Explanation / Answer
Alladin Company
Depreciation expense =depreciable base x 1/estimated useful life
Depreciable base = cost – residual value
Cost = purchase price + freight-in costs + installation costs = $425,000 + $2,000 +$8,300 =$435,300
Residual value = $7,800
Depreciable base = $435,300 - $7,800 = $427,500
Useful life = 10 years
Depreciation expense for 2017 = $427,500 x 1/10years = $42,750
Under straight line depreciation method, the depreciation expense would remain constant throughout the useful life of the asset.
Depreciation rate for sum of the years’ digits method is calculated using the formula, n(n+1)/2 x depreciable base
= [10 (10+1)]/2 =55
Depreciable base = cost – residual value
= $435,300 - $7,800
Depreciable base = $427,500
Depreciation for the year 2018 = $427,500 x 9/55 =$69,955
Depreciation expense = cost x 2 x depreciation rate under straight line method
Depreciation rate = 2 x 1/10 = 20%
Depreciation for 2017 (8/12 months x 20% x $435,300) =$58,040
The machine was bought on May 1 (May 1 to Dec 31), so depreciation is for the period of 8 months only.
Book value at the beginning of 2018 = cost – accumulated depreciation
= $435,300 - $58,040 = $377,260
Depreciation expense for 2018 = 377,260 x 20% (book value multiplied rate of depreciation)
2018 depreciation = $75,452
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