Question

Question 1 On January 1, 20X2, The GenKota Winery purchased a new bottling system. The system has an expected life of 5 years. The system cost $325,000. Shipping, installation, and set up were an additional $35.000. At the end of the useful life, Julie Hayes, chief accountant for GenKota, expects to dispose of the bottling system for $26,000. She further anticipates total output of 668,000 bottles over the useful life. The output for 20x2 was 108,000 bottles, 130,000 (2003), 150,000 (20X4), 160,000 (20Xs), and 120,000 (20X6). i) Prepare depreciation schedules assuming use of the: (a) straight-line depreciation method (b) units-of-production depreciation method (c) sum-of-the-years digits depreciation method (d) double-declining balance depreciation method ii) Assuming use of the straight-line method, prepare revised depreciation calculations if the useful life estimate was revised at the beginning of 20X4, to anticipate a remaining useful life of 4 additional years in other words, a total life of 6 years). The revised useful life was accompanied by a change in estimated salvage value to $34,400.

Answer 1

i.a) Straight line depreciation method

Cost = 325000+35000 = 360000

Straight line method depreciation p.a.= (360000-26000)/5 = 334000/5 = 66800 p.a.

Year	Book Value at start	Depreciation expense	Accumulated depreciation	Book value Year End
2002	360000	66800	66800	293200
2003	293200	66800	133600	226400
2004	226400	66800	200400	159600
2005	159600	66800	267200	92800
2006	92800	66800	334000	26000

b) Units of production depreciation method:

Year	Depreciable value (360000-26000)	Units produced	Book Value at start	Depreciation expense = Depreciable value*units produced in a year/ Total output	Accumulated depreciation	Book value Year End
2002	334000	108000	360000	54000	54000	306000
2003	334000	130000	306000	65000	119000	241000
2004	334000	150000	241000	75000	194000	166000
2005	334000	160000	166000	80000	274000	86000
2006	334000	120000	86000	60000	334000	26000
		668000

c) Sum of years digits depreciation method:

Sum of years = 1+2+3+4+5 = 15

Year	Book Value at start	Depreciable value	Remaining useful life	Depreciation % = Remaining useful life/Sum of years	Depreciation expense	Accumulated depreciation	Book value at year end
2002	360000	334000	5	33%	111333	111333	248667
2003	248667	334000	4	27%	89067	200400	159600
2004	159600	334000	3	20%	66800	267200	92800
2005	92800	334000	2	13%	44533	311733	48267
2006	48267	334000	1	7%	22267	334000	26000
			15

d) Double declining depreciation method:

Straight line rate = 66800/334000 = 20%

Double declining rate = 20*2 = 40%

Year	Book Value at start	Depreciation Amount = Book value at start*40%	Accumulated depreciation	Book value at year end
2002	360000	144000	144000	216000
2003	216000	86400	230400	129600
2004	129600	51840	282240	77760
2005	77760	31104	313344	46656
2006	46656	20656*	334000	26000

*20656 = 46656-26000

*It is taken as a balancing figure, since salvage at year end 2006 is $26000.

ii) Depreciation p.a. as per straight line = 66800 p.a.

Book value at the beginning of 2004 = 360000-66800-66800 = 226400

Revised balance life = 4 years

Revised salvage = 34400

Revised depreciation = (226400-34400)/4 = 48000 p.a.

Year	Book Value at start	Depreciation expense	Accumulated depreciation	Book value Year End
2004	226400	48000	48000	178400
2005	178400	48000	96000	130400
2006	130400	48000	144000	82400
2007	82400	48000	192000	34400