Oriole Ltd. purchased a new machine on April 4, 2014, at a cost of $168,000. The
ID: 2571190 • Letter: O
Question
Oriole Ltd. purchased a new machine on April 4, 2014, at a cost of $168,000. The company estimated that the machine would have a residual value of $18,000. The machine is expected to be used for 9,700 working hours during its four-year life. Actual machine usage was 1,300 hours in 2014; 2,100 hours in 2015; 2,100 hours in 2016; 2,300 hours in 2017; and 1,900 hours in 2018. Oriole has a December 31 year end.
Calculate depreciation for the machine under each of the following methods: (Round expense per unit to 2 decimal places, e.g. 2.75 and final answers to 0 decimal places, e.g. 5,275.)
(1) Straight-line for 2014 through to 2018.
(2) Diminishing-balance using double the straight-line rate for 2014 through to 2018.
(3) Units-of-production for 2014 through to 2018.
Which method results in the highest depreciation expense over the life of the asset? Highest net income? Highest cash flow?
2014 expense 2015 expense 2016 expense 2017 expense 2018 expense s s s s sExplanation / Answer
Please note that in the problem it is given as Life of the asset being 4 years but the actually it is for 5 years (2014, 2015, 2016,2017 and 2018).So the problem is solved taking life of the asset as 5 years. 1) Straight Line Method: Cost of Machine 168,000.00 Life of the machine 5 years Residual value 18,000.00 Depreciation amount per year 30,000.00 Depreciation % 20% 2014* 22,356.16 2015 30,000.00 2016 30,000.00 2017 30,000.00 2018 30,000.00 Total Depreciation 142,356 Calculation of Depreciation for Year 2014 No. of days in 2014 272 days (from 4th April to 31st Dec) Depreciation per year 30000 Depreciation for part year 22,356 2) Diminishing balance using double the straight line rate Straight Line Depreciation rate 20% Depreciation rate for Diminishing Method 40% Book Value ( Beginning of year) Depreciation Book Value (End of the Year) 2014* 150,000.00 44,712.33 105,287.67 2015 105,287.67 42,115.07 63,172.60 2016 63,172.60 25,269.04 37,903.56 2017 37,903.56 15,161.42 22,742.14 2018 22,742.14 9,096.85 13,645.28 Total Depreciation 136,355 Calculation of Depreciation for Year 2014 No. of days in 2014 272 days Depreciation per year 40% of the asset carrying value Depreciation for part year 44,712.33 Depreciation for all years is calculated on the Book Value/ carrying value at the beginning of the year. 3) Units of production method Cost of Machine 168,000.00 Residual value 18,000.00 Depreciable value 150,000.00 No. of Working hours in Life of asset 9700 Depreciation per hour 15.46 (150000/9700) Machine Usage hours Depreciation 2014* 1300 20,103.09 2015 2100 32,474.23 2016 2100 32,474.23 2017 2300 35,567.01 2018 1900 29,381.44 Total Depreciation 9700 150,000.00 Units of Production Method has highest depreciation expense over the Life of the asset Highest Net income will be under Diminishing Balance Method as the depreciation under this method is lowest for the asset life. There would be no cash flow for depreciation charged as this only the apportionment of the asset cost over the life of the asset.
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