Question

Gruman Company purchased a machine for $198,000 on January 2, 2016. It made the following estimates:

Service life 5 years or 10,000 hours
Production 180,000 units
Residual value $18,000

In 2016, Gruman uses the machine for 1,700 hours and produces 40,000 units. In 2017, Gruman uses the machine for 1,200 hours and produces 34,000 units. If required, round your final answers to the nearest dollar.

Required:
Compute the depreciation for 2016 and 2017 under each of the following methods:

a. Straight-line method
b. Sum-of-the-years'-digits method
c. Double-declining-balance method
d. Activity method based on hours worked
e. Activity method based on units of output

Answer 1

$36,000 $36,000

b. $60,000 $48,000

c. $79,200, $47,520

d. $30,600, $21,600

e. $40,000 $34,000

Step-by-step explanation:

A. Straight line depreciation expense = (Cost of asset - Salvage value) / useful life

( $198,000 - $18,000 ) / 5 = $36,000

Depreciation expense each year would be $36,000

B. Sum-of-the-year digits = (remaining useful life / sum of the years ) x (Cost of asset - Salvage value)

Sum of the years = 1 +2 +3 +4 + 5 = 15

Depreciation expense in year 1 = (5/15) X ( $198,000 - $18,000 ) = $60,000

Depreciation expense in year 2 = (4/15) x ( $198,000 - $18,000 ) = $48,000

C. Depreciation expense using the double declining method = Depreciation factor x cost of the asset

Depreciation factor = 2 x (1/useful life)

2 x(1/5) = 0.4

Depreciation expense in year 1 = 0.4 x $198,000 = $79,200

Book value at the end of year 1 = $198,000 - $79,200 = $118,800

Depreciation expense in year 2 = 0.4 x $118,800 = $47,520

D. Activity method based on hours worked = (hours worked that year / total hours of the machine) x (Cost of asset - Salvage value)

Depreciation expense in year 1 = (1,700 / 10,000) x ( $198,000 - $18,000 ) = $30,600

Depreciation expense in year 1 = (1,200 / 10,000) x ( $198,000 - $18,000 ) = $21,600

E. Activity method based on units of output = (output produced that year / total output capacity of the machine) x (Cost of asset - Salvage value)

Depreciation expense in year 1 = ( 40,000 / 180,000) x ( $198,000 - $18,000 ) = $40,000

Depreciation expense in year 12= ( 34,000 / 180,000) x ( $198,000 - $18,000 ) = $34,000