Question

Problem 11-1 Metock Company purchased Machine #201 on May 1, 2017. The following information relating to Machine #201 was gathered at the end of May. Price Credit terms Freight-in Preparation and installation costs Labor costs during regular production operations $15,330 $124,100 2/10, n/30 $1,168 5,548 It is expected that the machine could be used for 10 years, after which the salvage value would be zero. Metlock intends to use the machine for Only 8 years, however, after which it expects to be able to sell it for $2.190. The invoice for Machine #201 was paid May 5 2017. Metock uses the calendar year as the basis for the preparation of financial statements Compute the depreciation expense for the years indicated using the following methods. Depreciation Expense (1) Straight-line method for 2017 (2) Sum-of-the-years'-digits method for 2018 (3) Double-declining-balance method for 2017

Answer 1

The credit terms might be 2/10, n/30. This means the amount is due in 30 days; however, if the amount is paid in 10 days a discount of 2% will be permitted. So basic price of machinery is $124100-$124100*2/100 i.e. 121618.

Useful life 8 Yrs & Salvage Value is $2190.

Depriciable Value is (121618+1168+5548Machine Cost - $2190(Salvage Value) i.e $126144.

Straight Line Method For Year 2017:

1. 1 / 8-year useful life = 12.5% depreciation rate per year.
   1. 12.5% depreciation rate x $126144 depreciable asset cost = $15768 annual depreciation.
2. But Machine was purchased as on 1st May 2017 then Total No of Month Asset utilised i.e.(May 2017 to Dec 2017)8 Month then Depreciation Cost For Year 2017 is $15768 * 8/12 i.e.$10512.
3. Depreciation cost is same among all 8 Years.

Sum Of The Years Digit Method for Year 2018.:

1. Depreciable asset cost is $126144
2. Again Useful Life is 8 Year but Depreciation is increases Yoy by ratio 1/ (1+2+3+....8) Simple formula is n(n+1)/2, Where n is useful life in Years i.e. 8. So 8(8+1)/2=72/2 i.e. 36.For 1st Year Depreciation Value is 8/36 & in Secound Year It is 7/36 and so on.
   1. For the cost of Year 2018 first we have to find out the cost of FY 2017 i.e.for 8 Month.So (Depreciable Value ) 126144*(8/36)*(8/12) i.e $18688( Cost From May 17 to Dec 17) & Cost From Jan 18 to April 18 is {126144*(8/36)*(4/12)} i.e $9344. The Cost From May 18 to Dec 18 is 126144*(7/36)*(8/12) i.e. $16352
3. So Total Cost of Depreciation under this method is in Year 2018 -- $9344+$16352 i.e. $25696
   1. Depreciation Cost is Decreases Year over Year in This Method.

Double Declining Balance Method For Year 2017:

(Under this method the depreciation expense will be faster in the early years of the asset's life but slower in the later years.)

Asset Life = 8 years. Hence, the straight line depreciation rate = 1/8 = 12.5% per year.

Depreciation rate for double declining balance method = 12.5% * 200% = 12.5% * 2 = 25% per year.

The depreciation amounts for the asset are calculated as follows:

• Year 2017

  Depreciation = $126144 * 25% * 8/12 (May 17 to Dec 17) = $21024

So We Finally Recommended Straight Line Method So that the Depreciation Cost is Equal among all Years