Question

Plastic Works Corporation bought a machine at the beginning of the year at a cost of $16,550. The estimated useful life was five years, and the residual value was $2,650. Assume that the estimated productive life of the machine is 13,900 units. Expected annual production was: year 1, 4,300 units; year 2, 4,300 units; year 3, 2,650 units; year 4, 1,390 units, and year 5, 1,260 units. Required: 1. Complete a depreciation schedule for each of the alternative methods. (Enter all values as positive amount.) a. Straight-line. Balance Sheet Income Statement Depreciation Expense Year Cost Accumulated Depreciation Book Value At acquisition

Answer 1

1a. Straight line method of depreciation:

Depreciation expense = (Purchase price of asset - Estimated residual value)/ Useful life of asset

= ($16,550 - $2,650) / 5 years = $2,780 per year

	Income Statement	Balance sheet
Year	Depreciation expense ($)	Cost ($)	Accumulated depreciation ($)	Book Value ($)
At acquisition	0	$16,550	0	$16,550
1	$2,780	$16,550	$2,780	$13,770 ($16,550 - $2,780)
2	$2,780	$16,550	$5,560 ($2,780 + $2,780)	$10,990 ($16,550 - $5,560)
3	$2,780	$16,550	$8,340 ($5,560 + $2,780)	$8,210 ($16,550 - $8,340)
4	$2,780	$16,550	$11,120 ($8,340 + $2,780)	$5,430 ($16,550 - $11,120)
5	$2,780	$16,550	$13,900 ($11,120 + $2,780)	$2,650 ($16,550 - $13,920)

1b. Units of production method:

Depreciation expense = (Purchase price of the asset - estimated residual value) * Units produced in a year / Estimated total number of units produced

Depreciation for Year 1 = ($16,550 - $2,650) *4,300 / 13,900

= $4,300

Depreciation for Year 2 = ($16,550 - $2,650) * 4,300 / 13,900

= $4,300

Depreciation for Year 3 = ($16,550 - $2,650) *2,650 / 13,900

= $2,650

Depreciation for Year 4 = ($16,550 - $2,650) * 1,390/ 13,900

= $1,390

Depreciation for Year 5 = ($16,550 - $2,650) * 1,260 / 13,900

= $1,260

	Income Statement	Balance sheet
Year	Depreciation expense ($)	Cost ($)	Accumulated depreciation ($)	Book Value ($)
At acquisition	-	$16,550	-	$16,550
1	$4,300	$16,550	$4,300	$12,250 ($16,550 - $4,300)
2	$4,300	$16,550	$8,600 ($4,300 + $4,300)	$7,950 ($16,550 - $8,600)
3	$2,650	$16,550	$11,250 ($8,600 + $2,650)	$5,300 ($16,550 - $11,250)
4	$1,390	$16,550	$12,640 ($11,250 + $1,390)	$3,910 ($16,550 - $12,640)
5	$1,260	$16,550	$13,900 ($12,640 + $1,260)	$2,650 ($16,550 - $13,900)

1c. Double-declining balance method:

Depreciation rate = (1/useful life of asset) * 100 = (1/5) *100 = 20%

Double-declining rate = twice the depreciation rate = 2 * 20% = 40%

Depreciation for Year 1 = $16,550 * 40% = $6,620

Depreciation for Year 2 = ($16,550 - $6,620) * 40% = $3,972

Depreciation for Year 3 = ($16,550 - $6,620 - $3,972)* 40% = $2,383

Depreciation for Year 4 = ($16,550 - $6,620 - $3,972 - $2,383)* 40% = $1,430 but restricted to $925 because the residual value exceeds the carrying value of the asset.

Depreciation for year 5 is Nil.

	Income Statement	Balance sheet
Year	Depreciation expense ($)	Cost ($)	Accumulated depreciation ($)	Book Value ($)
At acquisition	-	$16,550	-	$16,550
1	$6,620	$16,550	$6,620	$9,930 ($16,550 - $6,620)
2	$3,972	$16,550	$10,592 ($6,620 + $3,972)	$5,958 ($16,550 - $10,592)
3	$2,383	$16,550	$12,975 ($10,592 + $2,383)	$3,575 ($16,550 - $12,975)
4	$925	$16,550	$13,900 ($12,975 + $925)	$2,650 ($16,550 - $13,900)
5	-	$16,550	$13,900	$2,650

2a. In the Year 2, highest net income will be reported while using straight line method of depreciation, since the depreciation expense will be lower for year 2 under straight line method.

2b. No. The machine was not more efficiently used under the straight line depreciation method. The machine will be depreciated effectively under units-of-production method of depreciation, as it will depreciate according to the units produced during the year.