Question

Swanson & Hiller, Inc., purchased a new machine on September 1 of the current year at a cost of $130,000. The machine’s estimated useful life at the time of the purchase was five years, and its residual value was $10,000. The company reports on a calendar year basis. Required:

a-1. Prepare a complete depreciation schedule, beginning with the current year, using the straight-line method. (Assume that the half-year convention is used).

a-2. Prepare a complete depreciation schedule, beginning with the current year, using the 200 percent declining-balance method. (Assume that the half-year convention is used).

a-3. Prepare a complete depreciation schedule, beginning with the current year, using the 150 percent declining-balance, switching to straight-line when that maximizes the expense.

(Assume that the half-year convention is used). b. Which of the three methods computed in part a is most common for financial reporting purposes?

c. Assume that Swanson & Hiller sells the machine on December 31 of the fourth year for $29,500 cash. Compute the resulting gain or loss from this sale under each of the depreciation methods used in part a.

Answer 1

a-1. Straight line method:

Depreciation expense = Purchase cost of asset - residual value / estimated useful life

= $130,000 - 10,000 / 5

= $24,000

Year	Depreciation	Accumulated depreciation
1( for 6 months)	$12,000	$12,000
2	24,000	36,000
3	24,000	60,000
4	24,000	84,000
5	24,000	108,000
6 (for 6 months)	12,000	120,000
Total	$120,000

a-2. 200% declining balance method:

Depreciation rate = 100 / 5 years * 200% = 40%

Year	Book value at the start of the year	Depreciation rate	Depreciation	Accumulated depreciation	Book value at the end of the year
1( for 6 months)	$130,000	20%	$26,000	$26,000	$104,000
2	104,000	40%	41,600	67,600	62,400
3.	62,400	40%	24,960	92,560	37,440
4	37,440	40%	14,976	107,536	22,464
5	22,464	40%	8,986	116,522	13,478
6(for 6 months)	13,478	20%	2,696	119,218	10,782

a-3 150% declining balance method:

Depreciation rate = 100 / 5 years * 150% = 30%

Year	Book value at the start of the year	Depreciation rate	Depreciation	Accumulated depreciation	Book value at the end of the year
1( for 6 months)	$130,000	15%	$19,500	$19,500	$110,500
2	110,500	30%	33,150	52,650	77,350
3.	77,350	30%	23,205	75,855	54,145
4	54,145	30%	16,244	92,099	37,901
5	37,901	Straight line method *	13,951	106,050	23,950
6	23,950	Straight line method	13,950	120,000	10,000

* Switch to straight line method from year 5 , Depreciation expense  calculated as (37,901 - 10,000 / 2) for both the remaining years

b. Straight line method of depreciation is the most common for financial reporting purposes out of the three methods.

c. Gain or( loss) from sale of machine = Sale value - Book value after depreciation ( cost of machine - accumulated depreciation)

Straight line method = $29,500 - 46,000 (130,000 - 84,000)

= $(16,500)

200% declining balance method = $29,500 - 22,464 (130,000 - 107,536)

= $7,036

150% declining balance method = $29,500 - 37,901 (130,000 - 92,099)

= $(8,401)