Question

PROBLEM:3

Sangria Boat Lifts purchased equipment on January 1, 2017 for $96,000. It is estimated that the equipment will have a $5,000 residual value at the end of its 8-year useful life. It is also estimated that the equipment will produce 100,000 units over its 8-year life.

Instructions: Answer the following independent questions.

a)    Calculate the amount of depreciation expense for the year ended December 31, 2017, using the straight-line method of depreciation.

b)    If 16,000 units of product are produced in 2017 and 36,000 units are produced in 2018, what is the carrying amount of the equipment at December 31, 2018 using the units-of-production depreciation method?

c)    If the company uses the double diminishing-balance method of depreciation, what will be the balance of the Accumulated Depreciation—Equipment account at December 31, 2019?

Answer 1

Information Given -

Sangria Boat Lifts purchased equipment on January 1, 2017 for $96000.

It is estimated that the equipment will have a $5000 residual value at the end of its 8-year useful life.

It is also estimated that the equipment will produce 100000 units over its 8-year life.

.

(a) -- Calculate the amount of depreciation expense for the year ended December 31, 2017, using the straight-line method of depreciation.

Answer -

Year	Explanation	Depreciation expense
December 31, 2017	(Cost of equipment - Residual value) / Useful life = ($96000 - $5000) / 8	$11375

.

(b) -- If 16000 units of product are produced in 2017 and 36000 units are produced in 2018, what is the carrying amount of the equipment at December 31, 2018 using the units-of-production depreciation method?

Answer -

Depreciation rate per unit = [($96000 - $5000) / 100000 units] = $0.91 per unit.

Year	Units produced	Depreciation rate per unit ($)	Explanation	Depreciation expense ($)
2017	16000	0.91	16000 units * $0.91	14560
2018	36000	0.91	36000 units * $0.91	32760

The carrying amount of the equipment at December 31, 2018 -

= Cost of equipment - Depreciation expense of 2017 and 2018

= $96000 - ($14560 + $32760)

= $48680.

.

(c) -- If the company uses the double diminishing-balance method of depreciation, what will be the balance of the Accumulated Depreciation--Equipment account at December 31, 2019?

Answer -

Double diminishing-balance rate = [2 * straight line percentage] = [2 * ($11375/$91000)] = 25%.

Year	Book value at the Beginning ($)	Depreciation rate per year	Depreciation expense ($)	Book value at the End ($)	Accumulated depreciation ($)
2017	96000	25%	24000 [96000 * 25%]	72000 [96000 - 24000]	-
2018	72000	25%	18000 [72000 * 25%]	54000 [72000 - 18000]	42000 [24000 + 18000]
2019	54000	25%	13500 [54000 * 25%]	40500 [54000 - 13500]	55500 [42000 + 13500]

Hence, the balance of the Accumulated Depreciation--Equipment account at December 31, 2019 = $55500.