Question

E9–3 Cirrus Ltd. purchased a new machine on April 4, 2014, at a cost of $172,000. Th e company estimated that the
machine would have a residual value of $16,000. Th e machine is expected to be used for 10,000 working hours during its
four-year life. Actual machine usage was 1,500 hours in 2014; 2,200 hours in 2015; 2,300 hours in 2016; 2,100 hours in
2017; and 1,900 hours in 2018. Cirrus has a December 31 year end.
Instructions

(a) Calculate depreciation for the machine under each of the following methods: (1) straight-line, (2) diminishing-
balance using double the straight-line rate, and (3) units-of-production for 2014 through to 2018.

(b) Which method results in the highest depreciation expense over the life of the asset? Highest net income? Highest
cash fl ow?

Answer 1

a)

1) Deprecation under Straight-line method = Cost of the asset - Salvage Value/Number of years expected to be used

= $172,000 -$16,000/4 years

= $39,000

Therefore, depreciation under straight line method is $39,000.

Under straight line method, each year depreciation is same that is $39,000 each four years. That is -

Year - 2014 = $39,000; Year - 2015 = $39,000; Year - 2016 = $39,000; Year - 2017 = $39,000;

2) Depreciation under Double Straight-line Diminishing Balance method = Cost of the asset/Number of years expected to be used*2

Year - 2014 = $172,000/4*2

= $86,000

Year - 2015 = $172,000 - $86,000/4*2

= $43,000

Year - 2016 = $172,000 - $86,000 - $43,000/4*2

= $21,500

Year - 2017 = $172,000 - $86,000 - $43,000 - $21,500

= $21,500

3) Depreciation under Units of Production method = Cost of the asset/total number of units produced*units produced in a specific year

Year - 2014 = $172,000/10,000 units*1,500 units

= $25,800

Year - 2015 = $172,000/10,000 units*2,200 units

= $37,840

Year - 2016 = $172,000/10,000 units*2,300 units

= $39,560

Year - 2017 = $172,000/10,000 units*2,100 units

= $36,120

Year - 2018 = $172,000/10,000 units*1,900 units

= $32,680

b)

Deprecation under Straight-line method = $39,000*4

= $156,000 + $16,000 of salvage

Deprecation under Double Straight-line Diminishing Balance method =  $86,000 + $43,000 + $21,500 + $21,500

= $172,000

Depreciation under Units of Production method = [$25,800 + $37,840 + $39,560 + $36,120 + $32,680]

= $172,000

b) Both diminishing balance method and units of production have $172,000 as depreciation both, and when the year in which depreciation is less then net income will show highest net income.