(Depreciation—Conceptual Understanding) Rembrandt Company acquired a plant asset at the beginning of Year 1. The asset has an estimated service life of 5 years. An employee has prepared depreciation schedules for this asset using three different methods to compare the results of using one method with the results of using other methods. You are to assume that the following schedules have been correctly prepared for this asset using (1) the straight-line method, (2) the sum-of-the years’-digits method, and (3) the double-declining-balance method.
Answer the following questions.
Depreciation is a branch of accounting that deals with systematically spreading or dividing the cost or other principal value of a fixed asset over its expected useful life by charging regular expenses or revenues.
If there is any salvage value and the quantity is unknown (as is the case here), the cost must be calculated using the double-declining balance method's data.
Determining the percentage of double declining balance
Calculating the Cost of asset
There is a Salvage value of $5,000 for the asset used by the Rembrandt Company whose estimated service life is 5 years.
The highest charge to income for Year 1 will be yielded by the double-declining balance method.
In double declining balance depreciation, the existing depreciation approach is doubled. Deferring income taxes to later years permits the company to devalue settled resources more intensely during its early years.
The highest charge to income for Year 4 will be yielded by the straight-line method.
The most typical approach for recognizing a fixed asset's carrying value over time is to use straight-line depreciation. When there is no precise pattern to how assets will be used over time, this is used.
The straight-line technique, which delivers the lowest accumulated depreciation at the conclusion of Year 3, is the method that produces the greatest book value at the end of Year 3.
Computation of Straight-line depreciation for Year 3
Computation of Sum-of-the Years’-Digits for Year 3
Computation of Double-Declining Balance for Year 3
The technique with the lowest book value at the end of Year 3 will generate the highest gain (or lowest loss) if the asset is sold at the end of Year 3, which in this case is the double-declining balance approach.
(Depreciation Computations—Five Methods) Jon Seceda Furnace Corp. purchased machinery for $315,000 on May 1, 2017. It is estimated that it will have a useful life of 10 years, salvage value of $15,000, production of 240,000 units, and working hours of 25,000. During 2018, Seceda Corp. uses the machinery for 2,650 hours, and the machinery produces 25,500 units.
From the information given, compute the depreciation charge for 2018 under each of the following methods. (Round to the nearest dollar.)
(Depreciation Computations—Four Methods) Robert Parish Corporation purchased a new machine for its assembly process on August 1, 2017. The cost of this machine was $117,900. The company estimated that the machine would have a salvage value of $12,900 at the end of its service life. Its life is estimated at 5 years, and its working hours are estimated at 21,000 hours. Year-end is December 31.
Compute the depreciation expense under the following methods. Each of the following should be considered unrelated.
(Depreciation Concepts) As a cost accountant for San Francisco Cannery, you have been approached by Phil Perriman, canning room supervisor, about the 2017 costs charged to his department. In particular, he is concerned about the line item “depreciation.” Perriman is very proud of the excellent condition of his canning room equipment. He has always been vigilant about keeping all equipment serviced and well oiled. He is sure that the huge charge to depreciation is a mistake; it does not at all reflect the cost of minimal wear and tear that the machines have experienced over the last year. He believes that the charge should be considerably lower.
The machines being depreciated are six automatic canning machines. All were put into use on January 1, 2017. Each cost $625,000, having a salvage value of $55,000 and a useful life of 12 years. San Francisco depreciates this and similar assets using double-declining-balance depreciation. Perriman has also pointed out that if you used straight-line depreciation, the charge to his department would not be so great.
Write a memo dated January 22, 2017, to Phil Perriman to clear up his misunderstanding of the term “depreciation.” Also, calculate year-1 depreciation on all machines using both methods. Explain the theoretical justification for double-declining-balance and why, in the long run, the aggregate charge to depreciation will be the same under both methods.
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