Question

E9-20 (book/static) 18 Question Help Crispy Fried Chicken bought equipment on January 2, 2018, for $33,000. The equipment was expected to remain in service for four years and to operate for 6,750 hours. At the end of the equipment's useful life, Crispy estimates that its residual value will be $6,000. The equipment operated for 675 hours the first year, 2,025 hours the second year, 2,700 hours the third year, and 1,350 hours the fourth year. Read the requirements. Requirement 1. Prepare a schedule of depreciation expense, accumulated depreciation, and book value per year for the equipment under the three depreciation methods: straight-line, units-of-production, and double-declining-balance. Show your computations. Note: Three depreciation schedules must be prepared. Begin by preparing a depreciation schedule using the straight-line method. Straight-Line Depreciation Schedule Depreciation for the Year Asset Depreciable Useful Depreciation Accumulated Date Cost Cost Life Expense Depreciation 1-2-2018 27000 12-31-2018 11 4 years = 12-31-2019 Book Value Evb 12-31-2020 .jpg 12-31-2021 i Requirements PLE g.p 1. Prepare a schedule of depreciation expense, accumulated depreciation, and book value per year for the equipment under the three depreciation methods: straight-line, units-of-production, and double-declining-balance. Show your computations. Note: Three depreciation schedules must be prepared. 2. Which method tracks the wear and tear on the equipment most closely? Choose from any i Print Done parts + remaining VICO Check Answer

Answer 1

Solution

Crispy Fried Chicken

Straight Line Depreciation Schedule

Straight line depreciation schedule:
Date	Asset Cost		Depreciation for the year
		Depreciable Cost	/	Depreciation Rate	=	Depreciation Expense	Accumulated depreciation	Book Value
1/2/2018	$33,000							$33,000
12/31/2018		$27,000	/	25%	=	$6,750	$6,750	$26,250
12/31/2019		$27,000	/	25%	=	$6,750	$13,500	$19,500
12/31/2020		$27,000	/	25%	=	$6,750	$20,250	$12,750
12/31/2021		$27,000	/	25%	=	$6,750	$27,000	$6,000

Notes –

1. Depreciable cost = asset cost – residual value

Asset cost = $33,000

Residual value = $6,000

Depreciable cost = 33,000 – 6,000 = $27,000

2. Depreciation rate = 1/useful life of the asset

Useful life of the asset = 4 years

Depreciation rate = ¼ = 25%

3. Book value = asset cost – accumulated depreciation

For first year = 33,000 – 6,750 = $26,250

For second year = 33,000 – 13,500 = $19,500

For third year = 33,000 – 20,250 = $12,750

For fourth year = 33,000 – 27,000 = $6,000

Units of production depreciation method:
calculation of depreciation expense per unit -
(Asset Cost	-	residual value)	/	estimated operating hours	=	depreciation per hour
($33,000	-	$6,000)	/	6,750 hours	=	$4 per hour

Depreciation schedule - units of production method:
Date	Asset Cost		Depreciation for the year
	$33,000	Depreciation per unit (hour)	Number of hours	Depreciation Expense	Accumulated Depreciation	Book Value
1/2/2018	$33,000					$33,000
12/31/2018		$4	675 hours	$2,700	$2,700	$30,300
12/31/2019		$4	2,025 hours	$8,100	$10,800	$22,200
12/31/2020		$4	2,700 hours	$10,800	$21,600	$11,400
12/31/2021		$4	1,350 hours	$5,400	$27,000	$6,000

Note:

1. Depreciation expense = depreciation per hour x number of hours

For first year = $4 x 675 hrs = $2,700

Second year = $4 x 2,025 hrs = $8,100

Third year = $4 x 2,700 hrs = $10,800

Fourth year = $4 x 1,350 hrs = $5,400

2. Book value = asset cost – accumulated depreciation

First year = 33,000 – 2,700 = $30,300

Second year = 33,000 – 10,800 = $22,200

Third year = 33,000 – 21,600 = $11,400

Fourth year = 33,000 – 27,000 = $6,000

Depreciation schedule using the double-declining-balance method:
Date	Asset Cost		Depreciation for the year
1/2/2018	$33,000	Book Value	x	DDB Rate		Depreciation Expense	Accumulated Depreciation	Book Value
12/31/2018		$15,000		50%		$16,500	$16,500	$16,500
12/31/2019		$16,500	x	50%	=	$8,250	$24,750	$8,250
12/31/2020		$8,250			=	$2,250	$27,000	$6,000
12/31/2021		$6,000				$0	$27,000	$6,000

Notes –

1. DDB rate = 2 x ¼ = 2 x 25% = 50%
2. Depreciation expense = book value x DDB rate

First year = 33,000 x 50% = $16,500

Second year = 16,500 x 50% = $8,250

Third year = 8,250 x 50% = 4,125

Though the depreciation expense for Year 3 comes to $4,125, it would make book value to fall below the residual value of $6,000. Hence, the depreciation expense in Year 3 is limited to $750 (8,250 – 6,000 = 2,250).

Likewise, depreciation expense of year 4 is zero as the asset cannot be depreciated beyond its residual value.

3. Book value = cost – accumulated depreciation

Year 1 = 33,000 – 16,500 = $16,500

Year 2 = 33,000 – 24,750 = $8,250

Year 3 = 33,000 – 27,000 = $6,000

Year 4 33,000 – 27,000 = 6,000

2. The units of production method tracks the equipment's wear and tear more closely.

Explanation: the method calculates depreciation expense based on the number of hours of use of equipment and hence provides accurate measure of wear and tear of the equipment.