Posted: January 29th, 2016
Study the FIFO and LIFO explanations in the chapter.
Study the “Calculating Inventory Turnover” portion of the chapter closely, whereby the cost of goods sold divided by the average inventory equals the inventory turnover.
Compute two inventory turnover calculations as follows:
Assume that Metropolis Health System (MHS) purchased equipment for $200,000 cash on April 1 (the first day of its fiscal year). This equipment has an expected life of 10 years. The salvage value is 10% of cost. No equipment was traded in on this purchase.
Straight-line depreciation is a method that charges an equal amount of depreciation for each year the asset is in service. In the case of this purchase, straight-line depreciation would amount to $18,000 per year for 10 years. This amount is computed as follows:
Accelerated depreciation represents methods that are speeded up, or accelerated. In other words a greater amount of depreciation is taken earlier in the life of the asset. One example of accelerated depreciation is the double-declining balance method. Unlike straight-line depreciation, trade-in or salvage value is not taken into account until the end of the depreciation schedule. This method uses book value, which is the net amount remaining when cumulative previous depreciation is deducted from the asset’s cost. The computation is as follows:
Assume that MHS purchased equipment for $600,000 cash on April 1 (the first day of its fiscal year). This equipment has an expected life of 10 years. The salvage value is 10% of cost. No equipment was traded in on this purchase.
Assume that MHS purchased two additional pieces of equipment on April 1 (the first day of its fiscal year), as follows:
For both pieces of equipment:
This example shows straight-line depreciation computed at a five-year useful life with no salvage value. Straight-line depreciation is the method commonly used for financing projections and funding proposals.
Five year useful life; no salvage value
Year # | Annual Depreciation | Remaining Balance |
---|---|---|
Beginning Balance = | 60,000 | |
1 | 12,000 | 48,000 |
2 | 12,000 | 36,000 |
3 | 12,000 | 24,000 |
4 | 12,000 | 12,000 |
5 | 12,000 | -0- |
This example shows straight-line depreciation computed at a five-year useful life with a remaining salvage value of $10,000. Note the difference in annual depreciation between Example 8B and Example 8C.
Five year useful life; $10,000 salvage value
Year # | Annual Depreciation | Remaining Balance |
---|---|---|
Beginning Balance = | 60,000 | |
1 | 10,000 | 50,000 |
2 | 10,000 | 40,000 |
3 | 10,000 | 30,000 |
4 | 10,000 | 20,000 |
5 | 10,000 | 10,000 |
This example shows double-declining depreciation computed at a five-year useful life with no salvage value. As is often the case with a five-year life, the double-declining method is used for the first three years and the straight-line method is used for the remaining two years. The double-declining method first computes what the straight-line percentage would be. In this case 100% divided by five years equals 20%. The 20% is then doubled. In this case 20% times 2 equals 40%. Then the 40% is multiplied by the remaining balance to be depreciated. Thus 60,000 times 40% for year one equals 24,000 depreciation, with a remaining balance of 36,000. Then 36,000 times 40% for year two equals 14,400 depreciation, and 36,000 minus 14,400 equals 21,600 remaining balance, and so on.
Now note the difference in annual depreciation between Example 8B, using straight-line for all five years, and Example 8D, using the combined double-declining and straight-line methods.
Five year useful life; $10,000 salvage value
Compute the straight-line depreciation for each year for equipment with a cost of $50,000, a five-year useful life, and a $5,000 salvage value.
Set up a purchase scenario of your own and compute the depreciation with and without salvage value.
Study the “Units of Service” portion of the chapter closely.
Place an order in 3 easy steps. Takes less than 5 mins.