Depreciation Questions PDF

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PURCHASED on 1st October 2018 Cost – 228,000 Residual Value – 28000 Depreciable amount – 228,000 – 28,000 = 200,000 Useful life – 10 years

A) Straight Line Method (USE RESIDUAL VALUE) Straight Line Depreciation rate = 100% / 10 years = 10% 200,000 / 10% = 20,000 a year NOTE FOR 2018 ONLY 3 MONTHS OF DEP ### 2018 Depreciation Expense = 20,000 / 4 = $5000

2019 Depreciation Expense = 200,000 x 10% = 20,000 = 20,000

B) Diminishing-balance method (DOUBLE straight-line rate – GIVEN) – no need to calculate USE ACTUAL COST VALUE

10% x 2 = 20%

2018 Depreciation Expense = 228,000 x 20% x 3/12 = 11,400

Carrying value = 228,000 – 11,400 = 216,600

2019 Depreciation Expense = 216600 x 20% = 43,320 C) Units-Of-Production Method

Expected working hours – 40,000 1800 Hours Machine usage

Depreciation cost per unit = Depreciable amount / total units pf production = 200,000 / 40,000 = $5 per hour

2018 Depreciation = 1800 hours x $5 = $9,000

A) Straight Line Method: Cost - $400,000 |

Residual Cost - $40,000

| Useful Life – 4 Years (25%)

Depreciable amount – 360,000 (Cost – Residual Calculation

Years

Depreciable Cost

Depreciation Rate

X

End of Year Annual Depreciation Expense =

Accumulated Depreciation

2018

360,000

25% (4 years)

$90,000

$90,000

2019 2020 2021

360,000 360,000 360,000

25% 25% 25%

$90,000 $90,000 $90,000

$180,000 $270,000 $360,000

Carrying Amount $310,000 (400,000 – 90,000) $220,000 $130,000 $40,000

B) Diminishing – Balance Method Rate = 1 – (40,000 / 400,000) ^1/4 = 0.4376 = 44% Calculation

Years

2018 2019 2020 2021

Carrying Amount Beginning of Year

400,000 224,000 125,440 70,246

x

Depreciation Rate#

44% 44% 44% 44%

End of Year Annual Depreciation Expense =

176,000 98,560 55,194 (rounded) 70,246 – 40,000 = 30,246

Accumulated Depreciation

Carrying Amount

176,000 224,000 274,560 125,440 329,754 70,246 360,000 40,000 (WORK (MUST BACKWARDS EQUAL from residual) RESIDUAL

VALUE) b) Which method would result in the higher reported profit in 2018? In the higher total reported profit over the 4-year period? Straight-line depreciation provides the lowest amount for 2018 depreciation expense ($90,000) and, therefore, the highest 2018 profit. Diminishing-balance depreciation provides the highest amount for 2018 depreciation expense ($176,000) and, therefore, the lowest 2018 profit.

Over the four-year period, both methods result in the same total depreciation expense ($360,000) and, therefore, the same total profit.

# High Depreciation Expense = Low Profit # # Low Depreciation Expense = High Profit #

A) Straight Line: 135,000 – 26,250 = 108,750

Diminishing rate (GIVEN 1.5x straight-line) Accumulated Depreciation 31/12 Year

Calculation MACHINE 1

2015

108750 x 10% = 10875

10,875

2016

108750 x 10% = 10875

21,750

2017

108750 x 10% = 10875

2018

108750 x 10% = 10875

32,625 43,500

Machine 2 2016

96,000 x 15% = 14,400

14,400

2017

81600 x 15% = 12,240

26,640

2018

69360 x 15% = 10,404

37,044

Units of production -> Total hours = 10,000 Usage per year - > 2016 (1000), 2017 (3000), 2018 (4000) Depreciable amount = 65,000 - 15,000 = 50,000 Depreciation cost per unit = Depreciable amount / total units pf production = 50,000 / 10,000 = $5 Machine 3 2016

1000 x $5 = 5,000

5,000

2017

3000 x $5 = 15,000

20,000

2018

4000 x $5 = 20,000

40,000

b) For Machine 3 in 2018, Which Depreciation Method is preferred for tax purposes? Why? Straight Line = 50,000 / 5 = 10,000

(5 years = 20%)

Diminishing-Balance rate (Assuming 1.5x straight line rate) = 1.5 x 20% (1/5) = 30%  65,000 x 30% = 19,500  45,500 x 30% = 13,650  31,850 x 30% = 9,555 Units of Production (FROM ANSWER ABOVE $20,000) Since the depreciation expense in 2018 in highest under the units of production method, the higher expense will lower the tax payment. Therefore, the Units of production method is preferred for tax purposed for Machine 3 in 2018.

c) If you are a manager of Winter Ltd and your bonus is linked to profit of the company, which depreciation method do you prefer for Machine 3 in 2018? Explain why in point form. As a manager whose bonus is linked to profit, I would prefer a depreciation method that resulted in the lowest expense. From (b) above, Diminishing-balance method resulted in the lowest depreciation expense for Machine 3 in 2018. However, it should be noted that diminishing-balance method results in higher depreciation expenses in the earlier years of an asset’s life.

### Lower Expense = Higher Profit ###...