Question

E11-6 (L01,2) (Depreciation Computations-Five Methods, Partial Periods) Muggsy Bogues Company purchased equip ment for $212,000 on October 1, 2017. It is estimated that the equipment will have a useful life of 8 years and a salvage value of $12,000. Estimated production is 40.000 units and estimated working hours are 20,000. During 2017, Bogues uses the equipment for 525 hours and the equipment produces 1,000 units. Instructions Compute depreciation expense under each of the following methods. Bogues is on a calendar-year basis ending December 31. (a) Straight-line method for 2017. (b) Activity method (units of output) for 2017

Answer 1

(a) Straight-line method

Depreciation= (Cost of Equipment - Salvage Value) / No. of Useful life years of Equipment

Putting given values,

$\Rightarrow$ ( $212,000 - $12,000) / 8 years

  $\Rightarrow$ $25,000 per year

But equipment is use for 3 months only so Depreciation will be proportionate to 3 months i.e. $25,000 * 3/12 = $6,250

(b) Activity Method (units of output) for 2017

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(c) Activity Method (working hours) for 2017

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(d) Sum of the years digits method for 2019

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(e) Double declining balance method for 2018
This method doubles the rate of depreciation as per Straight Line Method but it is charged on reducing balance or remaining book value of an asset. Therefore Depreciation cost will be greater in the initial years but lesser in later years.

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© Double declining balance method for 2018 Depreciation - rate Wet Depreciation as per straight line Method cost of Equipment = $95000 f goot $ 200.000 / 25 op = Depreciation for 2018 2017 = $200000 x 25% X3 = 12,500 12 2018 - Remaining Book value x 251. = ($200000 $12,500) X 2501 $46,875

vulle ' (6) Activity Met had / units of out put) for 2017 Depreciation Cost of - Salvage & Actual out but Tequipment value produced to Tot al estimated production during - life time. ($212001 - 12000 ) x dood units on units = 1 $ 5000 Activity Method (working havn) for 2012 © LOU Depreca - Salvage X actual hours l equp ment value used during the period Total estimated working hours ($212,000 - $12.000) x 595 has 20000 hours 1 $5250

Sum of the years digits method for 2019 Depreciation - Remaining useful life of Equipment & Net lost Sum of the year of Equipment digits 8- (Gyears 3 months) 8+7+6 +5+4+3+271 8 - 2.25) $ 200000 $31944 36 4 2.25 is calculated considering equipment is used from October 2017. That is for 3 months on in 2017. so z = 0.25 year.