2. Bob & Robin, Inc., purchased a new machine on October 1, 2001, at a cost of $144,000. The machine’s estimated useful life at the time of the purchase was 6 years, and its residual value was $12,000.
Instructions
a. Prepare a complete depreciation schedule, beginning with calendar year 2001, under each of the methods listed below (assume that the half-year convention is used):
1. Straight-line.
2. 200% declining-balance.
3. 150% declining-balance (not switching to straight-line).
b. Which of the three methods computed in part a is most common for financial reporting purposes? Explain.
c. Assume that Bob & Robin sell the machine on December 31, 2004, for $40,000 cash. Compute the resulting gain or loss from this sale under each of the depreciation methods used in part a. Does the gain or loss reported in the company’s income statement have any direct cash effects? Explain.
We have provided with the information as follow
| Partcular | Amount in $ |
| Cost of the Machine | 144000 |
| Life of the Machine | 6 year |
| Salvage Value | 12000 |
Now we will make depriciation Schedule under each method
depreciation schedule, beginning with calendar year 2001,
1
. Straight-line.
Depriciation = 144000-12000/6
=22000
Schedule for 6 year
| Year | Opeaning Balance |
Depriciation for the year | Closing Balance |
| 1 | 132000 | 22000 | 110000 |
| 2 | 110000 | 22000 | 88000 |
| 3 | 88000 | 22000 | 66000 |
| 4 | 66000 | 22000 | 44000 |
| 5 | 44000 | 22000 | 22000 |
| 6 | 22000 | 22000 | 0 |
2. 200% declining-balance.
Rate of depriciation under SLM =100/6 year
=16.67
So rate in DDL is 16.67*2
=33.33
Depriciation schedule under DDM
| Year | Opeaning Balance |
Depriciation for the year | Closing Balance |
| 1 | 144000 | 47995.2 | 96004.8 |
| 2 | 96004.8 | 31998.4 | 64006.4 |
| 3 | 64006.4 | 21333.33 | 42673.07 |
| 4 | 42673.067 | 14222.93 | 28450.13 |
| 5 | 28450.134 | 9482.43 | 18967.7 |
| 6 | 18967.704 | 6967.704 | 12000 |
| Sale at 6 yr | -12000 | ||
| Value | 0 | ||
3. 150% declining-balance (not switching to straight-line).
rate= 16*1.5
=25%
| Year | Opeaning Balance |
Depriciation for the year | Closing Balance |
| 1 | 144000 | 36000 | 108000 |
| 2 | 108000 | 27000 | 81000 |
| 3 | 81000 | 20250 | 60750 |
| 4 | 60750 | 15187.5 | 45562.5 |
| 5 | 45562.5 | 11390.63 | 34171.88 |
| 6 | 34171.875 | 22171.88 | 12000 |
| Sale at 6 yr | -12000 | ||
| Value | 0 | ||
b. Which of the three methods computed in part a is most common for financial reporting purposes? Explain.
Answer:I would say that SLM method is methods computed in part a is most common for financial reporting purposes Because simplest to calculate, results in fewer errors, stays the most consistent and transitions well from company-prepared statements to tax returns and under Generally Accepted Accounting Principal GAAP SLM is mostly used
c. Assume that Bob & Robin sell the machine on December 31, 2004, for $40,000 cash. Compute the resulting gain or loss from this sale under each of the depreciation methods used in part a. Does the gain or loss reported in the company’s income statement have any direct cash effects? Explain.
| SLM | |
| Partcular | Amount in $ |
| Value | 44000 |
| Sale | 40,000 |
| Gain | -4,000 |
| DDB-200% | |
| Partcular | Amount in $ |
| Value | 28450.13376 |
| Sale | 40,000 |
| Gain | 11,550 |
| DDB-150% | |
| Partcular | Amount in $ |
| Value | 44000 |
| Sale | 45,563 |
| Gain | 1,563 |
the gain or loss reported in the company’s income statement will not direct effects on cash
