Question

Swanson & Hiller, Inc., purchased a new machine on September 1 of the current year at a cost of $118,000. The machine's estimated useful life at the time of the purchase was five years, and its residual value was $8,000. The company reports on a calendar year basis. Required: a-1. Prepare a complete depreciation schedule, beginning with the current year, using the straight-line method. (Assume that the half-year convention is used). a-2. Prepare a complete depreciation schedule, beginning with the current year, using the 200 percent declining-balance method. (Assume that the half- year convention is used). a-3. Prepare a complete depreciation schedule, beginning with the current year, using the 150 percent declining-balance, switching to straight-line when that maximizes the expense. (Assume that the half-year convention is used). b. Which of the three methods computed in part a is most common for financial reporting purposes? c. Assume that Swanson & Hiller sells the machine on December 31 of the fourth year for $29,500 cash. Compute the resulting gain or loss from this sale under each of the depreciation methods used in part a.

Answer 1

a-1) Straight line method

Depreciation Expense per year = (Cost - Residual Value)/Useful Life

= ($118,000 - $8,000)/5 yrs = $22,000 per year

(For the year 1 and year 6 half year depreciation will be charged as the machine is purchased on Sep 1 of year 1).

Depreciation Schedule Using Straight Line Method (Amounts in $)

Year	Beginning Book Value (A)	Depreciation Expense (B)	Accumulated Depreciation (C)	Ending Book Value (A-B)
1	118,000	11,000	11,000	107,000
2	107,000	22,000	33,000	85,000
3	85,000	22,000	55,000	63,000
4	63,000	22,000	77,000	41,000
5	41,000	22,000	99,000	19,000
6	19,000	11,000	110,000	8,000

a-2) 200% Declining Balance Method

Depreciation rate = (1/Useful life)*2*100

= (1/5)*2*100 = 40%

Depreciation Schedule Using 200% Declining Method (Amounts in $)

Year	Beginning Book Value (A)	Depreciation Expense (B = A*40%)	Accumulated Depreciation (C)	Ending Book Value (A-B)
1	118,000	23,600 (118,000*40%*1/2)	23,600	94,400
2	94,400	37,760	61,360	56,640
3	56,640	22,656	84,016	33,984
4	33,984	13,594	97,610	20,390
5	20,390	8,156	105,766	12,234
6	12,234	4,234 (110,000-105,766) (bal fig)	110,000	8,000

In year 6, depreciation expense is calculated as difference between total depreciable value and Accumulated depreciation at the end of year 5.

a-3) 150% Declining Balance Method

Depreciation rate = (1/Useful life)*150%*100

= (1/5)*150%*100 = 30%

Depreciation Schedule Using 150% Declining Method (Amounts in $)

Year	Beginning Book Value (A)	Depreciation Expense (B = A*30%)	Accumulated Depreciation (C)	Ending Book Value (A-B)
1	118,000	17,700 (118,000*30%*1/2)	17,700	100,300
2	100,300	30,090	47,790	70,210
3	70,210	21,063	68,853	49,147
4	49,147	14,744	83,597	34,403
5	34,403	13,202 [(34,403-8,000)/2]	96,799	21,201
6	21,201	13,201 [(34,403-8,000)/2]	110,000	8,000

The remaining book value in the excess of residual value of $5,000 at the end of year 4 is depreciated equally over year 5 and year 6.

b) The most common method for financial reporting purposes is Straight line method.

c-1) Straight line method

Loss or gain on sale = Selling price - Book value at the end of year 4

= $29,500 - $41,000 = ($11,500)

Therefore there is a loss on sale of machine of $11,500.

c-2) 200% declining method

Loss or gain on sale = Selling price - Book value at the end of year 4

= $29,500 - $20,390 = $9,110

Therefore there is a gain on sale of machine of $9,110.

c-3) 150% declining method

Loss or gain on sale = Selling price - Book value at the end of year 4

= $29,500 - $34,403 = ($4,903)

Therefore there is a loss on sale of machine of $4,903.