Question

Part B. Question 1 On 6 September 20Y1, East River Tug Co. purchased a new tugboat for $400,000. The estimated life of the boat was 20 years, with an estimated residual value of $40,000 (a) Compute the depreciation on this tugboat in 20Y1 and 20Y2 using the following methods. Apply the half-year convention. (round to the nearest dollar. Show workings. 2041 2042 (1) Straight-line (ii) 200% declining balance (iii) 150% declining balance (b) The estimated total output of the tugboat was 360 miles. The tugboat sailed 30 miles in 20Y1 and 40 miles in 20Y2. Compute the depreciation on this tugboat in 20Y1 and 20Y2. 2041 2042 Units-of-production Question 2 Dynasty Co. uses straight-line depreciation in its financial statements, with depreciation for a partial year rounded to the nearest full month. On 2 October 20XT, Dynasty purchased equipment at a cost of $140,000. For financial reporting purposes, the useful life of this equipment was estimated at 5 years, with a $30,000 salvage value. Compute the depreciation expense relating to this equipment that Dynasty will recognize in its financial statements with year ended 31 December in the following years. If no depreciation will be recognized in a particular year, write zero Amount (S) Year 20X1 20X2 20X3 20X4 20X5 20X6

Answer 1

Assuming the Financial year to be 1 January to 31 December Solution 1 (a) Cost of Tugboat $ 4,00,000 Estimated life 20 years Residual Value $ 40,000 Depreciation as per SLM = Cost of Asset - Residual Value Life of Asset ($ 400000 - $40000)/20 $ 18,000 per year = Depreciation rate (SLM) = = = 1/useful life 1/20 [ 5.00% As per half year convention, if asset is used for less than half year half depreaciation will be applied on it Half year rate 200% declining balance rate = 2 x SLM rate = 2 x 5% = 10% 5% 150% declining balance rate = 1.5 x SLM rate =1.5 x 5% = 7.5% 3.75% Calculating Depreciation i) Straight Line 20Y1 Half year ($18000/2) = 20Y2 full year $ 9,000 $ 18,000 ii) 200% Declining Balance 2041 $400000 x 5% = 20Y2 $380000 x 10% = Depreciation WDV $ 20,000 ######## $ 38,000 ######## ii) 150% Declining Balance 20Y1 $400000 x 3.75% = 20Y2 $385000 x 7.50% = Depreciation WDV $ 15,000 ######## $ 28,875 ########

Table Showing Depreciation i) Straight Line ii) 200% Declining balance iii) 150% declining balance 2041 $ 9,000 $ 20,000 $ 15,000 2042 $ 18,000 $ 38,000 $ 28,875 Solution 1 (b) Cost of Tugboat Estimated Life Depreciation of boat $ 4,00,000 360 miles cost of Boat x miles sailed in year Total miles to be sailed = Dep in 2011 $400000 x 30/360 $ 33,333.33 Dep in 20Y2 $400000 x 40 / 360 $ 44,444.44 2011 Based on Units of prod J$ 33,334 Rounded up to nearest dollar) 2012 $ 44,445

Solution 2. Cost of Equipment purchased $ 1,40,000 Salvage Value $ 30,000 Estimated life 5 years Depreciation as per SLM = Cost of Asset - Residual Value Life of Asset ($140000 - $30000)/ 5 $ 22,000 per annum = During 20X1 asset was used from oct (3 months) Therefore, Depreciation will be $22000 x 3/12 $ 5,500 Table showing Depreciation Year Amoount ($) 20X1 $ 5,500 20X2 22,000 20X3 22,000 20X4 22,000 20X5 22,000 20X6 16,500 (Balancing Fig.) 1,10,000

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