Question

In recent years, Oriole Company has purchased three machines. Because of frequent employee turnover in the accounting department, a different accountant was in charge of selecting the depreciation method for each machine, and various methods have been used. Information concerning the machines is summarized in the table below. Salvage Useful Life Depreciation Method Machine Acquired Cost Value (in years) 1 Jan. 1, 2020 $132,500 $52,500 8 Straight-line 2 July 1,2021 91,000 11,800 5 Declining-balance 3 Nov. 1,2021 71.900 7,900 Units-of-activity 6 For the declining-balance method, Oriole Company uses the double-declining rate. For the units-of-activity method, total machine hours are expected to be 32,000. Actual hours of use in the first 3 years were: 2021, 680, 2022, 6,400; and 2023,7,600 Compute the amount of accumulated depreciation on each machine at December 31, 2023 MACHINE 1 MACHINE 2 MACHINE 3 Accumulated Depreciation at December 31 $ eTextbook and Media If machine 2 was purchased on April 1 instead of July 1, what would be the depreciation expense for this machine in 2021? In 2022? 2021 2022 Depreciation Expense

Answer 1

Depreciation expense for machinery 1 under straight-line method:

Purchase price , Jan.1, 2020 = $132,500

Salvage value = $52,500

Useful life of the asset = 8 years

Depreciation expense = (purchase price - salvage value) / useful life of the asset = ($132,500 - $52,500) / 8 years = $10,000 every year

Depreciation expense for December 31, 2020 = $10,000

Depreciation expense for December 31, 2021 = $10,000

Depreciation expense for December 31, 2022 = $10,000

Depreciation expense for December 31, 2023 = $10,000

Therefore accumulated depreciation as at December 31, 2023 = $40,000

Depreciation expense for machinery 2 under double-declining-balance method:

Purchase price , July.1, 2021 = $91,000

Salvage value = $11,800

Useful life of the asset = 5 years

Depreciation rate = (1/useful life) * 100 = (1/5) * 100 = 20%

Twice the depreciation rate = 2 * 20% = 40%. Therefore depreciation rate = 40%

Depreciation expense for December 31, 2021 = $91,000 * 40% * 6/12 i.e. for 6 months (July to December)

= $18,200

Depreciation expense for December 31, 2022 = ($91,000 - $18,200) * 40% = $29,120

Depreciation expense for December 31, 2023 = ($91,000 - $18,200 - $29,120) * 40% = $17,472

Therefore accumulated depreciation as at December 31, 2023 = $18,200 + $29,120 + $17,472 = $64,792

Depreciation expense for machinery 3 under units-of-production method:

Purchase price , Nov.1, 2021 = $71,900

Salvage value = $7,900

Useful life of the asset = 6 years

Depreciation expense = (purchase price - salvage value) * Hours used in a year / Total machine hours of its useful life

Depreciation expense for December 31, 2021 = ($71,900 - $7,900) * 680 hours / 32,000 hours = $1,360

Depreciation expense for December 31, 2022 = ($71,900 - $7,900) * 6400 hours / 32,000 hours = $12,800

Depreciation expense for December 31, 2023 = ($71,900 - $7,900) * 7600 hours / 32,000 hours = $15,200

Therefore accumulated depreciation as at December 31, 2023 = $1,360 + $12,800 + $15,200 = $29,360

MACHINE 1 MACHINE 2 MACHINE 3

Accumulated depreciation at December 31, 2013 $40,000 $64,792 $29,360

If machine 2 was purchased on April 1, 2021 then depreciation expense for 2021 and 2022 will be:

Depreciation expense for 2021 under double-declining balance method

= $91,000 * 40% * 9/12 i.e. for 9 months (April to December)

   = $27,300

Depreciation expense for 2022 = ($91,000 - $27,300) * 40% = $25,480

2021 2022

Depreciation Expense $27,300 $25,480