Question

Assume Purity Ice Cream Company, Inc., in Ithaca, NY, bought a new ice cream maker at the beginning of the year at a cost of $9,000. The estimated useful life was four years, and the residual value was $1,000. Assume that the estimated productive life of the machine was 16,000 hours. Actual annual usage was 5,500 hours in Year 1; 3,800 hours in Year 2; 3,200 hours in Year 3; and 3,500 hours in Year 4.

Required:
Complete a separate depreciation schedule for each of the alternative methods.
A. Straight-line.
B. Units-of-production (use four decimal places for the per unit output factor).
C. Double-declining-balance.

Answer 1

Straight line depreciation Method

Year Depreciation Cumulative depreciation Net Book value

1. $2000 $2000 $7000

2 $2000 $4000 $5000

3 $2000 $6000 $3000

4. $2000 $8000 $1000

Unit of production

Year Depreciation Cumulative depreciation Net Book value

1 $2,750 $2750 $6250

2. $1,900 $4,650 $4,350

3. $1,600 $6,250 $2,750

4. $1,750 $8,000 $1,000

Double declining method

Year Depreciation Cumulative depreciation Net Book value

1 $4500 $4500 $4500

2. $2250 $6,750 $2250

3. $1125 $7,875 $1125

4. $562.50 $8437.5 $562.50

Step-by-step explanation:

Book value in year in subsequent years = previous book value - that year's depreciation expense

Accumulated depreciation is sum of depreciation expense

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

($9000 - $1000) / 4 = $2000

Depreciation expense each year would be $2000

Accumulated depreciation would increase each year by the depreciation expense, which is $2000.

Net book value in year 1 = $9000 - $2000 = $7000

Net book value in year 1 = $7000 - $2000 = $5000

Net book value in year 1 = $5000 - $2000 = $3000

Net book value in year 1 = $3000 - $2000 = $1000

B. Unit of production = (hours worked that year / total hours of the machine) x (Cost of asset - Salvage value)

Depreciation expense

Year 1 = (5,500 / 16,000) x ($9000 - $1000) = $2,750

Year 2 = (3,800 / 16,000) x ($9000 - $1000) = $1900

Year 3 = (3,200 / 16,000) x ($9000 - $1000) = $1600

Year 4 = (3,500 / 16,000) x ($9000 - $1000) = $1750

Accumulated depreciation in year 1 = $2750

Accumulated depreciation in year 2 = $2750 + $1900 = $4,650

Accumulated depreciation in year 3 = $4,650 + $1600 = $6,250

Accumulated depreciation in year 4 = $6,250 + $1750 = $8000

Book value in year 1 = $9000 - $2,750 = $6250

Book value in year 2 = $6250 - $1900 = $4,350

Book value in year 3 = $4,350 - $1600 = $2750

Book value in year 4 = $2750 - $1750 = $1000

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

Depreciation factor = 2 x (1/useful life) = 2x (1/4 ) = 0.5

Depreciation expense in Year 1 = 0.5 x $9000 = $4500

Book value in year 1 = $9000 - $4500 = $4500

Depreciation expense in Year 2 = 0.5 x $4500 = $2250

Book value in year 2 = $4500 - $2250 = $2250

Depreciation expense in Year 3 = 0.5 x $2250 = $1125

Book value in year 3 = $2250 - $1125 = $1125

Depreciation expense in Year 4 = 0.5 x $1125 = $562.50

Book value in year 4 = $1125 - $562.50 = $562.50

Accumulated depreciation in year 1 = $4500

Accumulated depreciation in year 2 = $4500+ $2250 = $6,750

Accumulated depreciation in year 3 = $6,750 + $1125 = $7,875

Accumulated depreciation in year 4 = $7,875 + $562.50 = $8437.5