Question

Dordine Company

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Dordine Company acquired equipment on March 1, 2020, at a cash cost of $1,000,000. Transportation charges amounted to $12,000, installation cost was $40,000, testing costs were $30,000, and the payment of a fine for not getting the proper permit for moving the equipment was $1,000. The equipment was estimated to have a useful life of 12 years and a salvage value of $60,000 at the end of its life. It was further estimated that the equipment would be used in the production of $364,000 units of product during its life. During the 2020 year, 40,000 units of product were produced. Required: A. Prepare a schedule to calculate the depreciable base of the asset. B. Compute the depreciation to the nearest dollar for the year ended December 31, 2020, using the straight-line method. C. Compute the depreciation to the nearest dollar for the year ended December 31, 2020, using the units-of-production method D. Compute the depreciation to the nearest dollar for the year ended December 31, 2020, using the sum-of-the-years- digits method. E. Compute the depreciation to the nearest dollar for the year ended December 31, 2020, using the double-declining balance method.

Answer 1

A. Schedule showing the depreciable base of the asset:

	$
Cash cost of the asset	10,00,000
Transportation cost	12,000
Installation cost	40,000
Testing cost	30,000
Total acquisition cost	10,82,000
Less: Salvage Value	60,000
Basis for depreciation ($10,82,000 - $60,000)	$ 10,22,000

B. Depreciation for the year ended December 31, 2020 using straight line method:

a. Depreciable base	$10,22,000
b. Number of years	12 years
c. Annual depreciation (a/b)	$85,167

Under straight line method, the depreciation for all the years will be equal. Therefore depreciation expense for the first year will be $85,167 under straight-line method.

C. Depreciation for the year ended December 31, 2020 using units of production method:

Calculation of cost per unit:
a. Depreciation base	$ 10,22,000
b. Total number of units	3,64,000
c. Total cost per unit ($) (a/b)	$2.81
d. Number of units produced in year 1	40,000
e. First year depreciation expense (c * d)	$112,308

Therefore depreciation for the first year under units of production method will be $112,308.

D. Depreciation for the year ended December 31, 2020 using Sum of years digits method:

a. Depreciation base	$10,22,000
b. Remaining useful life of asset	12 years
c. Sum of the useful years of asset(1+2+3+4+5+6+7+8+9+10+11+12)	78
d. First year depreciation expense [(a * b)/c]	$157,231

Therefore depreciation for the first year under sum of years digits method will be $157,231.

E. Depreciation for the year ended December 31, 2020 using double-declining method:

Straight line depreciation rate = (1/useful life) * 100 = (1/12) * 100 = 8.33 %

Twice the straight line depreciation rate = 8.33% * 2 = 16.67%

a. Beginning of year book value	$10,82,000
b. Twice the straight line depreciation rate	16.67%
c. Annual depreciation (a * b)	$180,369.4

Therefor the depreciation for the first year under double-declining method is $180,369.40