A production machine which cost $1,100,000 is acquired on October 1 2016. Its es

Question

A production machine which cost $1,100,000 is acquired on October 1 2016. Its es ars or about 80,000 operating hours. During 2016, the machine was use produce products for 3,000 operating hours during 20 to 16 and 8,100 operating hours during 2017. Lorny uses the half-year convention for depreciating assets. Required: Calculate depreciation expense for 2016 and 2017 by each of the following methods: (a) Straight-line method (b) Double-declining balance method (c) Units-of-output method 2017 Depreciation Expense 2016 Straight-line method Double-declining balance method Units-of-output method

Explanation / Answer

DEPRECIATION EXPENSE:

STRAIGHT-LINE METHOD: (Asset Cost- Residual Value)/ Useful Life of the Asset

2016: {($1,100,000 - $100,000)/10 Years}*6/12 =$50,000

2017: {($1,100,000 - $100,000)/10 Years} = $100,000

DOUBLE DECLINING BALANCE METHOD:

Declining Balance Method : (Cost of Asset – Accumulated Depreciation) * Depreciation Rate

For Double Declinig Balance : (1/Recovery Period)*2 = (1/10)*2 = 0.20

2016: $75000*20% =$15,000 (To reflect the half year convention divide $15000 by 2 to get $7500 as the amount of depreciation for the first year)

2017 : ($75000-$7500)*20% = $13,500 of depreciation.

UNITS-OF-OUTPUT METHOD:

Units-of-Output Depreciation = (Cost of Asset - Residual Value) / Total Units of Output

Depreciation Expense = Units of Output Depreciation x Units Produced

The units-of-output depreciation method is based on the assumption an asset will produce a fixed number of units over its lifetime. The loss in value of the asset (depreciation expense) during an accounting period is directly related to the output of the asset in that same accounting period.

Depreciation is an accounting method of cost allocation. It is used to allocate the cost of an asset over its useful life. It's also referred to as a non-cash expense because the cash used to buy the asset left the company when it was purchased. Depreciation allows the cost of a balance sheet item (an asset) to flow smoothly to the income statement (an expense) over its serviceable life.

The First step is to calculate the depreciation expense per hour:

($1,100,000-$100,000)/80000 hours = $12.5 per hour

2016 : $12.5 per hour *3000 hours = $37,500

2017 : $12.5 per hour *8100 hours = $101,250

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