Question

Ayman Company purchased equipment on January 1, 2017 for $90,000. It is estimated that the equipment will have a $5,000 salvage value at the end of its 5-year useful life. It is also estimated that the equipment will produce 100,000 units over its 5-year life.

Instructions

Answer the following independent questions.

1.   Compute the amount of depreciation expense for the year ended December 31, 2018, using the straight-line method of depreciation.

2.   If 16,000 units of product are produced in 2017 and 24,000 units are produced in 2018, what is the book value of the equipment at December 31, 2018? The company uses the units-of-activity depreciation method.

3.   If the company uses the double-declining-balance method of depreciation, what is the balance of the Accumulated Depreciation—Equipment account at December 31, 2019?

Answer 1

Answer 1.

Cost of Equipment = $90,000
Salvage Value = $5,000
Useful Life = 5 years

Annual Depreciation = (Cost of Equipment - Salvage Value) / Useful Life
Annual Depreciation = ($90,000 - $5,000) / 5
Annual Depreciation = $85,000 / 5
Annual Depreciation = $17,000

Depreciation expense for the year ended December 31, 2018 is $17,000.

Answer 2.

Cost of Equipment = $90,000
Salvage Value = $5,000
Useful Life = 100,000 units

Depreciation per unit = (Cost of Equipment - Salvage Value) / Useful Life
Depreciation per unit = ($90,000 - $5,000) / 100,000
Depreciation per unit = $85,000 / 100,000
Depreciation per unit = $0.85

Depreciation for 2017 = Depreciation per unit * Number of units produced
Depreciation for 2017 = $0.85 * 16,000
Depreciation for 2017 = $13,600

Depreciation for 2018 = Depreciation per unit * Number of units produced
Depreciation for 2018 = $0.85 * 24,000
Depreciation for 2018 = $20,400

Book Value of Equipment = Cost of Equipment - Depreciation for 2017 - Depreciation for 2018
Book Value of Equipment = $90,000 - $13,600 - $20,400
Book Value of Equipment = $56,000

Answer 3.

Straight-line Depreciation Rate = 1 / Useful Life
Straight-line Depreciation Rate = 1 / 5
Straight-line Depreciation Rate = 0.20 or 20%

Double-declining-balance Depreciation Rate = 2 * Straight-line Depreciation Rate
Double-declining-balance Depreciation Rate = 2 * 20%
Double-declining-balance Depreciation Rate = 40%

2017:

Beginning Book Value = $90,000

Depreciation Expense = 40% * $90,000
Depreciation Expense = $36,000

Ending Book Value = $90,000 - $36,000
Ending Book Value = $54,000

2018:

Beginning Book Value = $54,000

Depreciation Expense = 40% * $54,000
Depreciation Expense = $21,600

Ending Book Value = $54,000 - $21,600
Ending Book Value = $32,400

2019:

Beginning Book Value = $32,400

Depreciation Expense = 40% * $32,400
Depreciation Expense = $12,960

Ending Book Value = $32,400 - $12,960
Ending Book Value = $19,440

Accumulated Depreciation = Depreciation Expense for 2017 + Depreciation Expense for 2018 + Depreciation Expense for 2019
Accumulated Depreciation = $36,000 + $21,600 + $12,960
Accumulated Depreciation = $70,560