nickkLv1

25 Mar 2022

On January 1,2022 , Shella Co. made the purchase of the following equipment for production in its factory.

 

Equipment A: The listed price for this machine was $58,000. In addition to this, Shella Co. had to pay the other fees including: VAT tax of $2,750, freight in expense of $100, shipping insurance of $75, installation of $75 and an estimation of $90 for oil and lubricants for the equipment in the first year of operation. It was estimated by the company that this equipment can be used up to 4 years, with the scrap value being $5,000 at the end of year 4 .

Equipment B: Shella had to pay a total of $120,000 for the purchase of this equipment. While the estimated useful life of this equipment is the same as equipment A, the scrap value is planned to be $10,000 instead.

 

Instructions

  1. In recording journal entries for Equipment A:

a. Record its purchase on January 1, 2022 .

b. Record annual depreciation at December 31, 2022, assuming the straight-line method of depreciation is used.

  2. Determine annual depreciation expense for Equipment B each year of its useful life under the following assumption.

a. Shella Co. uses the straight-line method of depreciation.

b. Shella Co. uses the declining-balance method. The estimated rate used is 50%.

c. Shella Co. uses the units-of-activity method and estimates the useful life of the machine is 25,000 units. Actual usage is as follows: 2022,5,500 units; 2023,                7,000 units; 2024, 8,000 units; 2025, 4,500 units.

d. Which method used to calculate depreciation on Equipment B reports the lowest amount of depreciation expense in year 1(2022) ? The lowest amount in year              4(2025) ? The lowest total amount over the 4-year period? Provide relevant explanation.