Question

Fancy Frappucinno purchased a coffee drink machine on January​ 1, 2018​, for $ 39,000. Expected useful life is 10 years or 150,000 drinks. In 2018​, 4,000 drinks were​ sold, and in 2019​, 15,000 drinks were sold. Residual value is $ 9,000.

Required:
1. Determine the depreciation expense for 2018 and 2019 using the following​ methods:
(a)​ Straight-line (SL),​ (b) Units of production​ (UOP), and​ (c) Double-declining-balance​ (DDB).
2. For each method​ (starting with​ (a) the​ straight-line method), select the appropriate formula needed to compute annual depreciation and then determine depreciation expense under that method for 2018 and 2019.

Answer 1

Straight line depreciation expense:

2018 = $3,000

2019 = $3,000

Unit of activity deprecation expense

2018 = $800

2019= $3,000

Double declining method:

2018 = $7,800

2019 = $6,240

Step-by-step explanation:

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

($39,000 - $9,000) / 10 = $3,000

The straight line depreciation method allocates the same deprecation expense for each year of the useful life of the machine.

Thus, the depreciation expense in 2018 and 2019 is $3,000

Unit of activity depreciation method = (Total drinks sold in a year / total capacity of the machine ) × Cost of asset - Salvage value)

In 2018, deprecation expense =

(4,000 / 150,000 ) x $30,000 = $800

In 2019, deprecation expense =

(15,000 / 150,000 ) x $30,000 = $3,000

The double declining method =

Depreciation factor × cost of asset

Deprecation factor = 2 × (1/useful life)

2 × (1/10) = 0.2

Deprecation expense in 2018 = 0.2 × 39,000 = $7,800

Net book value = $39,000 - $7,800 = $31,200

Deprecation expense in 2019 = 0.2 × $31,200 = $6,240

I hope my answer helps you