Hello,
(1) Here are the depreciation schedules :
STRAIGHT LINE METHOD | ||||
Depreciation = (Cost - residual value)/Useful life | ||||
Cost | 22000 | a | ||
Residual value | 2000 | b | ||
Useful life | 5 | c | ||
Depreciation | 4,000.00 | (a-b)/c | ||
Income Statement | Balance Sheet | |||
Year | Depreciation expense | Cost | Accumulated depreciation | Book value |
At acquisition | 22,000.00 | |||
1 | 4,000.00 | 22,000.00 | 4,000.00 | 18,000.00 |
2 | 4,000.00 | 22,000.00 | 8,000.00 | 14,000.00 |
3 | 4,000.00 | 22,000.00 | 12,000.00 | 10,000.00 |
4 | 4,000.00 | 22,000.00 | 16,000.00 | 6,000.00 |
5 | 4,000.00 | 22,000.00 | 20,000.00 | 2,000.00 |
UNITS OF PRODUCTION METHOD | ||||
Depreciation = [(Cost - residual value)/estimated total units to be produced over useful life] * Actual units produced | ||||
Cost | 22000 | d | ||
Residual value | 2000 | e | ||
Estimated total units to be produced over useful life | 10000 | f | ||
g | [(d-e)/f]*g | |||
Years : | Units | Depreciation expenses | ||
1 | 2000 | 4,000.00 | ||
2 | 3000 | 6,000.00 | ||
3 | 2000 | 4,000.00 | ||
4 | 2000 | 4,000.00 | ||
5 | 1000 | 2,000.00 | ||
Income Statement | Balance Sheet | |||
Year | Depreciation expense | Cost | Accumulated depreciation | Book value |
At acquisition | 22,000.00 | |||
1 | 4,000.00 | 22,000.00 | 4,000.00 | 18,000.00 |
2 | 6,000.00 | 22,000.00 | 10,000.00 | 12,000.00 |
3 | 4,000.00 | 22,000.00 | 14,000.00 | 8,000.00 |
4 | 4,000.00 | 22,000.00 | 18,000.00 | 4,000.00 |
5 | 2,000.00 | 22,000.00 | 20,000.00 | 2,000.00 |
DOUBLE DECLINING BALANCE METHOD | ||||
Depreciation = 2 * Straight Line Depreciation percent * Opening Book Value | ||||
Straight Line Depreciation percent = | 20% | (4,000/20,000) | ||
Income Statement | Balance Sheet | |||
Year | Depreciation expense ** | Cost | Accumulated depreciation | Book value |
At acquisition | 22,000.00 | |||
1 | 8,800.00 | 22,000.00 | 8,800.00 | 13,200.00 |
2 | 5,280.00 | 22,000.00 | 14,080.00 | 7,920.00 |
3 | 3,168.00 | 22,000.00 | 17,248.00 | 4,752.00 |
4 | 1,900.80 | 22,000.00 | 19,148.80 | 2,851.20 |
5 | 851.20 | 22,000.00 | 20,000.00 | 2,000.00 |
Calculation ** | ||||
Year 1 depreciation | 2*22,000*20% | |||
Year 2 depreciation | 2*13,200*20% | |||
Year 3 depreciation | 2*7,920*20% | |||
Year 4 depreciation | 2*4,752*20% | |||
Year 5 depreciation | (2*2,851.20*20%) - 289.28 | I have adjusted the depreciation expense of Year-5 to keep the salvage value as estimated. |
(2)
Year-2 | |
Depreciation expenses | |
SL method | 4,000.00 |
Units of production method | 6,000.00 |
Double declining balance |
5,280.00 |
As depreciation under Straight line method is the lowest among the above, Straight Line method will result in the highest net income in Year-2.
Higher net income would mean low depreciation charged on the machine. Hence it doesn't indicate a more efficient usage. If the machine was used more efficiently, depreciation charged would have been accelerated rather than being lower, resulting in a decreased net income.
Hope this helps. Please leave a feedback/rating if this helped!
Thanks and have a great day !
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