Question

P9.3A  

(LO 1, 2) AP Payne Company purchased equipment on account on September 3, 2019, at an invoice price of $210,000. On September 4, 2019, it paid $4,400 for delivery of the equipment. A one-year, $1,975 insurance policy on the equipment was purchased on September 6, 2019. On September 20, 2019, Payne paid $5,600 for installation and testing of the equipment. The equipment was ready for use on October 1, 2019.

Payne estimates that the equipment's useful life will be four years, with a residual value of $15,000. It also estimates that, in terms of activity, the equipment's useful life will be 82,000 units. Payne has a September 30 fiscal year end. Assume that actual usage is as follows:

# of Units	Year Ended September 30
16,750	2020
27,600	2021
22,200	2022
16,350	2023

Instructions

a.  

Determine the cost of the equipment.

b.  

Prepare depreciation schedules for the life of the asset under the following depreciation methods:

• 1.straight-line
• 2.double diminishing-balance
• 3.units-of-production

c.  

Which method would result in the highest profit for the year ended September 30, 2021? Over the life of the asset?

Taking It Further In the year the asset is purchased, should ChalkBoard record depreciation for the exact number of days the asset is owned? Why or why not? P9.3A (LO 1, 2) AP Payne Company purchased equipment on account on September 3, 2019, at an in- voice price of $210,000. On September 4, 2019, it paid $4,400 for delivery of the equipment. A one-year, $1,975 insurance policy on the equipment was purchased on September 6, 2019. On September 20, 2019, Payne paid $5,600 for installation and testing of the equipment. The equipment was ready for use on October 1, 2019 Payne estimates that the equipment's useful life will be four years, with a residual value of $15,000. It also estimates that, in terms of activity, the equipment's useful life will be 82,000 units. Payne has a September 30 fiscal year end. Assume that actual usage is as follows: Determine depreciatio Year Ended September 30 # of Units 2020 16,750 2021 27,600 2022 22,200 2023 16,350 Instructions a. Determine the cost of the equipment. b. Prepare depreciation schedules for the life of the asset under the following depreciation methods: 1. straight-line 2. double diminishing-balance 3. units-of-production c. Which method would result in the highest profit for the year ended September 30, 2021? Over the life of the asset? Taking It Further Assume instead that, when Payne purchased the equipment, it had a legal obligation to ensure that the equipment was recycled at the end of its useful life. Assume the cost of doing this is significant. Would this have had an impact on the answers to parts (a) and (b) above? Explain.

Answer 1

a	Cost of Equipment
	Invoice Price (A)	$210,000
	Charge Paid for delivery of Eqipment (B)	$4,400
	Installation Charges ©	$5,600
	Cost of Equipment (A+B+C)	$220,000
b- (1)	Depriciation Straight line Method	(Value of Euqipment-residual value)/No.f years
	Yearly Depriciation for Straight line method	(220000-15000)/4
	Yearly Depriciation for Straight line method	$51,250
b- (1)	Double Diminishing balance
	Double Diminshing Method
	Year	Opening book Value	Depriciation	Closing Value
	2020	$220,000	$110,000	$110,000
	2021	$110,000	$55,000	$55,000
	2022	$55,000	$27,500	$27,500
	2023	$27,500	$12,500	$15,000
				-
	Formula
	Declining Balance rate		Double of Straight rate on closing Value
	Use full Life	4 year
	SL rate	1/4	25%
	Declining Balance rate	25%*2	50.0%
C-1	Unit of production method	(Cost of Eqiupment- residual value)/Expected no. of Production during the life
	Depriciation per unit of Production	(220000-15000)/82000
	Depriciation per unit of Production	2.50
	Year	Unit produce	Depriciation per Unit	Depriciation	Opening value	Closing value
	2020	$16,750	2.50	$41,875	$220,000	$178,125
	2021	$27,600	2.50	$69,000	$178,125	$109,125
	2022	$22,200	2.50	$55,500	$109,125	$53,625
	2023	$16,350		$38,625	$53,625	$15,000