On January 1, 2006, Solomon Company purchased the following two machines for use in its production process.
Machine A: The cash price of this machine was $38,500. Related expenditures included:
sales tax $2,200, shipping costs $175, insurance during shipping $75, installation
and testing costs $50, and $90 of oil and lubricants to be used with the
machinery during its first year of operation. Solomon estimates that the useful
life of the machine is 4 years with a $5,000 salvage value remaining at the
end of that time period.
Machine B: The recorded cost of this machine was $100,000. Solomon estimates that the
useful life of the machine is 4 years with a $8,000 salvage value remaining at
the end of that time period.
Instructions
(a) Prepare the following for Machine A.
(1) The journal entry to record its purchase on January 1, 2006.

(2) The journal entry to record annual depreciation at December 31, 2006, assuming the
straight-line method of depreciation is used.
(b) Calculate the amount of depreciation expense that Solomon should record for machine B
each year of its useful life under the following assumption.
(1) Solomon uses the straight-line method of depreciation.
(2) Solomon uses the declining-balance method. The rate used is twice the straight-line rate.
(3) Solomon uses the units-of-activity method and estimates the useful life of the machine
is 25,000 units. Actual usage is as follows: 2006, 6,500 units; 2007, 7,500 units; 2008, 6,000
units; 2009, 5,000 units.
(c) Which method used to calculate depreciation on machine B reports the lowest amount of
depreciation expense in year 1 (2006)? The lowest amount in year 4 (2009)? The lowest total amount over a 4 year period.

Solution

a)

1)

Purchase price$38,500

Sales tax $2,200

Shipping costs $175

Insurance during shipping $75

Installation and testing $50

Total cost of machinery $41,000

Machinery$41,000

Cash $41,000

2)

Recorded cost $41,000

Less: Salvage value $5,000

Depreciable cost $36,000

Years of useful life ÷ 4

Annual depreciation $9,000

Depreciation Expense$9,000

Accumulated Depreciation $9,000

b)

1)

Recorded cost $100,000

Less: Salvage value $8,000

Depreciable cost $92,000

Years of useful life ÷ 4

Annual depreciation $23,000

2)

Straight-Line Depreciation Rate = ¼ = 0.25

Double-Declining Balance Rate = 0.25 * 2 = 0.5 = 50%

Double Decling Balance Depreciation Schedule
Year / Depreciable
Cost / Depreciation
Rate / Annual
Depreciation / Accumulated
Depreciation / Book
Value
2006 / $100,000 / 50% / $50,000 / $50,000 / $50,000
2007 / $50,000 / 50% / $25,000 / $75,000 / $25,000
2008 / $25,000 / 50% / $12,500 / $87,500 / $12,500
2009 / $12,500 / 50% / $4,500 / $92,000 / $8,000
  • The annual depreciation for 2009 has been adjusted from $6,250 to $4,500 for Book Value to equal Salvage Value

3)

Depreciation Cost per Unit of Activity = $92,000 / 25,000 = $3.68

Year / Usage / Rate / Annual Depreciation Expense
2006 / 6500 / $3.68 / $23,920
2007 / 7500 / $3.68 / $27,600
2008 / 6000 / $3.68 / $22,080
2009 / 5000 / $3.68 / $18,400

c)

The Straight-Line method reports the lowest depreciation expense for 2006, while the Double Declining Balance provides the lowest amount for 2009.

No matter which of the three methods is used, the same total amount of depreciation expense will be recognized over the four-year period