Exercise 116 Muggsy Bogues Company purchased equipment for 2

Exercise 11-6 Muggsy Bogues Company purchased equipment for $236,310 on October 1, 2014. It is estimated that the equipment will have a useful life of 8 years and a salvage value of $13,200. Estimated production is 40,200 units and estimated working hours are 19,900. During 2014, Bogues uses the equipment for 510 hours and the equipment produces 1,000 units. Compute depreciation expense under each of the following methods. Bogues is on a calendar-year basis ending December 31. (a) Straight-line method for 2014 (Round answer to 0 decimal places, e.g. 45,892.) $ (b) Activity method (units of output) for 2014 (Round rate per unit to 2 decimal places, e.g. 5.35 and final answer to 0 decimal places, e.g. 45,892.) $ (c) Activity method (working hours) for 2014 (Round rate per hour to 2 decimal places, e.g. 5.35 and final answer to 0 decimal places, e.g. 45,892.) $ (d) Sum-of-the-years\'-digits method for 2016 (Round answer to 0 decimal places, e.g. 45,892.) $ (e) Double-declining-balance method for 2015 (Round answer to 0 decimal places, e.g. 45,892.) $

Solution

(a) Depreciation for year 2014 using straight line method = 6,972

Explanation:-
Cost - Salvage value/ useful life of asset
= 236,310 - 13,200/8
= 27889
= 27889 × 3/12
=6,972
Depreciation is charged for 3 months(1 October to 31 December)

(b) Depreciation for the year 2014 using activity method(units of output) = 5,550

Explanation:-
Cost - Salvage value/ estimate production
= 236,310 - 13,200/40,200
= $5.55/output unit
= 1000 units × 5.55
= 5,550

(c) Depreciation for the year 2014 using activity method( working hours) = 5,717

Explanation:-
Cost - Salvage value / estimated working hour
= 236,310 - 13,200 / 19,900
= $11.21/ output unit
= 510 hours × $11.21
=5717

(d) Depreciation for the year 2016 using sum of the year digit method = 41,833

Explanation:-
n (n+1) /2
= 8 (8+1)/2
= 36
Year                              Total              2014      2015        2016
1     8/36 × 223,110      49,580         12,395     37,185
2     7/36 × 223,110      43,383                         10,846   32,537
3      6/36 × 223,110     37,185                                         9,296
Total                                                 12,395    48,031    41,833

(e) Depreciation for the year 2015 using double-declining- balance = 55,385

Explanation:-
Straight line depreciation rate = 1÷8 =0.125 = 12.5%
Declining balance rate = 2× 12.5% = 25%
Depreciation= 25% × 236,310
                      = 59,078 × 3/12 (for 3 months)
                     = 14,770(Depreciation for 2014)

Depreciation for 2015
Cost - accumulated depreciation
236,310 - 14,770 = 221,540
Depreciation = 25% × 221,540 = 55,385