Question

A machine that cost $400,000 has an estimated residual value of $40,000 and an estimated useful life of four years. The company uses straight-line depreciation. Calculate its book value at the end of year 3What is the Book Value?A machine that cost $400,000 has an estimated residual value of $40,000 and an estimated useful life of 20,000 machine hours. The company uses units-of-production depreciation and ran the machine 3,000 hours in year 1, 8,000 hours in year 2, and 6,000 hours in year 3.Calculate its book value at the end of year 3.A machine that cost $400,000 has an estimated residual value of $40,000 and an estimated useful life of four years. The company uses double-declining-balance depreciation.Calculate its book value at the end of year 3.

Answer 1

Answer: $130,000

$205,600

$50,000

Explanation:

Depreciation expense using the straight line depreciation method = (Original cost of asset - Salvage value) / useful life

Depreciation expense = ( $400,000 - $40,000) / 4 = $90,000

Net book value for year 1 =$400,000 - $90,000 = $310,000

Net book value for year two = $310,000 - $90,000 = $220,000

Net book value for year 3 = $220,000 - $90,000 = $130,000

Deprecation expense using the unit of production method = [ (Original cost of asset - Salvage value) / total estimated productive capacity] × actual productive use of asset

($400,000 - $40,000) / 20,000 = $18

Depreciation expense for year 1 = $18 × 3000 =$54,000

Net book value for year 1 = $400,000 - $54,000 = $346,000

Depreciation expense for year 2 = $18 × 1800 = $32,400

Net book value for year two = $346,000 - $32,400 = $313,600

Depreciation expense for year 3 = $18 × 6000 = $108,000

Net book value for year three = $313,600 - $108,000 = $205,600

In the double declining method = 2 × (1/number of years ) =2 × (1÷4) = 0.5

Deprecation expense using the double declining method = 0.5 × net book value

Depreciation expense for year 1 = 0.5 × $400,000=$200,000

Net book value for year 1 = $400,000 -$200,000=$200,000

Depreciation expense for year two = $200,000 × 0.5 = $100,000

Net book value for year two = $200,000 - $100,000 = $100,000

Depreciation expense for year 3 = $100,000 × 0.5 =$50,000

Net book value for year three = $100,000 - $50,000 = $50,000

Answer 2

a) The machine's book value at the end of year 3, using the straight-line method, is $130,000.

b) The machine's book value at the end of year 3, using the units-of-production method, is $94,000.

b) The machine's book value at the end of year 3, using the double-declining-balance method, is $50,000.

Data and Calculations:

Cost of machine = $400,000

Estimated residual value = $40,000

Depreciable amount = $360,000 ($400,000 - $40,000)

Estimated useful life = 4 years

1. Straight-line method:

Annual depreciation expense  = $90,000 ($360,000/4)

Accumulated depreciation after three years = $270,000 ($90,000 x 3)

The book value after three years = $130,000 ($400,000 - $270,000)

2. Units-of-production depreciation:

Estimated useful life = 20,000 machine hours

Total hours that the machine ran in three years = 17,000 hours

Depreciation expense per machine hour = $18 ($360,000/20,00)

Accumulated depreciation = $306,000 ($18 x 17,000)

The book value after three years = $94,000 ($400,000 - $306,000)

3. Double-declining-balance depreciation:

Annual depreciation rate = 50% (100/4 x 2)

First-year depreciation expense = $200,000 ($400,000 x 50%)

Second-year depreciation expense = $100,000 ($200,000 x 50%)

Third-year depreciation expense = $50,000 ($100,000 x 50%)

Accumulated depreciation = $350,000

The book value after three years = $50,000 ($400,000 - $350,000)

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