Question

A heavy construction firm has been awarded a contract to build a large concrete dam. It is expected that a total of 8 years will be required to complete the work. The firm will buy $600,000 worth of special equipment for the job. During the preparation of the job cost estimate, the following utilization schedule was computed for the special equipment:

Year Utilization (hr/yr)
1 6000
2 4000
3 4000
4 1600
5 800
6 800
7 2200
8 2200

At the end of the job, it is estimated that the equipment can be sold at auction for $60,000.

a. Compute the sum-of-years-digits' depreciation schedule.
b. Compute the unit-of-production depreciation schedule

Answer 1

Heavy Construction Firm

a. Sum-of-years-digits' Depreciation Schedule

Year Cost Depreciation Accumulated Net Book Value

Expense Depreciation

Year 1 $600,000 $120,000 $120,000 $480,000

Year 2 $600,000 $105,000 $225,000 $375,000

Year 3 $600,000 $90,000 $315,000 $285,000

Year 4 $600,000 $75,000 $390,000 $210,000

Year 5 $600,000 $60,000 $450,000 $150,000

Year 6 $600,000 $45,000 $495,000 $105,000

Year 7 $600,000 $30,000 $525,000 $75,000

Year 8 $600,000 $15,000 $540,000 $60,000

b. The Unit-of-Production Depreciation Schedule

Year Cost Depreciation Accumulated Net Book Value

Expense Depreciation

Year 1 $600,000 $150,000 $150,000 $450,000

Year 2 $600,000 $100,000 $250,000 $350,000

Year 3 $600,000 $100,000 $350,000 $250,000

Year 4 $600,000 $40,000 $390,000 $210,000

Year 5 $600,000 $20,000 $410,000 $190,000

Year 6 $600,000 $20,000 $430,000 $170,000

Year 7 $600,000 $55,000 $485,000 $115,000

Year 8 $600,000 $55,000 $540,000 $60,000

Step-by-step explanation:

a) Data and Calculations:

Cost of special equipment for the dam construction = $600,000

Estimated useful life = 8 years

Salvage value of equipment = $60,000

Depreciable amount = $540,000 ($600,000 - $60,000)

Sum-of-the-years-digit = 36 (8 + 7 + 6 + 5 + 4 + 3 + 2 + 1)

Utilization Schedule for the Special Equipment:

Year Utilization (hr/yr) Unit of Production SYD Depreciation

1 6000 $150,000 (6,000 * $25) $120,000 (8 * $15,000)

2 4000 $100,000 (4,000 * $25) $105,000 (7 * $15,000)

3 4000 $100,000 (4,000 * $25) $90,000 (6* $15,000)

4 1600 $40,000 (1,600 * $25) $75,000 (5 * $15,000)

5 800 $20,000 (800 * $25) $60,000 (4 * $15,000)

6 800 $20,000 (800 * $25) $45,000 (3 * $15,000)

7 2200 $55,000 (2,200 * $25) $30,000 (2 * $15,000)

8 2200 $55,000 (2,200 * $25) $15,000 (1 * $15,000)

Total 21,600 hours

Depreciation rate per hour = $25 ($540,000/21,600)

Sum-of-the-years-digits depreciation rate = $15,000 ($540,000/36)