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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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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…..
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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. | ||||||
