Question

To company Lullull lll UCILI W D ulu use? E9-5 On April 22, 2016, Sandstone Enterprises purchased equipment for $129,20 0, Sandstone Enterprises purchased equipment for $129,200. The company expects to use the equipment for 12,000 working hours during its four-year life and that it will have a residual value of $14,000. Sandstone has a December 31 year end and pro-rates depreciation to the nearest month. The actual machine usage was: 1,900 hours in 2016: 2,800 hours in 2017; 3,700 hours in 2018: 2.700 hours in 2019; and 1,100 hours in 2020. Instructions (a) Prepare a depreciation schedule for the life of the asset under each of the following methods: 1. straight-line, 2. double diminishing-balance, and 3. units-of-production. (b) Which method results in the lowest profit over the life of the asset? (c) Which method results in the least cash used for depreciation over the life of the asset? E9-6 Bisor Company has a December 31 vear and

Answer 1

Depreciation is a normal wear and tear of an asset. various methods are used to find out the depreciation.

(1) Straight line

Depreciation per year =cost-salvage / useful life

=$129,200-$14,000 /4

=$28,800

Depreciation schedule as per straight line

Year	Depreciation expense
2016	$19,200($28,800*8/12 months)	As purchased on April 22 we will consider only 8 months for year 2016
2017	$28,800
2018	$28,800
2019	$28,800
2020	$9,600($28,800*4/12)
Total	$115,200(19,200+28,800+28,800+28,800+9,600)

2. Double declining

It depreciated at rate double than straight line

=100/useful life *200%

=100/4*200%

=50%

Depreciation schedule as per double declining method

Year	cost	depreciation rate	depreciation expense	Book value	Accumulated depreciation
2016	$129,200	50%	$43,067($129,200*50%)*8/12	$86,133($129,200-43,067)	$43,067
2017		50%	$43,067(86,133*50%)	$43,067($86,133-43,067)	$86,134(43,067+43,067)
2018		50%	$21,534($43,067*50%)	$21,534	$107,667(86,134+21,534)
2019		50%	$7,533	$14,000	$115,200
2020		50%	$0	$14,000	$115,200

As we know that salvage is $14,000 year 2019 depreciation will be adjusted in a way that Book Value would be $14,000

3.units of production

we will find depreciation per unit

=cost-salvage/estimated hours

=$129,200-$14,000/12,000

=$9.6 per hour

depreciation schedule as per unit is production method

Year	Actual hours	depreciation rate	depreciation expense	book value	Accumulated depreciation
2016	1900	$9.6/hour	$18,240($9.6*1900)	$110,960($129,200-18,240)	$18,240
2017	2800	$9.6/hour	$26,880($9.6*2800)	$84,080(110,960-26,880)	$45,120(18,240+26,880)
2018	3700	$9.6/hour	$35,520($9.6*3700)	$48,560(84,080-35,520)	$80,640($45,120+35,520)
2019	2700	$9.6/hour	$25,920	$22,640	$106,560
2020	1100	$9.6/hour	$8,640($22,640-14,000)	$14,000
Total			$115,200

As we know that salvage value is $14,000, the depreciation expense for the year 2020 will be adjusted so that book value at the end would be $14,000.

B)

Even though different methods results in different yearly depreciation , they would all result in same depreciation expense throughout the useful life of an asset.There by resulting into same profit.

c)

all the methods will result into same cash flow through out the life i.e $129,200purchase price.

depreciation is a non cash expense and does not affect the cash flow.

hence all the methods will result in same cash flow.