Question

In recent years, Pharoah 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. Machine Acquired Salvage Value Cost Useful Life (in years) Depreciation Method Straight-line Jan. 1, 2015 $135,500 July 1, 2016 81,500 Nov. 1, 2016 77,600 $35,500 10,200 7,600 5 Declining-balance Units-of-activity For the declining-balance method, Pharoah Company uses the double-declining rate. For the units-of-activity method, total machine hours are expected to be 35,000. Actual hours of use in the first 3 years were: 2016, 710; 2017, 5,000; and 2018,6,400. Compute the amount of accumulated depreciation on each machine at December 31, 2018. MACHINE 1 MACHINE 2 MACHINE 3 Accumulated Depreciation at December 31 $ 40000 $ e Textbook and Media If machine 2 was purchased on April 1 instead of July 1, what would be the depreciation expense for this machine in 2016? In 2017? 2016 2017 Depreciation Expense $ e Textbook and Media

Answer 1

Depreciation under Straight line method = (Cost - Salvage value) / Estimated useful life

MACHINE 1 annual depreciation expense = ($135,500 - $35,500) / 10

= $10,000

MACHINE 1 accumulated depreciation at December 31, 2018 = $10,000 * 4 = $40,000

Depreciation under Double declining balance method = (Cost - Accumulated depreciation) / Estimated useful life * 2

Depreciation expense for 2016 = ($81,500 - $0) / 5 * 2 * 1/2

= $16,300

Depreciation expense for 2017 = ($81,500 - $16,300) / 5 * 2

= $26,080

Depreciation expense for 2018 = ($81,500 - $16,300 - $26,080) / 5 * 2

= $15,648

MACHINE 2 accumulated depreciation at December 31, 2018 = $16,300 + $26,080 + $15,648 = $58,028

Depreciation under Units of activity method = (Cost - Salvage value) / Total machine hours * Machine hours this year

Depreciation expense for 2016 = ($77,600 - $7,600) / 35,000 * 710 = $1,420

Depreciation expense for 2017 = ($77,600 - $7,600) / 35,000 * 5,000 = $10,000

Depreciation expense for 2018 = ($77,600 - $7,600) / 35,000 * 6,400 = $12,800

MACHINE 3 accumulated depreciation at December 31, 2018 = $1,420 + $10,000 + $12,800 = $24,220

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Depreciation under Double declining balance method = (Cost - Accumulated depreciation) / Estimated useful life * 2

Depreciation expense for 2016 = ($81,500 - $0) / 5 * 2 * 3/4

= $24,450

Depreciation expense for 2017 = ($81,500 - $24,450) / 5 * 2

= $22,820