Case Scenario:
Problem 1: Classic Irons, Inc. purchased Manufacturing Equipment with an expected useful life of five years of 5,000 hours of usage. The equipment was purchased on Jan. 1, 2008, for $460,000. It is expected to have a salvage value of $60,000 at the end of five years. During 2008, the equipment was used for 1,200 hours. Assume that usage for the next four years will be 1,100 hours, 900 hours, and 500 hours respectively.
a. What is the amount of depreciation expense for each of the five years using the straight- line method?
b. What is the amount of depreciation expense for each of the five years using the double declining balance method?
c. What is the amount of depreciation expense for each of the five years using the units of production method? (Hours are production units in this example.)
Problem 2: Smith Steakhouse is a restaurant catering to a variety of customers. They purchased a new high powered oven at a cost of 100,000 on Jan. 1, 2006. The oven has a useful expected life of four years and an estimated salvage value of $10,000. Smith Steakhouse uses the straight-line depreciation for all its depreciable assets.
On May 1, 2008 the owner of the restaurant was persuaded to purchase a new oven that operated more efficiently. The old oven was sold at the time for $15,000.
a. What is the amount of depreciation expense recorded on the old machine for each year of use? (Show your computations).
b. What is the amount of gain or loss on the disposal of the old machine? (Show your computations).