Question

Joss Stone Inc. purchased a large generator for its power plant for $3,500,000. Its useful life is estimated to be 20 years and its estimated hours of service will be 10,000,000 hours. The generator will be installed within the power plant for an additional cost $500,000. Training costs to get the generator up and running will $1,500,000. Company executives are debating which depreciation method to adopt and want from you a proposed five-year depreciation expense schedule using three depreciation methods: Straight Line – Double Declining Balance – Production Output. Output in hours for the first year of service will be 200,000 hours and then increase to 300,000 the second year and third year. What would the the depreciation expense schedule be for straight line, double declining balance, and production output methods?

Answer 1

Particulars	Amount
Cost of Power Plant	$3,500,000
Installation Cost	$500,000
Training and Testing Cost	$1,500,000
Total Cost of Plant	$5,500,000

1. First Five Year Depreciation Expense Schedule (Straight Line Method)

Annual Straight Line Depreciation
Value of Asset	$5,500,000
Less: Residual/Scrap Value	$0
Depreciable Value	$5,500,000
Estimated Useful Life of Asset (In Years)	20
Annual Straight Line Depreciation Expense	$275,000

Straight Line Depreciation for the period
Year	Depreciation Expenses (Straight Line Method)
1	$275,000
2	$275,000
3	$275,000
4	$275,000
5	$275,000
Total	$1,375,000

2.

The formula for double declining balance is:

Annual depreciation = Book Value * 100% / life * 2

Calculate the percentage that should be used first.

Percentage = 100% / Useful Life x 2 = 100% / 20 x 2 = 10%

Year	DDB Depreciation for the period			End of Period
	Beginning of period book value	Depreciation Rate	Depreciation Expenses	Accumulated Depreciation	Book Value
Year 1	5,500,000	10%	550,000	550,000	4,950,000
Year 2	4,950,000	10%	495,000	1,045,000	4,455,000
Year 3	4,455,000	10%	445,500	1,490,500	4,009,500
Year 4	4,009,500	10%	400,950	1,891,450	3,608,550
Year 5	3,608,550	10%	360,855	2,252,305	3,247,695
TOTAL			2,252,305

3.

Estimated use of Asset during life = 10,000,000 hours

Machine’s Depreciable Cost = Cost of Asset – Salvage Value = $5,500,000

Units of Production Method
Year	Number of Hours Used	Depreciation Rate per hour	Annual Depreciation Expenses
Year 1	200000	$0.55	$110,000
Year 2	300000	$0.55	$165,000
Year 3	300000	$0.55	$165,000
Year 4	0	$0.55	$0
Year 5	0	$0.55	$0
Total			$440,000