Homework SourseSandhill Limited purchased a machine on account on April 2 2
Sandhill Limited purchased a machine on account on April 2, 2018, at an invoice price of $332,220. On April 4, it paid $2,170 for delivery of the machine. A one-year, $3,960 insurance policy on the machine was purchased on April 5. On April 18, Sandhill paid $7,840 for installation and testing of the machine. The machine was ready for use on April 30.
Sandhill estimates the machine’s useful life will be five years or 6,153 units with a residual value of $77,180. Assume the machine produces the following numbers of units each year: 953 units in 2018; 1,483 units in 2019; 1,279 units in 2020; 1,390 units in 2021; and 1,048 units in 2022. Sandhill has a December 31 year end
Solution
Solution
Sandhill Limited
Determination of the annual depreciation and total depreciation over the asset’s life using:
Straight line method:
Year
Depreciable Cost
Depreciation Expense
Accumulated Depreciation
Carrying Amount
2018
$265,050
$35,340
$35,340
$306,890
2019
$265,050
$53,010
$88,350
$253,880
2020
$265,050
$53,010
$141,360
$200,870
2021
$265,050
$53,010
$194,370
$147,860
2022
$265,050
$53,010
$247,380
$94,850
2023
$0
$0
$247,380
$94,850
Double-Diminishing Balance method:
Year
Opening Carrying Amount
Depreciation Expense
Accumulated Depreciation
Carrying Amount
2018
$342,230
$91,261
$91,261
$250,969
2019
$250,969
$100,388
$191,649
$150,581
2020
$150,581
$60,232
$251,881
$90,349
2021
$90,349
$36,140
$288,021
$54,209
2022
$54,209
$21,684
$309,705
$32,525
2023
$32,525
$0
$309,705
$32,525
Units-of-production method:
Year
Units-of-production
Depreciation Expense
Accumulated Depreciation
Carrying Amount
2018
953
$41,052
$41,052
$301,178
2019
1,483
$63,883
$104,935
$237,295
2020
1,279
$55,095
$160,030
$182,200
2021
1,390
$59,876
$219,906
$122,324
2022
1,048
$45,144
$265,050
$77,180
2023
0
$0
$265,050
$77,180
Workings:
Determination of the depreciable cost of the asset for straight line method:
The capital cost of the asset consists of –
Invoice price $332,220
Delivery cost $2,170
Installation and testing $7,840
Cost of the asset $342,230
Less: Residual value $77,180
Depreciable Cost $265,050
Depreciation expense for 2018 –
Depreciation expense = depreciable cost x 1/useful life
Depreciation expense for 2018 = 265,050 x 1/5 x 8/12 = $35,340
Since the asset was put to use on April 30, depreciation expense for 2018 is provided for the 8 months used.
Under straight line method, the annual depreciation expense would remain constant throughout the useful life of the asset. Hence, the depreciation expense for the years 2019 – 2023 is $53,010.
Depreciation rate = 2 x straight line depreciation rate
Straight line depreciation rate = 1/useful life of the asset
Useful life of asset = 5
Hence, depreciation rate = 2 x 1/5 = 40%
Depreciation expense= depreciation rate x cost of asset
Depreciation expense for 2018 = 40% x $342,230 x 8/12 = $91,261
Since the asset is put to use on April 30, depreciation is calculated only for 8 months in the year 2018.
Depreciation expense for 2019 = depreciation rate x opening carrying value
Opening Carrying value for 2019 = cost – accumulated depreciation expense
= $342,230 - $91,261 = $250,969
Depreciation expense 2019 = $250,969 x 40% = $100,388
Depreciation expense for 2020 = depreciation rate x opening carrying value
Opening carrying value = $342,230 - $191,649 = $150,581
Depreciation expense 2020 = $60,232
The depreciation expense and opening carrying value are calculated similarly for the remaining years of useful life.
Depreciation expense = depreciable cost x units of production/estimated total units of production
Estimated total units of production = 6,153 units
Depreciable cost = asset cost – residual value
= $342,230 - $77,180 = $265,050
Depreciation rate = depreciable cost x 1/estimated units of production
= $265,050 x 1/6,153 = 43.0765
Depreciation expense for 2018 = units of production in 2018 x depreciation rate
= 953 x 43.0765 = $41,052
Carrying value = cost – accumulated depreciation
= $342,230 - $41,052 = $283,178
Depreciation expense for 2019 = units-of-production in 2019 x depreciation rate
= 1,483 x 43.0765 =$63,883
Carrying value = cost – accumulated depreciation
= 342,230 – (41,052 + 63,883) = $237,295
The depreciation expense and carrying value are calculated similarly for the remaining years.
| Straight line method: | ||||
| Year | Depreciable Cost | Depreciation Expense | Accumulated Depreciation | Carrying Amount |
| 2018 | $265,050 | $35,340 | $35,340 | $306,890 |
| 2019 | $265,050 | $53,010 | $88,350 | $253,880 |
| 2020 | $265,050 | $53,010 | $141,360 | $200,870 |
| 2021 | $265,050 | $53,010 | $194,370 | $147,860 |
| 2022 | $265,050 | $53,010 | $247,380 | $94,850 |
| 2023 | $0 | $0 | $247,380 | $94,850 |
| Double-Diminishing Balance method: | ||||
| Year | Opening Carrying Amount | Depreciation Expense | Accumulated Depreciation | Carrying Amount |
| 2018 | $342,230 | $91,261 | $91,261 | $250,969 |
| 2019 | $250,969 | $100,388 | $191,649 | $150,581 |
| 2020 | $150,581 | $60,232 | $251,881 | $90,349 |
| 2021 | $90,349 | $36,140 | $288,021 | $54,209 |
| 2022 | $54,209 | $21,684 | $309,705 | $32,525 |
| 2023 | $32,525 | $0 | $309,705 | $32,525 |
| Units-of-production method: | ||||
| Year | Units-of-production | Depreciation Expense | Accumulated Depreciation | Carrying Amount |
| 2018 | 953 | $41,052 | $41,052 | $301,178 |
| 2019 | 1,483 | $63,883 | $104,935 | $237,295 |
| 2020 | 1,279 | $55,095 | $160,030 | $182,200 |
| 2021 | 1,390 | $59,876 | $219,906 | $122,324 |
| 2022 | 1,048 | $45,144 | $265,050 | $77,180 |
| 2023 | 0 | $0 | $265,050 | $77,180 |
