Q1. Depreciation Computations-Five Methods
Jon Seceda Furnace Corp. purchased machinery for $315,000 on May 1, 2017. It is estimated that it will have a useful life of 10 years, salvage value of $15,000, production of 240,000 units, and working hours of 25,000. During 2018, Seceda Corp. uses the machinery for 2,650 hours, and the machinery produces 25,500 units.
Instructions
From the information given, compute the depreciation charge for 2018 under each of the following methods.
(a) Straight-line.
(b) Units-of-output.
(c) Working hours.
(d) Sum-of-the-years'-digits.
(e) Declining-balance (use 20% as the annual rate).
Q2. Depreciation for Partial Period-SL, SYD, and DDB
Alladin Company purchased Machine #201 on May 1, 2017. The following information relating to Machine #201 was gathered at the end of May.
Price - $85,000
Credit terms - 2/10, n/30
Freight-in - $800
Preparation and installation costs - $3,800
Labor costs during regular production operations - $10,500
It is expected that the machine could be used for 10 years, after which the salvage value would be zero. Alladin intends to use the machine for 8 years, however, after which it expects to be able to sell it for $1,500. The invoice for Machine #201 was paid May 5, 2017. Allandin uses the calendar year as the basis for the preparation of financial statements.
Instructions
(a) Compute the depredation expense for the years indicated using the following methods.
(1) Straight-line method for 2017.
(2) Sum-of-the-years'-digits method for 2018.
(3) Double-declining-balance method for 2017.
(b) Suppose Kate Crow, the president of Alladin, tells you that because the company is a new organization, she expects it will be several years before production and sales reach optimum levels. She asks you to recommend a depreciation method that will allocate less of the company's depreciation expense to the early years and more to later years of the assets' lives. What method would you recommend?
Q3. Impairment
Roland Company uses special strapping equipment in its packaging business. The equipment was purchased in January 2016 for $10,000,000 and had an estimated useful life of 8 years with no salvage value. At December 31, 2017, new technology was introduced that would accelerate the obsolescence of Roland's equipment. Roland's controller estimates that expected future net cash flows on the equipment will be $6,300,000 and that the fair value of the equipment is $5,600,000. Roland intends to continue using the equipment, but it is estimated that the remaining useful life is 4 years. Roland uses straight-line depreciation.
Instructions
(a) Prepare the journal entry (if any) to record the impairment at December 31, 2017.
(b) Prepare any journal entries for the equipment at December 31, 2018. The fair value of the equipment at December 31, 2018, is estimated to be $5,900,000.
(c) Repeat the requirements for (a) and (b), assuming that Roland intends to dispose of the equipment and that it has not been disposed of as of December 31, 2018.