Question

Computing Depreciation Using Various Depreciation Methods To demonstrate the computations involved in several methods depreciating a fixed asset, the following data are used for equipment purchased on January 1, 2020. Cost and residual value Estimated service life: Acquisition cost $7,500 Years 5 Residual value $300 Service hours 6,000 Productive output (units) 14,400 Required Compute annual depreciation using each of the following methods. a. Straight-line depreciation: Compute the depreciation rate and amount for each year. Depreciation Rate 2020 2021 2022 2023 2024 Depreciation Expense $ $ $ b. Units-of-production method using service hours as a measure of input: Compute the depreciation rate and amount of depreciation expense for the first year assuming 1,320 service hours of actual operation. Depreciation Rate 2020 Depreciation Expense C. Units-of-production method using units produced as a measure of output: Compute the depreciation rate and amount of depreciation expense for the first year assuming 2,400 units of output. Depreciation Rate 2020 Depreciation Expense $ d. Sum-of-the-years'-digits method: Compute the depreciation amount for each year. 2024 $ 2020 2021 2022 2023 $ $ e. Double-declining balance method: Compute the depreciation amount for each year. 2023 2024 2020 2021 2022

Answer 1

a) Straight line depreciation method-

Depreciation expense per annum=(Acquisition Cost-Residual value)/5

=($7500 − $300)/5= $1,440

Depreciation rate per annum shall be=(Depreciation expense/(Acquisition Cost-Residual value))x100

=(1440/(7500-300)x100 =20% on net cost ((Acquisition Cost-Residual value))

or

Depreciation rate per annum=1/useful life in years=1/5x100=20% on net cost (Acquisition Cost-Residual value)

Year	Depreciation Expenses
2020	$1,440
2021	$1,440
2022	$1,440
2023	$1,440
2024	$1,440

b) Unit of Production Depreciation (Based on service hrs.)-

Depreciation per service hour = ( Cost- Salvage Value) / Total Estimated service hrs.

=($7500 − $300)/6000= $1.20

Depreciation Expense for 2020 = Depreciation Rate perservice hrs × Estimated service hrs in 2020.

=1.20x1320

Depreciation Expense for 2020 =1584.

C) Unit of Production Depreciation ( Based on units produced)-

Depreciation per Unit = ( Cost- Salvage Value) / Total Estimated Production Unit

=($7500 − $300)/14400= $0.5

Depreciation Expense = Depreciation Rate per Unit × Unit Produced in a 2020.

=0.5x2400 units

Depreciation Expense for 2020 =$1200

d) Sum of year digit method-

Years	Seq. Of year	Remaining estimated useful life at beginning of year	The sum of the years' digits depreciation proportion	Applicable %	Depreciation expenses
2020	1	5	5/15	33.33%	$2399.76
2021	2	4	4/15	26.67%	$1920.24
2022	3	3	3/15	20%	$1440
2023	4	2	2/15	13.33%	$959.76
2024	5	1	1/15	6.67%	$480.24
		15			$7200

e) Double-declining balance method-

Double-declining balance (ceases when the book value = the estimated residual value)

2 × Straight-line depreciation rate × Book value at the beginning of the year

Here straight line depreciation rate will be = 20% so DDB rate will be 2x20 =40%

End of year	Net book value,in the beg. Of the year	Declining Balance Depreciation(2×SL rate × beginning NBV)=40% on book value	Net book value,at the end of year
2020	$7,500	$3,000	$4,500
2021	$4,500	$1,800	$2,700
2022	$2,700	$1,080	$1,620
2023	$1,620	$648	$972
2024	$972	$672 (972-300(res. value))	$300
Total		$7,200

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