Question

On September 1, 2011, a company purchased a weaving machine for $239,800. The machine has an estimated useful life of 8 years and an estimated residual value of $17,800. Additionally, it is estimated that the machine would produce 740,000 bolts of woven fabric over its useful life. The company ended up selling the machine in 2018 after 1 month of use. The following budgeted and actual activity levels were provided to support your work: Year 2011 2012 2013 2014 2015 2016 2017 2018 2019 total Budgeted Bolts Budgeted cumulative 20,000 20,000 100,000 120,000 100,000 220,000 100,000 320,000 100,000 420,000 85,000 505,000 85,000 590,000 85,000 675,000 65,000 740,000 740,000 Actual Bolts actual cumulative 35,000 35,000 115,000 150,000 116,000 266,000 119,000 385,000 120,000 505,000 117,000 622,000 112,000 734,000 9,000 743,000 n.a. 743,000

Answer 1

Total Cost of Machine = $239,800

Estimated Life of Machine = 8 years

Residual Value = $17,800

Depreciation For 8 Years in Written down Value

1st Year = 239800*35000/740000 =$11,342

2nd Year = (239800*150000/740000) - 11342 = $37,266

3rd Year = (239800*266000/740000) - (11342+37266) = $37,590

4th Year = (239800*385000/740000) - (11342+37266+37590) = $38,563

5th Year = (239800*505000/740000) - (11342+37266+37590+38563) = $38,886

6th Year = (239800*622000/740000) - (11342+37266+37590+38563+38886) = $37,915

7th Year = (239800*734000/740000) - (11342+37266+37590+38563+38886+37915) = $36,294

(i) The total Cumulative depreciation in 7th year is $237,856 and there is an excess production of 3000 units in 8th year(743000-740000) therefore the written down value of the machine is nil(0). So, any value of the sale of the machine is a gain for the company

Therefore the 1st statement provided in the question is FALSE

(ii) The depreciation on staright line basis for an year is 27,750 {(239800-17800)/8}

Therefore the depreciation in every year is different for the machine (refer above Working)

Therefore the 2nd statement provided in the question is FALSE

(iii) The depreciation for the 1st year under Straight line method is $27,750

The depreciation for the 1st year under Units of Production method is $11,352

Therefore, The company will report $16,398 (27750-11352) more Net income in 2011 when the company uses units of production method for the computation of depreciation

Therefore the 3rd statement provided in the question is TRUE

(iv) For Computation of De[reciation under Units of Production Method, We use Budgeted level of activity only for considering Aggregate units of products which can be produced in Machine's entire life.

Therefore the 4th statement provided in the question is FALSE