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Question 8

Shauriwako Company purchases a factory machine at cost $18,000 on January 1, 2012. The
macine is expected to have a salvage value or residue value of $2,000 at the end of 4-year useful
life.
During its useful life, the machine is expected to be used 160,000 hours. Actual annual hourly us
was:
Year 1…….40,000
Year 2…….60,000
Year 3…….35,000
Year 4…….25,000
Instructions:
Prepare depreciation schedules for the following methods:
a) The straight line
b) Units of activity
c) Double decline on straight line
d) Sum of the years’ digits

Solutions:
a) Straight Line Depreciation

Dep = Original cost – Salvage Value = $18,000 - $2,000 = $4,000


Useful life 4 years

Period Book Annual Accumulate Book


Value in Depreciation d Value in
Beginning Expenses Depreciation Ending
Year Expenses Year
Year 1 18,000.00 4,000.00 4,000.00 14,000.00
Year 2 14,000.00 4,000.00 8,000.00 10,000.00
Year 3 10,000.00 4,000.00 12,000.00 6,000.00
Year 4 6,000.00 4,000.00 16,000.00 2,000.00
b) Unit of activity
Note: Purchase cost is $18,000
Year 1….40,000
Year 2….60,000
Year 3….35,000
Year 4….25,000
Total 160,000

Dep = Original cost – Salvage Value = $18,000 - $2,000 = $0.10 per hour
Estimated activity 160,000 hours

Period Units Depreciati Depreciati Accumulat Ending


produc on Cost on ed Book
ed per unit Expense Depreciatio Value
n Expense
Year 1
40,000. 0.10 4,000.00 4,000.00 14,000.00
00
Year 2
60,000. 0.10 6,000.00 10,000.00 8,000.00
00
Year 3
35,000. 0.10 3,500.00 13,500.00 4,500.00
00
Year 4
25,000. 0.10 2,500.00 16,000.00 2,000.00
00

c) Double decline on straight line

100 X 2 = 50%
4

Peri Book Declinin Annual Accumulat Book


od Value in g Depreciati ed Value
Beginni Balanci on Depreciati in
ng Year ng Rate Expenses on Endin
Expenses g
Year
Year 18,000.0 50% 9,000.00 9,000.00 9,000.
1 0 00
Year 9,000.00 50% 4,500.00 13,500.00 4,500.
2 00
Year 4,500.00 50% 2,250.00 15,750.00 2,250.
3 00
Year 2,250.00 50% 4,000.00 2,000.
4 00

d) Sum of the years' digits

Sum of useful life = 4 + 3 + 2 + 1 = 10

Year 1 = 4
10

Year 2 = 3
10

Year 3 = 2
10

Year 4 = 1
10

Dep = Original cost – Salvage Value = $18,000 - $2,000 = $16,000

Year Depreciable Depreciate Depreciable


Amounts d factor Expenses
1 16,000.00 0.4 6,400.00
2 16,000.00 0.3 4,800.00
3 16,000.00 0.2 3,200.00
4 16,000.00 0.1 1,600.00