EXPLAIN STEP PLEASE Depreciation Methods Gruman Company purc

EXPLAIN STEP PLEASE

Depreciation Methods

Gruman Company purchased a machine for $220,000 on January 2, 2016. It made the following estimates:

In 2016, Gruman uses the machine for 1,800 hours and produces 44,000 units. In 2017, Gruman uses the machine for 1,500 hours and produces 35,000 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:

Straight-line method

Sum-of-the-years\'-digits method

Double-declining-balance method

Activity method based on hours worked

Activity method based on units of output

For each method, what is the book value of the machine at the end of 2016? At the end of 2017?

Straight-line method

Sum-of-the-years\'-digits method

Double-declining-balance method

Activity method based on hours worked

Activity method based on units of output

If Gruman used a service life of 8 years or 15,000 hours and a residual value of $10,000, what would be the effect on the following under the straight-line, sum-of-the-years\'-digits, and double-declining-balance depreciation methods?

Depreciation expense

Straight-line method

Sum-of-the-years\'-digits method

Double-declining-balance method

Book value

Straight-line method

Sum-of-the-years\'-digits method

Double-declining-balance method

Service life	5 years or 10,000 hours
Production	200,000 units
Residual value	$20,000

Solution

Answer 1. Straight Line Method Depreciation expense per annum = (Cost - Salvage Value) / Life of Assets Depreciation expense per annum = ($220,000 - $20,000)/ 5 Years Depreciation expense per annum = $200,000 / 5 Years = $40,000 per annum Depreciation Expense: 2016        40,000.00 2017        40,000.00 Sum-of-the-years-digits Method SYD for 5 Years = n(n+1)/2 = 5 (5+1)/2 = 15 Depreciation Expense: 2016 = 5/15 X ($220,000 - $20,000) = $66,666.67 or say $66,667 (Approx.) 2017 = 4/15 X ($220,000 - $20,000) = $53,333.33 or say $53,333 (Approx.) Double Declining Balance Method Rate of Dep. Under DDBM = 2 X 20% (Rate of Dep. Under Straight Line Method) Rate of Dep. Under DDBM = 40% Depreciation Expense: 2016 = $220,000 X 40% = $88,000 2017 = ($220,000 - $88,000) X 40% = $52,800 Activity method based on hours worked Depreciation Rate per Hour = ($220,000 - $20,000) / 10,000 Hrs Depreciation Rate per Hour = $20 per hour Depreciation Expense: 2016 = 1,800 Hrs X $20 = $36,000 2017 = 1,500 Hrs X $20 = $30,000 Activity method based on units of output Depreciation Rate per Unit = ($220,000 - $20,000) / 200,000 Units Depreciation Rate per Unit = $1 per Unit 2016 = 44,000 Units X $1 = $44,000 2017 = 35,000 Units X $1 = $35,000 Answer 2. Straight Line Method Sum-of-the-years-digits Method Double Declining Balance Method Activity method based on hours worked Activity method based on units of output Dep. Exp. Book Value Dep. Exp. Book Value Dep. Exp. Book Value Dep. Exp. Book Value Dep. Exp. Book Value 2016        40,000.00       180,000.00    66,667.00       153,333.00    88,000.00        132,000.00       36,000.00         184,000.00        44,000.00       176,000.00 2017        40,000.00       140,000.00    53,333.00       100,000.00    52,800.00           79,200.00       30,000.00         154,000.00        35,000.00       141,000.00 Answer 3. Straight Line Method Depreciation expense per annum = (Cost - Salvage Value) / Life of Assets Depreciation expense per annum = ($220,000 - $10,000)/ 8 Years Depreciation expense per annum = $210,000 / 5 Years = $26,250 per annum Depreciation Expense: 2016        26,250.00 2017        26,250.00 Sum-of-the-years-digits Method SYD for 8 Years = n(n+1)/2 = 8 (8+1)/2 = 36 Depreciation Expense: 2016 = 8/36 X ($220,000 - $10,000) = $46,666.67 or say $46,667 (Approx.) 2017 = 7/36 X ($220,000 - $10,000) = $40,833.33 or say $40,833 (Approx.) Double Declining Balance Method Rate of Dep. Under DDBM = 2 X 12.50% (Rate of Dep. Under Straight Line Method) Rate of Dep. Under DDBM = 25% Depreciation Expense: 2016 = $220,000 X 25% = $55,000 2017 = ($220,000 - $55,000) X 25% = $41,250 Answer 4. Straight Line Method Sum-of-the-years-digits Method Double Declining Balance Method Dep. Exp. Book Value Dep. Exp. Book Value Dep. Exp. Book Value 2016        26,250.00       193,750.00    46,667.00       173,333.00    55,000.00        165,000.00 2017        26,250.00       167,500.00    40,833.00       132,500.00    41,250.00        123,750.00