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# Demonstration Problem - PowerPoint PPT Presentation

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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What the Numbers Mean 9e

### Demonstration Problem

Chapter 6 – Exercise 7

Depreciation Calculation Methods

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.

• 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?

a. Amount to be depreciated =

a. Amount to be depreciated =

Cost – Salvage Value

a. Amount to be depreciated =

Cost – Salvage Value

Annual depreciation expense =

a. Amount to be depreciated =

Cost – Salvage Value

Annual depreciation expense =

Amount to be depreciated /

Useful Life

a. Amount to be depreciated =

Cost – Salvage Value

Annual depreciation expense =

Amount to be depreciated / Useful Life

Annual depreciation expense =

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 =

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

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 =

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 =

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

• 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?

b. Straight-line rate =

b. Straight-line rate = 1 /8

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

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

Double-declining rate =

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

Double-declining rate = 12.5% * 2

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

Double-declining rate = 12.5% * 2 =25%

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.

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.

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.

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.

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

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

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

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

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

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.

• 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?

c. Net book value =

c. Net book value =

Cost – Accumulated depreciation

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.

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

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