Question

Question 1: 10 Marks Caterpillar purchased a machine with a cash price of $425000 on January 1, 2011. It also spent $10000 for installing the machine, $20000 for testing the machine and another $20000 for oil and lubricants. It was estimated that this machine would have a useful life of 8 years and a salvage value of $15000 at that time. The straight-line method of depreciation was considered the most appropriate to use with this type of machine. Depreciation is to be recorded at the end of each year. During 2014, the company's technician reconsidered their expectations and estimated that the equipment's useful life would probably be 10 years instead of 8 years. The estimated salvage value will remain unchanged. During 2016, the technician realized that they were using inappropriate depreciation method and considered to use triple declining balance method from now on. In 2019, they changed their estimation of salvage value to $2000. Required: Construct a table to show the amount of depreciation should be recorded each year during the lifetime of the machine. (Answer should include all necessary calculations and columns in the table).

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Answer 1

Answer

Cash Price Installation Testing Oil & Lubricant Total cost Salvage Value Depreciable Amount Life in years Annual Depreciation Accumulated Depreciation as at 1 Jan 2014 Carrying Value as at 1 Jan 14 Salvage Value Revised Depreciable Amount Remaining Life Revised Annual Depreciation Accumulated Depreciation as at 1 Jan 2016 Carrying Value as at 1 Jan 16 425,000 10,000 20,000 $20,000 charged to income statement as repair expense $455,000 A January 1, 2011 $15,000 B 440,000 C=A-B 8 D 55,000 E=C/D 165,000 F 55,000 x 3 years 290,000 G=A-F 15,000 H 275,000 I=G-H 7 J (10-3) 39,286 K=1/) 78,571 39,286 x 2 years 211,429 Remaining life 5 years

Double declining method 300%-declining balance Straight-line depreciation rate =(100% divided by 5 years). 20.00% 300% of the straight-line rate is 60% This rate is applied to the book value of the asset at the beginning of each year. (Book value is cost minus accumulated depreciation.) Carrying Value as at 1 Jan 16 Salvage Value Depreciable amount $ Year Depreciation 211,429 15,000 196,429 Accumulated Depreciation Book Value $ 211,429 126,857 $ 126,857 $ 84,571 50,743 $ 177,600 $ 33,829 18,828 $ 196,428 $ 15,000 2016 2017 2018 $ $ $ $ 0 2019 2020 Carrying value at 1 Jan 2019 15,000 Remaining life 2 years Double declining method 300%-declining balance Straight-line depreciation rate =(100% divided by 2 years). 50.00% 300% of the straight-line rate is 150% This rate is applied to the book value of the asset at the beginning of each year. (Book value is cost minus accumulated depreciation.) Carrying value at 1 Jan 2019 Salvage Value Depreciable amount $ 15,000 2,000 13,000 Accumulated Depreciation Book Value $ 15,000 13,000 $ 13,000 $ 2,000 $ 13,000 $ 2,000 Year Depreciation 2,019 2,020 $ $ Requirement Depreciation Expense 2011 2012 2013 2014 2015 55,000 55,000 55,000 39,286 39,286 126,857 50,743 18,828 13,000 2016 2017 2018 2019 2020 Salvage value Original cost 453,000 2,000 455,000 $