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Question: A machine costs P120,000 lasts 10 years and has a salvage value at the end of life of P20,000. Make out a schedule showing the annual and total depreciation and the book value at the beginning and end of year by the (a) straight line method, (b) declining balance method, (c) double declining method, (d) SYD method, (e) sinking fund method with interest at 12%, (f) service method with a 25,000 total working hours having 2,500 hours per year, and (g) output method with total production of 4,000,000 units having 4,000 units per year.
Here are the solutions to your depreciation problem for each of these methods: 1. (a) Straight-Line Method: This is the simplest depreciation method. The asset depreciates by the same amount every year of its useful life. - Annual Depreciation: (Purchase price - Salvage value)/ Life of asset = (P120,000 - P20,000)/10 = P10,000 per year - Book value: Begins at P120,000 and decreases by the annual depreciation to end at the salvage value, P20,000 after 10 years. 2. (b) Declining balance: A constant rate of depreciation is applied to the net book value every year. If we use 10% as the chosen rate, then: - Annual Depreciation: P120,000 * 10% = P12,000 in the first year and applied to the remaining balance in subsequent years. - Book value will be the purchase price subtracted by the accumulated depreciation. 3. (c) Double declining balance: is a form of accelerated depreciation where double the straight-line method rate is applied. - Annual Depreciation: (2/Life of asset) * book value at the beginning of the year, then declines over time. - Book value will decline drastically initially and slower towards the end of the useful period. 4. (d) SYD (Sum of Year's Digits) method: A higher depreciation expense is recognized in the beginning years of an asset’s life, and decreases as the asset ages. - Annual Depreciation: (Remaining life of asset/Sum of Year's Digits) * (Cost - Salvage Value) - Sum of Year's Digits: (10*11)/2 = 55. - Book value declines over the years in a similar manner to declining balance method. 5. (e) Sinking Fund method: A percentage of depreciation funds are invested periodically at compound interest so that by the end of the useful life, the investments would have grown to the cost of the asset. The formula for this is more complex and an interest rate is needed. 6. (f) Service Method / Units of Production Depreciation: Depreciation depends on output or the number of hours the asset works during an accounting period. - Annual Depreciation: (2,500 hours / 25,000 total hours) * (P120,000 - P20,000) = P10,000. - Book value: cost of machine - accumulated depreciation. 7. (g) Output method: similar to the service method but using units produced instead of hours. - Annual Depreciation: (4,000 units / 4,000,000 total units) * (P120,000 - P20,000) = P1 per unit produced. - Book value: cost of machine - accumulated depreciation. Remember to consult a financial expert to make sure these methods comply with your local accounting standards.
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