Question

Q2/

Pharoah Limited purchased a machine on account on April 2, 2018, at an invoice price of $356,620. On April 4, it paid $2,130 for delivery of the machine. A one-year, $3,970 insurance policy on the machine was purchased on April 5. On April 18, Pharoah paid $7,590 for installation and testing of the machine. The machine was ready for use on April 30.

Pharoah estimates the machine’s useful life will be five years or 6,212 units with a residual value of $73,690. Assume the machine produces the following numbers of units each year: 896 units in 2018; 1,400 units in 2019; 1,405 units in 2020; 1,396 units in 2021; and 1,115 units in 2022. Pharoah has a December 31 year end.

A/ Determine the cost of the machine.

Cost of the machine

$

B/

Calculate the annual depreciation and total depreciation over the asset’s life using: (Round the depreciation cost per unit to the nearest cent. Round answers to 0 decimal places, e.g. 5,275.)

(1) Straight-line method

Year		Depreciable Cost		Depreciation Expense		Accumulated Depreciation		Carrying Amount
2018		$		$		$		$
2019
2020
2021
2022
2023

(2) Double-diminishing-balance method

Year		Opening Carrying Amount		Depreciation Expense		Accumulated Depreciation		Carrying Amount
2018		$		$		$		$
2019
2020
2021
2022
2023

(3) Units-of-production method

Year		Units-of-production		Depreciation Expense		Accumulated Depreciation		Carrying Amount
2018				$		$		$
2019
2020
2021
2022

Which method causes net income to be lower in the early years of the asset’s life?

Straight-Line MethodDouble-Diminishing-Balance MethodUnits-of-Production MethodStraight-Line MethodDouble-Diminishing-Balance MethodUnits-of-Production Method

Answer 1

A.	Invoice price		$356,620
	Delivery Cost		$2,130
	Installation and testing		$7,590
	Cost of the machine		$366,340
B.	1	Straight-line
		Year	Depreciable Cost	Depreciation Exp.	Acc. Dep	Carrying Amount
		2018	$292,650	$43,898	$43,898	$322,443
		2019	$292,650	$58,530	$102,428	$263,913
		2020	$292,650	$58,530	$160,958	$205,383
		2021	$292,650	$58,530	$219,488	$146,853
		2022	$292,650	$58,530	$278,018	$88,323
		2023	$292,650	$14,633	$292,650	$73,690
		Depreciation per year = ($366,340 - $73,690)/5 = $58,530
	2	Double declining balance method
		Year	Opening Carrying Amount	Depreciation Exp.	Acc. Dep	Carrying Amount
		2018	$366,340	$109,902	$109,902	$256,438
		2019	$256,438	$102,575	$212,477	$153,863
		2020	$153,863	$61,545	$274,022	$92,318
		2021	$92,318	$18,628	$292,650	$73,690
		2022	$73,690	$0	$292,650	$73,690
		2023	$73,690	$0	$292,650	$73,690
	3	Units of activity
		Year	Units of Production	Depreciation Exp.	Acc. Dep	Carrying Amount
		2018	896	$42,211	$42,211	$324,129
		2019	1,400	$65,955	$108,165	$258,175
		2020	1,405	$66,190	$174,356	$191,984
		2021	1,396	$65,766	$240,122	$126,218
		2022	1,115	$52,528	$292,650	$73,690
		2023
			6,212
		Depreciation per hour = ($366,340 - $73,690)/6,212 = $47.1104