Depreciation Accounting Problems 4.10 and 4.

11

Problems 4.10 and 4.11 focus on depreciation accounting.

Problem 4.10

During its first year of operations, United Entertainment Co. (UEC) purchased a piece of equipment
for $96,000. It submitted and paid for the purchase via the seller’s online purchase order system on
January 1, so for purposes of this problem you can assume that UEC has owned the equipment for
a full year during year one of operations. UEC estimates that the equipment will have an expected
useful life of 12 years and a salvage value of $40,000. In addition, UEC estimates that the
equipment will produce 80,000 units over its useful life.

Determine the amount of depreciation expense that UEC should recognize for years one to five
using each of the following depreciation methods and assume that UEC produces 6,800, 6,400,
6,600, 6,100, and 5,900 units in years one to five, respectively:

Part A: Straight-Line Method

Formula: Cost - Salvage / Useful Life 96,000 - 40,000/ 12 = $4,666.67/year

Depreciation Expense: Years 1 - 5: $4,666.67 each year or $23,333.35 for first five years

Part B: Declining Balance Method (for both 150 percent and 200 percent)

Straight Line Rate = 1/12

Straight Line Rate = .083
Declining Balance Rate @150% = 150% X .083
Declining Balance Rate @150% = .1245

Asset would be fully depreciated in year 7 if problem was extended.

Declining Balance Rate @200% = 200% X .083
Declining Balance Rate @200% = .166

* Actual year 5 depreciation is $7,709.81, but year 5 depreciation expense is

capped at $6,444.62 so asset is not depreciated below its $40,000 salvage value.

Part C: Sum-of-the-Years’ Digits Method

SYD = [12(12+1)]/2
SYD = 78

Part D: Units of Production Method

Depreciation Rate = (96,000 - 40,000) / 80,000

Depreciation Rate = 0.70/unit
Problem 4.11

UEC also purchased office computers worth $112,000 during its first year of operations on June 1. In
addition to the cost of the computers, it cost UEC an additional $2,100 in delivery charges, which
included the delivery fee and cost of in-transit insurance. Lastly, UEC paid a third-party contractor
$900 to install the computers. UEC believes the computers will only last four years, at which point
UEC will sell them for parts for $12,400.

Determine the amount of depreciation expense that UEC should recognize for each year under the
following depreciation methods:

Part A: Straight-Line Method

Formula: Cost - Salvage / Useful Life = (115,000-12.400) / 4 = 25,650 per year

Depreciation Expense: Years 1 - 4: $25,650 each year
Total Depreciation Expense: $102,600

Part B: Declining Balance Method (for both 150 percent and 200 percent)

Straight Line Rate = 1/4

Straight Line Rate = .25
Declining Balance Rate @150% = 150% X .25
Declining Balance Rate @150% = .375
* Asset was not fully depreciated in 4 years so depreciation carries into year 5
to record the remaining $5,147.61 worth of depreciation to reach salvage of $12,400

Declining Balance Rate @200% = 200% X .25

Declining Balance Rate @200% = .50

* Actual year 4 depreciation is $7,187.50, but year 4 depreciation expense is

capped at $1,975.00 so asset is not depreciated below $12,400.00 salvage value.

Part C: Sum-of-the-Years’ Digits Method

SYD = [4(4+1)]/2
SYD = 10