Question & Answer: Fried Chicken bought equipment on January 22​, 2016 for $36,000. The equipment was expected to remain in service for four years and to p…..

Fried Chicken bought equipment on January 22​, 2016 for $36,000. The equipment was expected to remain in service for four years and to perform6,000 fry jobs. At the end of the​ equipment’s useful​ life, Delicious estimates that its residual value will be $6,000.

The equipment performed 600 jobs the first​ year, 1,800 the second​ year, 2,400 the third​ year, and 1,200 the fourth year.

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Requirements

1. Prepare a schedule of depreciation​ expense, accumulated​ depreciation, and book value per year for the equipment under the three depreciation methods. Show your computations. ​Note: Three depreciation schedules must be prepared.
2. Which method tracks the wear and tear on the equipment most​ closely?

Expert Answer

 

Straight-Line Method
Depreciation = (Cost of asset – Resedual value) / number of useful years
= (36000-6000)/4 = $7500
Straight-Line Depreciation Schedule
Depreciation for the year
Date Asset Cost Depreciable cost Depreciation rate Depreciation expense Accumulated depreciation Book value
22-01-2016 36000 36000
31-12-2016 30000 0.25 7500 7500 28500
31-12-2017 30000 0.25 7500 15000 21000
31-12-2018 30000 0.25 7500 22500 13500
31-12-2019 30000 0.25 7500 30000 6000
Units-of-Production method
Depreciation per unit = (cost of asset-residual value)/useful life in units
= (36000-6000)/6000 = $5 per fry jobs
Units-of-Production Depreciation Schedule
Depreciation for the year
Date Asset Cost Depreciation per unit Number of Units Depreciation expense Accumulated depreciation Book value
22-01-2016 36000 36000
31-12-2016 5 600 3000 3000 33000
31-12-2017 5 1800 9000 12000 24000
31-12-2018 5 2400 12000 24000 12000
31-12-2019 5 1200 6000 30000 6000
Double-Declining Method
Rate of depreciation = 100% / useful life * 2
= 100%/4 *2 = 50%
Double declining method Depreciation Schedule
Depreciation for the year
Date Asset Cost Book Value DDB Rate Depreciation expense Accumulated depreciation Book value
22-01-2016 36000 36000
31-12-2016 36000 50% 18000 18000 18000
31-12-2017 18000 50% 9000 27000 9000
31-12-2018 9000 3000 30000 6000
31-12-2019 0 30000 6000
Note : The DDB rate cannot be used for the 3rd year because it would decrease the book value below the residual value.

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