Question

P11-1 (Depreciation for Partial Period—SL, SYD, and DDB) Alladin Company purchased Machine #201 on May 1, 2014. The following information relating to Machine #201 was gathered at the end of May. Price $85,000 Credit terms 2/10, n/30 Freight-in $ 800 Preparation and installation costs $ 3,800 Labor costs during regular production operations $10,500 It is expected that the machine could be used for 10 years, after which the salvage value would be zero. Alladin intends to use the machine for only 8 years, however, after which it expects to be able to sell it for $1,500. The invoice for Machine #201 was paid May 5, 2014. Alladin uses the calendar year as the basis for the preparation of financial statements. Instructions (a) Compute the depreciation expense for the years indicated using the following methods. (Round to the nearest dollar.) (1) Straight-line method for 2014. (2) Sum-of-the-years’-digits method for 2015. (3) Double-declining-balance method for 2014. (b) Suppose Kate Crow, the president of Alladin, tells you that because the company is a new organization, she expects it will be several years before production and sales reach optimum levels. She asks you to recommend a depreciation method that will allocate less of the company’s depreciation expense to the early years and more to later years of the assets’ lives. What method would you recommend? please explain answer so I can understand the process

Answer 1

	Purchase Price	$85,000
	Less: Discount (2%)	-$1,700
	Freight-in	$800
	Installation	$3,800
		$87,900
1	Straight-line
	Year	Book Value year start	Depreciation Life	Depreciation Exp.	Acc. Dep	Book Value year-end
	2014	$87,900	8	$7,200	$7,200	$80,700
	2015	$80,700	5	$10,800	$18,000	$69,900
	Depreciation per year = ($87,900 - $1,500)/8 = $10,800
2	Sum-of-the-Years'-Digits Method
	Year	Book Value Year Start	Total Cost Depreciable	Depreciation Rate	Depreciation Exp.	Acc. Dep	Book Value year-end
	2014	$87,900	$86,400	14.81%	$12,800	$12,800	$75,100
	2015	$75,100	$86,400	19.44%	$16,800	$29,600	$58,300
3	Double declining balance method
	Year	Book Value year start	Depreciation Rate	Depreciation Exp.	Acc. Dep	Book Value year-end
	2014	$87,900	16.67%	$14,650	$14,650	$73,250
	2015	$73,250	25.00%	$18,313	$32,963	$54,938
4	Activity method because it is appropriate for measuring the dollar amount of depreciation charges through the number of hours or units rather than the number of years