AC 51 - Calculations A B = A x 66.66 C = A B Year Opening...

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Question: January 5, 2014, for $116,600. The equipment was expected to have a useful life of three years, or 20,000 operating hours, and a residual value of $6,600. The equipment was used for 8,700 hours during 2014, 7,380 hours in 2015, and 3,920 hours in 2016. Required: 1. Determine the amount of depreciation expense for the years ended December 31, 2014, 2015, and 2016 by (a) the straight-line method, (b) the double-declining-balance method Answer: a) Under straight line method, Depreciation = (Purchase price - Salvage value) / Useful life. = ($116,600 - $6,600) / 3 = $36,666.66 per year. So, depreciation for December 31, 2014 = December 31, 2015 = December 31, 2016 = $36,666.66 per year. b) Depreciation under double declining balance method is calculated by applying double the rate under straight line method to the balance remaining in the asset account at the beginning of each year. The depreciation stops when book value = estimated salvage value. Depreciation = 2 x Straight line depreciation rate x Book value at beginning of each year. Straight line rate = 1 / 3 = 33.33% So, Double declining rate = 33.33 x 2 = 66.66%
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Unformatted text preview: Calculations A B = A x 66.66% C = A - B Year Opening book value Double declining depreciation Net book value 2014 116600.00 77725.56 38874.44 2015 38874.44 25913.70 12960.74 2016 12960.74 6360.74 6600 Queston: Relevan± cash Fows) Captns’ Cereal is considering in±roducing a variaton of i±s curren± breakfas± cereal, Crunch S±u². The new cereal will be similar ±o ±he old wi±h ±he excepton ±ha± i± will con±ain sugarcoa±ed marshmallows shaped in ±he form of s±ars and will be called Crunch S±u² n’ S±ars. I± is estma±ed ±ha± ±he sales for ±he new cereal will be $25 million; however, 20 percen± of ±hose sales will be former Crunch Stuf customers who have switched to Crunch Stuf n’ Stars but who would not have switched iF the new product had not boon introduced. What is the relevant sales level to consider when deciding whether to introduce Crunch Stuf n’ Stars? Answer: The relevant Sales level is the Sales actually generated by the new product of its own, that is without shift of old customers to new product. This will be $25 million x (1 - 0.20) = $20 million....
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