Demonstration Problem

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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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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

and its estimated salvage value at the end of its life is

\$24,000.

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?
Problem Solution

a. Amount to be depreciated =

Problem Solution

a. Amount to be depreciated =

Cost – Salvage Value

Problem Solution

a. Amount to be depreciated =

Cost – Salvage Value

Annual depreciation expense =

Problem Solution

a. Amount to be depreciated =

Cost – Salvage Value

Annual depreciation expense =

Amount to be depreciated /

Useful Life

Problem Solution

a. Amount to be depreciated =

Cost – Salvage Value

Annual depreciation expense =

Amount to be depreciated / Useful Life

Annual depreciation expense =

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 =

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

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 =

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 =

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

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?
Problem Solution

b. Straight-line rate =

Problem Solution

b. Straight-line rate = 1 /8

Problem Solution

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

Problem Solution

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

Double-declining rate =

Problem Solution

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

Double-declining rate = 12.5% * 2

Problem Solution

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

Double-declining rate = 12.5% * 2 =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

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.

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.

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.

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.

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

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

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

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

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

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.

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?
Problem Solution

c. Net book value =

Problem Solution

c. Net book value =

Cost – Accumulated depreciation

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.

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

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