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Demonstration Problem

Accounting What the Numbers Mean 9e. Demonstration Problem. Chapter 6 – Exercise 7 Depreciation Calculation Methods. Problem Definition. Millco, Inc., acquired a machine that cost $240,000 early in 2010. The machine is expected to last for eight years

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Demonstration Problem

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  1. Accounting What the Numbers Mean 9e Demonstration Problem Chapter 6 – Exercise 7 Depreciation Calculation Methods

  2. Problem Definition Millco, Inc., acquired a machine that cost $240,000 early in 2010. The machine is expected to last for eight years and its estimated salvage value at the end of its life is $24,000.

  3. Problem Definition • Using straight-line depreciation, calculate the depreciation expense to be recognized in the first year of the machine’s life and calculate the accumulated depreciation after the fifth year of the machine’s life. • Using declining balance depreciation at twice the straight-line rate, calculate the depreciation expense for the third year of the machine’s life. • What will be the net book value of the machine at the end of the eighth year of use before it is disposed of, under each depreciation method?

  4. Problem Solution a. Amount to be depreciated =

  5. Problem Solution a. Amount to be depreciated = Cost – Salvage Value

  6. Problem Solution a. Amount to be depreciated = Cost – Salvage Value Annual depreciation expense =

  7. Problem Solution a. Amount to be depreciated = Cost – Salvage Value Annual depreciation expense = Amount to be depreciated / Useful Life

  8. Problem Solution a. Amount to be depreciated = Cost – Salvage Value Annual depreciation expense = Amount to be depreciated / Useful Life Annual depreciation expense =

  9. Problem Solution a. Amount to be depreciated = Cost – Salvage Value Annual depreciation expense = Amount to be depreciated / Useful Life Annual depreciation expense = ($240,000 - $24,000) / 8 =

  10. Problem Solution a. Amount to be depreciated = Cost – Salvage Value Annual depreciation expense = Amount to be depreciated / Useful Life Annual depreciation expense = ($240,000 - $24,000) / 8 = $27,000 per year

  11. Problem Solution a. Amount to be depreciated = Cost – Salvage Value Annual depreciation expense = Amount to be depreciated / Useful Life Annual depreciation expense = ($240,000 - $24,000) / 8 = $27,000 per year After 5 years, accumulated depreciation =

  12. Problem Solution a.Amount to be depreciated = Cost – Salvage Value Annual depreciation expense = Amount to be depreciated / Useful Life Annual depreciation expense = ($240,000 - $24,000) / 8 = $27,000 per year After 5 years, accumulated depreciation = $27,000 * 5 years =

  13. Problem Solution a. Amount to be depreciated = Cost – Salvage Value Annual depreciation expense = Amount to be depreciated / Useful Life Annual depreciation expense = ($240,000 - $24,000) / 8 = $27,000 per year After 5 years, accumulated depreciation = $27,000 * 5 years = $135,000

  14. Problem Definition • Using straight-line depreciation, calculate the depreciation expense to be recognized in the first year of the machine’s life and calculate the accumulated depreciation after the fifth year of the machine’s life. • Using declining balance depreciation at twice the straight-line rate, calculate the depreciation expense for the third year of the machine’s life. • What will be the net book value of the machine at the end of the eighth year of use before it is disposed of, under each depreciation method?

  15. Problem Solution b. Straight-line rate =

  16. Problem Solution b. Straight-line rate = 1 /8

  17. Problem Solution b. Straight-line rate = 1 /8 = 12.5%.

  18. Problem Solution b. Straight-line rate = 1 /8 = 12.5%. Double-declining rate =

  19. Problem Solution b. Straight-line rate = 1 /8 = 12.5%. Double-declining rate = 12.5% * 2

  20. Problem Solution b.Straight-line rate = 1 /8 = 12.5%. Double-declining rate = 12.5% * 2 =25%

  21. Problem Solution b. Straight-line rate = 1 /8 = 12.5%. Double-declining rate = 12.5% * 2 = 25% At End of Year Net Book Value Depreciation Accumulated Net Book Year at Beginning of Year Expense Depreciation Value Solution approach: Set up columns to gather the data needed to calculate the depreciation expense, accumulated depreciation, and net book value at the beginning and end of each year.

  22. Problem Solution b. Straight-line rate = 1 /8 = 12.5%. Double-declining rate = 12.5% * 2 = 25% At End of Year Net Book Value Depreciation Accumulated Net Book Year at Beginning of Year Expense Depreciation Value 1 $240,000 The Net Book Value at the Beginning of Year One is equal to the purchase price of the asset.

  23. Problem Solution b. Straight-line rate = 1 /8 = 12.5%. Double-declining rate = 12.5% * 2 = 25% At End of Year Net Book Value Depreciation Accumulated Net Book Year at Beginning of Year Expense Depreciation Value 1 $240,000 $240,000 * 25% = $60,000 Depreciation expense = Net Book Value at Beginning of Year * Double-declining rate.

  24. Problem Solution b. Straight-line rate = 1 /8 = 12.5%. Double-declining rate = 12.5% * 2 = 25% At End of Year Net Book Value Depreciation Accumulated Net Book Year at Beginning of Year Expense Depreciation Value 1 $240,000 $240,000 * 25% = $60,000 $60,000 Accumulated depreciation = The sum of the depreciation expense of all prior years.

  25. Problem Solution b. Straight-line rate = 1 /8 = 12.5%. Double-declining rate = 12.5% * 2 = 25% At End of Year Net Book Value Depreciation Accumulated Net Book Year at Beginning of Year Expense Depreciation Value 1 $240,000 $240,000 * 25% = $60,000 $60,000 $180,000 Net Book Value at the End of Year = Cost of the Asset (or $240,000) – Accumulated Depreciation

  26. Problem Solution b. Straight-line rate = 1 /8 = 12.5%. Double-declining rate = 12.5% * 2 = 25% At End of Year Net Book Value Depreciation Accumulated Net Book Year at Beginning of Year Expense Depreciation Value 1 $240,000 $240,000 * 25% = $60,000 $60,000 $180,000 2 180,000 Net Book Value at Beginning of Year Two = Net Book Value at End of Year One

  27. Problem Solution b. Straight-line rate = 1 /8 = 12.5%. Double-declining rate = 12.5% * 2 = 25% At End of Year Net Book Value Depreciation Accumulated Net Book Year at Beginning of Year Expense Depreciation Value 1 $240,000 $240,000 * 25% = $60,000 $60,000 $180,000 2 180,000 180,000 * 25% = 45,000 Depreciation Expense = Net Book Value at Beginning of Year * Double-declining date

  28. Problem Solution b. Straight-line rate = 1 /8 = 12.5%. Double-declining rate = 12.5% * 2 = 25% At End of Year Net Book Value Depreciation Accumulated Net Book Year at Beginning of Year Expense Depreciation Value 1 $240,000 $240,000 * 25% = $60,000 $60,000 $180,000 2 180,000 180,000 * 25% = 45,000 105,000 Accumulated depreciation = The sum of the depreciation expense of all prior years = $60,000 + $45,000 = $105,000

  29. Problem Solution b. Straight-line rate = 1 /8 = 12.5%. Double-declining rate = 12.5% * 2 = 25% At End of Year Net Book Value Depreciation Accumulated Net Book Year at Beginning of Year Expense Depreciation Value 1 $240,000 $240,000 * 25% = $60,000 $60,000 $180,000 2 180,000 180,000 * 25% = 45,000 105,000 135,000 Net Book Value at the End of Year = Cost of the Asset (or $240,000) – Accumulated Depreciation

  30. Problem Solution b. Straight-line rate = 1 /8 = 12.5%. Double-declining rate = 12.5% * 2 = 25% At End of Year Net Book Value Depreciation Accumulated Net Book Year at Beginning of Year Expense Depreciation Value 1 $240,000 $240,000 * 25% = $60,000 $60,000 $180,000 2 180,000 180,000 * 25% = 45,000 105,000 135,000 3 135,000 135,000 * 25% = 33,750 138,750 101,250 Depreciation expense for the third year of the asset’s life = $33,750.

  31. Problem Definition • Using straight-line depreciation, calculate the depreciation expense to be recognized in the first year of the machine’s life and calculate the accumulated depreciation after the fifth year of the machine’s life. • Using declining balance depreciation at twice the straight-line rate, calculate the depreciation expense for the third year of the machine’s life. • What will be the net book value of the machine at the end of the eighth year of use before it is disposed of, under each depreciation method?

  32. Problem Solution c. Net book value =

  33. Problem Solution c. Net book value = Cost – Accumulated depreciation

  34. Problem Solution c. Net book value = Cost – Accumulated depreciation After 8 years, the asset will have been fully depreciated to its estimated salvage value of $24,000 under each method.

  35. Problem Solution c. Net book value = Cost – Accumulated depreciation After 8 years, the asset will have been fully depreciated to its estimated salvage value of $24,000 under each method. Accumulated depreciation will be $216,000, and net book value will be $24,000. $240,000 - $216,000 = $24,000

  36. Accounting What the Numbers Mean 9e You should now have a better understandingof depreciation calculation methods. Remember that there is a demonstration problem for each chapter that is here for your learning benefit. David H. Marshall Wayne W. McManus Daniel F. Viele

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