Question

Question 2 (20 marks) Sunshine Corporation purchased a new machine on Jan 4, 2018 for $165,000 cash. The machine has a useful life of five years or of 25,000 hours. After the useful life the machine will have a residual value of $2,000. The machine was used for 3,200 hours in 2018 and 4,000 hours in 2019. Required: a. Calculate the depreciation expense for 2018 and 2019 under each of the following methods: 1. Straight-line (3 marks) ii. Double diminishing-balance (5 marks) Hi. Units-of-production (5 marks) b. Calculate the carrying amount at the end of 2019 for the machine when the company is using the Straight-line depreciation method. (3 marks) C. Record the journal entry for the cash purchase of the machine on Jan 4, 2018 and for its depreciation expense for the year ended December 31, 2019 under the units-of-production method. (4 marks)

Answer 1

a)Calculation of Depreciation Expense of 2018 and 2019 with Following Methods:

For 2018 and 2019

Machine Purchased = $165,000

Useful Life =5 Years or 25000 hours

Residual Value = $ 2,000

i)Straight Line Method

(Purchase Value-Residual Value)/Useful Life of Asset = (165000-2000)/5

= $32,600 per year

ii)Double diminishing Balance

Use the following formula to calculate double-diminishing depreciation rate:

Double-declining Depreciation Rate = Straight-line Depreciation Rate x 2

Straight line Dep Rate= 32600/163000*100= 20%

double-diminishing depreciation rate= 20% X 2 = 40%

In 2018

163000*40%=$ 65200

In 2019

(163000-65200)*40%=$ 39120

iii)Units of Production

Annual Depreciation=(Depreciable Value×Units produced during the year)/Estimated total production

In 2018

(163000X3200)/25000

=$ 20864

In 2019

(163000X4000)/25000

=$ 26080

b) Carrying Amount of 2019 using Straight Line Method

Depreciable VAlue - (Depreciation X2)= 163000- (32600X2)

= $97800

c)Journal Entry

Purchase of MAchinery

MAchinery A/c....dr $165000

To Cash $165000

(Being Machinery Purchased)

Depreciation Expense for 2019 in Units of Production Method

Depreciation A/c...........Dr $26080

To MAchinery $26080

(being depreciation of machinery provided)

Profit & Loss A/c............Dr $26080

To Depreciation $26080   

(Being depreciation transferred to Profit and Loss A/c)