diculate depreciation A machine cost 900000 on Apri 12017 ts

diculate depreciation. A machine cost $900,000 on Apri 1,2017. ts estimated salvage value lss life is eight years. Instructions ( Calculate the depreciation expense (to the nearest dolla) by each of the folowing methods showing the figures used. (a) Straight-line for 2017 (b) Double-declining balance for 2018 (c) Sum-of-the-years\'-digits for 2018 (2) Which method would result in the smallest income amount for 2018?

Solution

1)

a)

Depreciation under straight line method

= (Purchase cost – Salvage value) / Useful life x Number of months used / 12 months

Purchase cost = $900,000

Salvage value = $90,000

Useful life = 8 years

Number of months used = April 2017 to December 2017

= 9 months

So, Depreciation for 2017

= ($900,000 - $90,000) / 8 x 9 / 12

= $ 75,937.5

Depreciation for 2018

= ($900,000 - $90,000) / 8 x 12 / 12

= $101,250

b)

Depreciation rate under double declining balance method

= 1 / Useful life x 2

= 1 / 8 x 2

= 0.25 or 25%

Depreciation for 2017

= Book value for 2017 x Depreciation rate x Number of months used / 12 months

= $900,000 x 25% x 9 / 12

= $168,750

Book value at the beginning of 2018

= Book value in 2017 – Depreciation for 2017

= $900,000 - $168,750

= $731,250

So, Depreciation for 2018

= $731,250 x 25% x 12 / 12

= $182,812.5

c)

Depreciable amount

= Purchase cost – Salvage value

= $900,000 - $90,000

= $810,000

Sum of years from 1 to 8

= n x (n + 1) / 2

Where,

n = Useful life = 8

So, Sum of years

= 8 x 9 / 2

= 36

Depreciation = Remaining useful life / Sum of years digits x Depreciable cost x Number of months used / 12 months

So, Depreciation for 2017

= 8 / 36 x $810,000 x 9 / 12

= $135,000

Depreciation for 2018

= 7 / 36 x $810,000 x 12 / 12

= $157,500

2)

As we can find from the above calculations, depreciation for 2018 is highest under double declining balance method. When depreciation will be high, Income will be low and so double declining balance method will lead to lowest income