Question

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Glans Company purchased equipment on account on April 6, 2019, at an invoice price of $442,000. On April 7, 2019, it paid $4,000 for delivery of the equipment. A one-year, $3,000 insurance policy on the equipment was purchased on April 9, 2019. On April 22, 2019, Glans paid $6,000 for installation and testing of the quipment. The equipment was ready for use on May 1, 2019.

Glans estimates that the equipment's useful life will be four years, with the residual value of $20,000. It also estimates that, in terms of activity, the equipment's useful life will be 150,000 units. Glans has an April 30 fiscal year end. Assume that actual usage is as follows:

# of Units                   Year Ended April 30

22,600                             2020

45,600                             2021

49,700                             2022

32,200                             2023

Instructions:

a. Determine the cost of the equipment

b. Prepare depreciation schedules for the life of the asset under the following depreciation methods:

 1. straight-line

 2. double diminishing-balance

 3. units-of-productions

c. Which method would result in the highest profit for the year ended April 30, 2021? Over the life of the asset?

Answer 1

Cost of the assets
Invoice price	4,42,000
Add: Delivery charges	4,000
Add: Insurance	3,000
Add: Installation and testing	6,000
	4,55,000

Straight Line method

Depreciation = (book value -salvage value) / Useful life of the asset

Depreciation = (455000 - 20000 ) / 4 years = $1,08,750

Year	Cost of the assets	Depreciation	Accumulated Depreciation	Carrying Amount
2020	455000	108750	108750	346250
2021	455000	108750	217500	237500
2022	455000	108750	326250	128750
2023	455000	108750	435000	20000

b) Double diminishing balance

Rate of Depreciation =1/4 years = 25%

Double rate = 25% *2 =50%

Year	Cost of the assets	Operating WDV	Depreciation Rate	Depreciation	Accumulated Depreciation	Closing WDV
2020	455000	455000	50%	227500	227500	227500
2021	455000	227500	50%	113750	341250	113750
2022	455000	113750	50%	56875	398125	56875
2023	455000	56875	50%	28437.5	426562.5	28437.5

c) Units of production

Depreciation per unit of production = (Cost of the asset - Salvage value) / Estimated production

Depreciation per unit of production = (455000 - 20000 ) / 150000 =2.9

Year	Cost of the Assets	Number of Units	Depreciation per unit	Total Depreciation	Accumulated Depreciation	Closing WDV
2020	455000	22600	2.90	65540	65540	389460
2021	455000	45600	2.90	132240	197780	257220
2022	455000	49700	2.90	144130	341910	113090
2023	455000	32200	2.90	93090	435000	20000

The Figure highlighted in Bold has been adjusted to

bring the closing WDV = 20000 as WDV can not less than

the salvage value of the asset

c) As per above soluation the deperciation is least under straight line method in 2021,and lesser depreciation would cause higher profit over the year under the following methods the income would higher

Year	Less Deperciation charged
2020	Straight Line method
2021	Straight Line method
2022	Double diminishing balance
2023	Double diminishing balance