Question

Your client, Burley Designs, recently acquired a new machine to build bicycle wheels for the tandems, recumbents and trailers they build. Total machine cost after installation, calibrations and other related capitalized costs was $18,250. The machine has an expected life of 7 years with a residual value of $2000. The machine is capable of producing 20,000 wheels per year. Burley estimates that they will only ask the machine to produce as follows: Year 2 3 4 5 6 Anticipated Product Schedule - Wheels 13,500 14,250 15,000 16.200 17,000 18,000 19,100 Required: 1. Prepare and present depreciation schedules for the machine. Use straight line, units of production and the double declining methods of depreciation. 2. For each method make a brief explanation of how the schedules were determined. 3. Discuss an advantage and disadvantage of each method. 4. Recommend a particular depreciation method for Burley to use and support your recommendation with reasoning. 5. Remember that your audience is professional, but not accountants.

Answer 1

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Burley Designs			Straight Line Table	Cost/Opening Book Value	Depreciation Expense	Accumulated depreciation	Net Book Value
Cost of Machine	18,250.00	A	Year 0	18,250.00	-	-	18,250.00
Residual Value	2,000.00	B	Year 1	18,250.00	2,321.43	2,321.43	15,928.57
Depreciable Value	16,250.00	C=A-B	Year 2	15,928.57	2,321.43	4,642.86	13,607.14
			Year 3	13,607.14	2,321.43	6,964.29	11,285.71
Straight Line Method			Year 4	11,285.71	2,321.43	9,285.71	8,964.29
Depreciable Value	16,250.00	See C	Year 5	8,964.29	2,321.43	11,607.14	6,642.86
Life	7.00	D	Year 6	6,642.86	2,321.43	13,928.57	4,321.43
Annual depreciation	2,321.43	E=C/D	Year 7	4,321.43	2,321.43	16,250.00	2,000.00
			Total		16,250.00
Answer 2	In straight line method, fixed amount of depreciation is charged throughout the life of the asset. And I have shown in the same way.
Answer 3	Advantage of straight line method is easy to use. It saves time and resources.
	Disadvantage of straight line method is it assumes that machine will give same amount of service over its life. But actually machines gives better service in initial years and breakdowns are more in later years.

Units of Production Method			Table	Cost/Opening Book Value	Depreciation Expense	Accumulated depreciation	Net Book Value
Depreciable Value	16,250.00	See C	Year 0	18,250.00	-	-	18,250.00
Life (Units)	113,050.00	F	Year 1	18,250.00	1,940.51	1,940.51	16,309.49
Depreciation per unit	0.14	G=C/F	Year 2	16,309.49	2,048.32	3,988.83	14,261.17
	H	I=H*G	Year 3	14,261.17	2,156.13	6,144.96	12,105.04
	Production	Depreciation	Year 4	12,105.04	2,328.62	8,473.57	9,776.43
Year 1	13,500.00	1,940.51	Year 5	9,776.43	2,443.61	10,917.18	7,332.82
Year 2	14,250.00	2,048.32	Year 6	7,332.82	2,587.35	13,504.53	4,745.47
Year 3	15,000.00	2,156.13	Year 7	4,745.47	2,745.47	16,250.00	2,000.00
Year 4	16,200.00	2,328.62	Total		16,250.00
Year 5	17,000.00	2,443.61
Year 6	18,000.00	2,587.35
Year 7	19,100.00	2,745.47
Total	113,050.00	16,250.00
Capability of production	140,000.00
(20000*7)
Answer 2	In units of production method, depreciation is charged on the basis of number of units produced. And I have shown in the same way.
Answer 3	Advantage of units of production method is it matches number of units with the expense incurred on it. Thus it gives better picture of matching expenses with production.
	Disadvantage of units of production method is it assumes that machine will produce given number of units. This estimated may be wrong. It will lead to wrong/ incorrect depreciation expense booking.
	Like in the present case estimate production units was 20,000 per year i.e. 140,000 for life. But actual is less as we can see so we have to calculate depreciation accordingly.

Double Declining Method				M	N=M*L
Cost of Machine	18,250.00	See A	Table	Cost/Opening Book Value	Depreciation Expense	Accumulated depreciation	Net Book Value
Life	7.00	See D	Year 0	18,250.00	-	-	18,250.00
Annual depreciation	2,607.14	J=A/D	Year 1	18,250.00	5,214.29	5,214.29	13,035.71
Depreciation rate	14.29%	K=J/A	Year 2	13,035.71	3,724.49	8,938.78	9,311.22
Double Depreciation %	28.57%	L=K*2	Year 3	9,311.22	2,660.35	11,599.13	6,650.87
			Year 4	6,650.87	1,900.25	13,499.38	4,750.62
			Year 5	4,750.62	1,357.32	14,856.70	3,393.30
			Year 6	3,393.30	969.52	15,826.21	2,423.79
			Year 7	2,423.79	692.51	16,518.72	1,731.28
			Total		16,518.72
Answer 2	In Double Declining Method, depreciation is charged on the reducing balance of the machine. And I have shown in the same way.
Answer 3	Advantage of Double Declining Method is it follows the concept that machines gives better service in initial years so deprecation should be more in initial years and breakdowns are more in later years so deprecation should be less in later years
	Disadvantage of Double Declining Method- Proper control should be taken as to identify if the machine is still giving service in later years because it will continue charging depreciation on the book value thus increasing the life if the asset.
Answer 4
The machine is used directly in production of wheels so Burley Designs can use units of production method. It is more appropriate because then depreciation expense will be matched with the units produced exactly.
Else Burley Designs can also use Double declining method because this method is also widely recognized.