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Question ONE FLO Corp
Question ONE FLO Corp. purchased machinery for $ 600,000 on July 1, 2015. It is estimated that it will have a useful life of 10 years, residual value of $ 25,000, production of 200,000 units, and working hours of 40,000. During 2016, FLO Corp. uses the machinery for 5,500 hours and the machinery produces 10,000 units. Instructions: From the information given, compute the depreciation charge for 2016 under each of the following methods. a) Straight-line.co marta) b) Units-of-output. (30 mariu) c) Working hours. (30 marin) d) Sum-of-the years'- digits. (30 mark e) Double-declining balance. 20 marion)
Expert Solution
Answer:
a) Straight Line Method:
Straight line Depreciation = (Purchase value – residual value) / Useful no. of years
= (600,000-25,000)/10 = 57,500
b) Units of Output:
Depreciation = (Purchase value – residual value) / Total Output * Output in 2016
= (600,000-25,000)/200,000 * 10,000
= 28,750
c) Working hours:
Depreciation = (Purchase value – residual value) /Total Working hours * Hours worked in 2016
= (600,000-25,000) / 40,000*5,500
= 79,062.50
d) Sum of years Method:
The machine was purchased on July 1,2015. July 1,2015 to June 30,2016 is considered as the first year.
Depreciation for first year = 10/N * (Purchase value – residual value)
Where N = 1+2+3+4+….+10 = 55
The easy way to find N is using the formula n*(n+1)/2
Where n is the no. of years of useful life
Depreciation for first year = 10/55 * (600,000-25,000)
= 104,545.45
Depreciation for second year = 9/55 * (600,000-25,000)
= 94,090.90
Depreciation for the year 2016 = (104,545.45/2) + (94,090.90/2)
= 99,318.18
e) Double-Declining Balance method:
Declining rate = 100/Useful no of years * 2
= 100/10 * 2
= 20%
Like sum of years method, the first year is from July 1,2015 to June 30,2016
Depreciation for 1st year = 20% * 600,000
= 120,000
Depreciation for 2nd year = 20% * (600,000-120,000)
= 20% * 480,000 = 96,000
Depreciation for 2016 = (120,000/2) + (96,000/2)
= 108,000
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