Question

Depreciation Calculations Gretchen, Inc., a firm that makes oversized boots, purchased a machine for its factory. The following data relate to the machine: Price $38,500 Delivery charges $450 Installation charges $550 Date purchased May 1, 2017 Estimated useful life: In years 10 years In hours of production 25,000 hours of operating time Salvage value $2,000 During 2017, the machine was used 2,000 hours. During 2018, the machine was used 3,000 hours. Required: 1. Determine the depreciation expense and the year-end carrying amount for the machine for the years 2017 and 2018, assuming that the straight-line method is used. 2017 2018 Depreciation Expense $ $ 3,750 Carrying Amount 2. Determine the depreciation expense and the year-end carrying amount for the machine for the years 2017 and 2018, assuming that the units-of-production method is used. 2017 2018 Depreciation Expense Carrying Amount C $ $0 3. If you were Gretchen, which method would you use in order to report the highest profits in 2017 and 2018 combined? income in 2017 and 2018 combined. Because straight-line depreciation provides the smallest amount of depreciation expense in early years, net income would be higher with this The straight-line method would be used in order to report the highest method than with the others.

Answer 1

Ans:

Total cost of machine = 38500+450+550 =39500

2017

1. Depreciation = (39500-2000)/10 = 3750 per year

Depreciation for 2017 is 3750*8/12=2500

Carrying value=37500-2500=35000

2018

Carrying value=35000-3750=31250

	2017	2018
Depreciation expense	$2500	3750
Carrying amount	$35000	31250

2. Depreciation per hour = (39500-2000)/25000 = $1.50 per hour

	2017	2018
Depreciation expense	2000*1.50 =$3000	3000*1.5 = $4500
Carrying amount	$34500	$30000

2017

Carrying value=37500-3000=34500

2018

Carrying value=34500-4500=30000

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