Silverman Company purchased machinery for $162,000 on January 1, 2017. It is estimated that the machinery will have a useful life of 20 years, salvage value of $15,000, production of 84,000 units, and working hours of 42,000. During 2017, the company uses the machinery for 14,300 hours, and the machinery produces 20,000 units. Compute depreciation under the straight-line, units-of-output, working hours, sum-of-the-years’-digits, and double-declining-balance methods.
Depreciation is an expense incurred on an asset that has become obsolete due to erosion and abrasion. An asset can be depreciated in various ways, which help in bringing the exact value of the asset at the time of sale.
Computing depreciation under the straight-line method
Computing depreciation under the units-of-output method
Computing depreciation under the working hour method
Computing depreciation under the sum of years digit method
Computing depreciation under the double-declining balance method
(Ratio Analysis) The 2014 annual report of Tootsie Roll Industries contains the following information.
December 31, 2014
December 31, 2013
Compute the following ratios for Tootsie Roll for 2014.
Dickinson Inc. owns the following assets.
Estimated useful life
Compute the composite depreciation rate and the composite life of Dickinson’s assets.
(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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