Q9-2TI - Horngren'S Financial And Managerial Accounting

Question

2. On January 1, Alamo Cranes purchased a crane for \(140,000. Alamo expects the crane to remain useful for six years (1,000,000 lifts) and to have a residual value of \)2,000. The company expects the crane to be used for 80,000 lifts the first year. Compute the first-year depreciation expense on the crane using the following methods: a. Straight-line b. Units-of-production (Round depreciation per unit to two decimals. Round depreciation expense to the nearest whole dollar.) Compute the first-year and second-year depreciation expense on the crane using the following method: c. Double-declining-balance (Round depreciation expense to the nearest whole dollar.)

Step-by-Step Solution

Answer

Answer

Depreciation expense for the first year by Straight-Line Method is $23,000, by Units-of-production Method is $11,200, and by Double-declining-balance Method is $46,667.

Step 1: Meaning of Straight Line Method and calculating depreciation expense for the first year by the straight line method

According to this method, an equal amount of depreciation is charged every year on an asset. 

$$\begin{gathered} Straight line Depreciation=\frac{(Cost- Residual Value)}{Useful\mathit{ }life} \\ =\frac{\left(\$140,00-\$2000\right)}{6years} \\ =\$23,000 per year \end{gathered}$$

Step 2: units-of-production method

$$\begin{gathered} Straight line Depreciation=\frac{(Cost- Residual Value)}{Useful\mathit{ }life} \\ =\frac{\left(\$140,00-\$2000\right)}{1000,000 lifts} \\ =\$0.14per unit\left(rounded off\right) \end{gathered}$$

This method states that the depreciation charged is based on the asset’s usage and varies from year to year.