A machine costs $11,500. At the end of its 5-year useful life its salvage value is estimated to be $1,500. Prepare its depreciation schedule if annual depreciation is (a) 20% of the first cost, (b) 20% of the book value. The depreciation charge for the last (fifth) year must be adjusted so as not

Question

A machine costs $11,500. At the end of its 5-year useful life its salvage value is estimated to be $1,500. Prepare its depreciation schedule if annual depreciation is (a) 20% of the first cost, (b) 20% of the book value. The depreciation charge for the last (fifth) year must be adjusted so as not to exceed the maximum allowable.

Accepted Answer

[latex]Total^{4}[/latex] allowable depreciation for the machine, being the difference between the first cost ($11,500) and salvage value ($1,500) is $10,000 over 5 years of its useful life .

(a) The annual depreciation being 20% of the first cost is 0.2 × $11,500 = $2,300. A complete depreciation schedule is [latex]shown^{5}[/latex] in the following table. Note, however, that the depreciation for the fifth year is $800—[latex]remainder^{6}[/latex] of the total allowable. Since by the end of the fourth year cumulative depreciation is already $9,200, the fifth-year depreciation = $10,000 – $9,200 = $800.

Year	Beginning BV	Depr Exp	Cumulative Depr
0	$11,500.00
1	$11,500.00	$2,300.00	$2,300.00
2	$11,500.00	$2,300.00	$4,600.00
3	$11,500.00	$2,300.00	$6,900.00
4	$11,500.00	$2,300.00	$9,200.00
5	$11,500.00	$800.00	$10,000.00

(b) In this case depreciation is 20% of the book value. The complete schedule is shown as follows. Note that the book values have been tabulated in the last column to facilitate the evaluation of depreciation for the subsequent year.

Year	Depr Exp	Cumulative Depr	Beginning BV
0			$11,500
1	$2,300	$2,300	$9,200
2	$1,840	$4,140	$7,360
3	$1,472	$5,612	$5,888
4	$1,178	$6,790	$4,710
5	$3,210	$10,000	$1,500

Note that the depreciation cost for each of the first 4 years is 20% of the book value at the end of the [latex]previous^{7}[/latex] year. For example, for year 3, it is 20% of $7,360 = $1,472. The fifth- Note that the depreciation cost for each of the first 4 years is 20% of the book value at the end of the previous7 year. For example, for year 3, it is 20% of $7,360 = $1,472. The fifth- year depreciation of $3,210 is the remainder that could be charged, i.e., total allowable minus the cumulative depreciation up to the fourth year ($10,000 – $6,790 = $3,210).
If you find the entries in the table confusing, an alternative table format may be the following in which book value is posted in the second column.

Year	Beginning Bv	Cumulative Depr	Depr Exp
0	$11,500
		$2,300
1	$1,840		$2,300
		$1,840
2	$7,360		$4,140
		$1,472
3	$5,888		$5,612
		$1,178
4	$4,710		$6,790
		$3,210
5	$1,500		$10,000

In this format the depreciation costs have been posted in between the years since they relate to the duration rather than to a particular point in time. The entries are perhaps more comprehensible in this format. For example, the depreciation cost of $1,472 for the duration in between years 2 and 3 is 20% of $7,360—the book value at the beginning of year 2. As another example, the $4,710 book value at the beginning of year 4 is simply the book value at the beginning of year 3 ($5,888) minus the depreciation cost for the duration in between years 3 and 4 ($1,178). Note that for any year the total of the book value and cumulative depreciation equals the first cost ($11,500). For example, for year 3, it is $5,888 + $5,612 = $11,500.

Question 10.1: A machine costs $11,500. At the end of its 5-year useful lif...

This Question has been Answered.

Already have an account?

Login

Related Answered Questions