Muggsy Bogues Company purchased equipment for $286,360 on October 1, 2014. It is estimated that the equipment will have a useful life of 8 years and a salvage value of $26,520. Estimated production is 40,600 units and estimated working hours are 19,000. During 2014, Bogues uses the equipment for 550 hours and the equipment produces 1,100 units.
Compute depreciation expense under each of the following methods. Bogues is on a calendar-year basis ending December 31.
a Straight-line method for 2014
b Activity method (units of output) for 2014
c Activity method (working hours) for 2014
D Sum-of-the-years’-digits method for 2016
E Double-declining-balance method for 2015
Answer:
| (a) | Straight-line method for 2014 | $8,120 |
| (b) | Activity method (units of output) for 2014 | $7,040 |
| (c) | Activity method (working hours) for 2014 | $7,521 |
| (d) | Sum-of-the-years’-digits method for 2016 | $48,719.50 |
| (E) | Double-declining-balance method for 2015 | $69,130 |
Working notes for the above answer is as under
(a)
Straight-line method for 2014 .
| purchased equipment for | 286360 |
| equipment will have a useful life | 8 Year |
| salvage value | 26520 |
Depreciation will be calculated for 3 months because machine was purchased on 1 October
Straight-line method depreciation = 286360-26520/ 8 year
=259840/ 8year
=$ 32,480 depreciation a year
=32480*3 /12
=$ 8,120
(b)
Activity method (units of output) for 2014
| purchased equipment for | 286360 |
| equipment will have a useful life | 8 Year |
| salvage value | 26520 |
| . Estimated production | 40600 units |
| Units Produced | 1100 Units |
Activity method (units of output) for 2014
= (Cost-salvage value) * units produces during the year / total units produced of life
=286360-26520 * 1100 /40600
=6.4 *1100
=$ 7040
(c)
Activity method (working hours) for 2014
| purchased equipment for | 286360 |
| equipment will have a useful life | 8 Year |
| salvage value | 26520 |
| Total working hours | 19000 |
| Worked for 2014 | 550 |
Activity method (working hours) depriciation
=(Cost-salvage value) * hours during the year / total hours of life
=286360-26520 * 550 / 19000
=6.4 *1100
=$ 7521
(d)
.sum of digit method.
| Year | Sum of digit |
Depriciation | ||
| 1 | ,8/36 | ,259840*8/36 | 57742.22222 | 259840 |
| 2 | ,7/36 | ,259840*7/36 | 50524.44444 | 259840 |
| 3 | ,6/36 | ,259840*6/36 | 43306.66667 | 259840 |
| 4 | ,5/36 | ,259840*5/36 | 36088.88889 | 259840 |
| 5 | ,4/36 | ,259840*4/36 | 28871.11111 | 259840 |
| 6 | ,3/36 | ,259840*3/36 | 21653.33333 | 259840 |
| 7 | ,2/36 | ,259840*2/36 | 14435.55556 | 259840 |
| 8 | ,1/36 | ,259840*1/36 | 7217.777778 | 259840 |
Depriciation for 2016 = 48719.5
=
| 2014 | 2015 | 2016 |
| 14436 | 43306 | |
| 12631 | 37893 | |
| 10826.5 | ||
| 48719.5 |
(e)
Double-declining-balance method for 2015
Staight line rate
= 100 /8
=12.5
so in Double-declining-balance method we have to take double rate
=12.5 % * 2
= 25%
| Year | Opeaning bal | Dep, | Clg Bal |
|
| 1 | 286360 | 25% | 71590 | 214770 |
| 2 | 214770 | 25% | 53692.5 | 161077.5 |
| 3 | 161077.5 | 25% | 40269.375 | 120808.1 |
| 4 | 120808.1 | 25% | 30202.03125 | 90606.09 |
Depreciation 2015
=
| 2014 | 2015 |
| 17897.5 | 53692.5 |
| 13423.125 | |
| 69130.625 |
