Question

Depreciation Methods

Gruman Company purchased a machine for $198,000 on January 2, 2016. It made the following estimates:

Service life	5 years or 10,000 hours
Production	180,000
Residual value	$18,000

In 2016, Gruman uses the machine for 1,700 hours and produces 45,000 units. In 2017, Gruman uses the machine for 1,400 hours and produces 30,000 units. If required, round your final answers to the nearest dollar.

Required: 1. Compute the depreciation for 2016 and 2017 under each of the following methods: a. Straight-line method 2016 $ 36,000 2017 $ 36,000 b. Sum-of-the-years'-digits method 2016 $ 60,000 2017 $ 48,000 c. Double-declining-balance method 2016 $ 79,200 2017 $ 47,520 d. Activity method based on hours worked 2016 $ 30,600 2017 $ 25,200 e. Activity method based on units of output 2016 $ 45,000 2017 $ 30,000

Answer 1

Depreciation - Case 1

Gruman Company Depreciation expense a Straight line method 2016 36,000 2017 36,000 b Sum of years digit method 2016 60,000 2017 48,000 с Double declining balance method 2016 79,200 2017 47,520 d Activity method based on hours worked 2016 30,600 2017 25,200 e Activity method based on units of output 2016 45,000 2017 30,000 a Book Value Straight line method 2016 162,000 2017 126,000 b Sum of years digit method 2016 138,000 2017 90,000 C Double declining balance method 2016 118,800 2017 71,280 d Activity method based on hours worked 2016 167,400 2017 142,200 e Activity method based on units of output 2016 153,000 2017 123,000

Gruman Company Straight line method Annual depreciation (Cost-Residual Value)/Useful Life (198000-18000)/5 years 36,000 Calculation Cost Depreciation expense Accumulated depreciation Year-end book value Depreciation expense Accumulated depreciation Year-end book value 198,000 36,000 36,000 162,000 Same as dep exp 198000-36000 198,000 36,000 72,000 126,000 36000+36000 198000-72000 Years of Useful life 2016 2017 Sum of years digit method Depreciation formula (Cost-Residual value) / Sum of digits in useful life * remaining useful life =(198000-18000)/(1+2+3+4+5) $ 12,000 Cost Years of Useful life 2016 2017 198,000 198,000 Depreciation expense Accumulated depreciation Year-end book value Depreciation expense Accumulated depreciation Year-end book value 60,000 60,000 138,000 12000*5 Same as dep exp 198000-60000 48,000 108,000 90,000 12000*4 60000+48000 198000-108000 Double declining balance method Double declining rate 100%/Useful Life*2 =100%/5 years*2 40% Cost Years of Useful life 2016 2017 198,000 118,800 Depreciation expense Accumulated depreciation Year-end book value Depreciation expense Accumulated depreciation Year-end book value 79,200 79,200 118,800 198000*40% Same as dep exp 198000-79200 47,520 126,720 71,280 118800*40% 79200+47520 198000-126720 Activity method based on hours worked Dep per hour worked (Cost less Residual Value) / Total Expected Hours Worked (198000-18000)/10000 hours 18 Cost Years of Useful life 2016 2017 198,000 198,000 Depreciation expense Accumulated depreciation Year-end book value Depreciation expense Accumulated depreciation Year-end book value 30,600 30,600 167,400 1700*18 Same as dep exp 198000-30600 25,200 55,800 142,200 1400*18 30600+25200 198000-55800 Activity method based on units of output Dep per unit of production (Cost less Residual Value) / Total Expected Units of Production (198000-18000)/180000 units 1 Cost Years of Useful life 2016 2017 198,000 198,000 Depreciation expense Accumulated depreciation Year-end book value Depreciation expense Accumulated depreciation Year-end book value 45,000 45,000 153,000 45000*1 Same as dep exp 198000-45000 30,000 75,000 123,000 30000*1 45000+30000 198000-75000

Depreciation - Case 2

Gruman Company Depreciation expense a Straight line method 2016 23,625 2017 23,625 b Sum of years digit method 2016 42,000 2017 36,750 с Double declining balance method 2016 49,500 2017 37,125 a Book Value Straight line method 2016 174,375 2017 150,750 b Sum of years digit method 2016 156,000 2017 119,250 с Double declining balance method 2016 148,500 2017 111,375

Gruman Company a Straight line method Annual depreciation (Cost-Residual Value)/Useful Life (198000-9000)/8 years 23,625 Calculation Cost Depreciation expense Accumulated depreciation Year-end book value Depreciation expense Accumulated depreciation Year-end book value 198,000 23,625 23,625 174,375 Same as dep exp 198000-23625 198,000 23,625 47,250 150,750 23625+23625 198000-47250 Years of Useful life 2016 2017 b Sum of years digit method Depreciation formula (Cost-Residual value) / Sum of digits in useful life * remaining useful life =(198000-9000)/(1+2+3+4+5+6+7+8) $ 5,250 Cost Years of Useful life 2016 2017 198,000 Depreciation expense Accumulated depreciation Year-end book value Depreciation expense Accumulated depreciation Year-end book value 42,000 42,000 156,000 5250*8 Same as dep exp 198000-42000 36,750 78,750 119,250 5250*7 42000+36750 198000-78750 198,000 c Double declining balance method Double declining rate 100%/Useful Life*2 =100%/8 years*2 25% Cost Years of Useful life 2016 198,000 148,500 Depreciation expense Accumulated depreciation Year-end book value Depreciation expense Accumulated depreciation Year-end book value 49,500 49,500 148,500 198000*25% Same as dep exp 198000-49500 37,125 86,625 111,375 148500*25% 49500+37125 198000-86625 2017